Sharp drop in DPU following rights issue

1Q11 DP U dropped sharply mainly due to share base expansion. Cambridge Industrial Trust (CIT) reported a lower DPU of 1.0S¢ in 1Q11 (- 21.4% YoY; -16.1% QoQ), representing 19.9% of our FY11 DPU estimate. The sharp drop in DPU is mainly attributable to the rights issue which was listed in Apr 2011. We expect CIT’s DPU to pick up in subsequent quarters as two acquisitions are expected to be completed and commence contributions in 2Q11. Given the 132m rights units have been officially listed on 15 Apr 2011, we lowered our FY11-12F DPU estimates by 13.9-9.2% respectively to account for the enlarged share base. Consequently, our TP is lowered to S$0.59, based on DDM (COE: 10.1%, TGR: 1.0%). Maintain BUY as CIT is still trading at undemanding spread of 6.5% vs pre-crisis spread of 4.9%.

S$46.4m worth of property acquisitions to be completed in 2Q11. Two new additions – a warehouse at 4 & 6 Clementi Loop, and an industrial building at 60 Tuas South Street 1 – will add ~233k sqft of GFA to CIT’s existing portfolio GFA of 6.98m sqft. Based on assumption of 40% debt funding, we expect incremental DPU of 0.09-0.23S¢ from the acquisitions in FY11-12. Meanwhile, the S$13.1m BTS project at Tuas View Circuit is expected to be completed only in 2Q12.

New term loan facility being mooted. CIT will need to refinance its loans beginning next year where its existing syndicated term loan of S$303m will mature in Feb 2012. It is currently in discussion with four financial institutions for new term loan of S$320m which comprises of a three-year tranche of S$220m and a five-year tranche of S$100m. Estimated all-in borrowing cost for the new term loan facility is ~4.4%/year. Coupled with the acquisition term loan facility which has debt cost of 3%, we expect CIT’s all in cost of debt to drop from current 5.7% to 4.0-4.1%. In addition, we believe CIT’s gearing will decline to ~30% by end FY11.

Rights Issue for S$116.8m of acquisitions

EFR to acquire 3 acquisitions at estimated NPI yield of 8%. CREIT is proposing to raise S$56.7m through a fully underwritten renounceable 1-for-8 rights issue. A total of 132.1m shares will be issued at S$0.429/unit (15.6% discount to VWAP on 10 Mar). Nett proceeds of S$53.8m from the EFR would be utilized, together with S$40.9m debt financing and existing cash to fund 3 acquisitions of S$116.8m. We estimate CREIT’s cost of capital to be about 6.27% and expect the acquisitions to be mildly accretive, adding just 0.8%-2.8% to FY11 and FY12 DPU estimates. Maintain BUY, DDM-based TP of S$0.61.

Accretive Acquisitions. The acquisitions comprise of 4&6 Clementi Loop (binding S&P agreement signed) and 2 other acquisitions in the western part of Singapore (MOUs signed), and are purchased on sale-and-leaseback basis to the respective vendors for lease terms of between 5 and 6 years with options to renew. The purchase consideration for 4&6 Clementi Loop is split into an initial amount of S$40m upon completion of purchase, and a further S$23.3m upon completion of extension development works by the vendor around end of 2012. An additional new building would be constructed, adding 10,291 sqm of Gross Floor Area. CREIT’s asset size increases to S$1b post acquisition. The acquisitions are expected to be completed by 3QFY11.

Favourable valuations; maintain BUY. The acquisitions are expected to improve the operating statistics of CREIT, pushing out the weighted average lease expiry of the portfolio from 4.1 to 4.2 years and reducing lease concentration from 17.3% to 15.4% for 2013 and from 37.3% to 33.1% for 2014. Free float is expected to increase by 12.5%, potentially increasing the trading liquidity of the stock. Stock trades at 10% FY11 yield, attractive relative to its peer average of 7.3% and its pre-crisis yield of 6.7%.

Cash call for acquisitions

• Cash call to fuel growth ambitions

• Earnings accretion from acquisitions is neutral; boost from interest savings from new loan facility

• BUY CIT for its high yield of 10%

Proposing to acquire 3 properties for S$116.8m. The three properties are located in the Western part of Singapore. The first property is at 4 & 6 Clementi Loop; Cambridge REIT (CIT) has agreed to pay the Vendor, Hoe Leong Corporation, S$40m with an additional S$23.3m payable upon completion of construction of an additional adjacent building in 2012. The remaining two properties (costing a total of S$53.5m) are still at MOU stage with CIT doing their due diligence. When acquired, CIT will lease them back to the vendors for durations of over 5 years, with lease extension options ranging 3-6 years. Completion of the acquisitions is expected to be in 3Q11.

Rights issue to raise S$56.7m. To part fund the purchase of the mentioned properties, CIT is proposing a 1-for-8 rights issue to raise gross proceeds of about S$56.7 m. The rights are priced at S$0.429 (15% discount to closing price of S$0.505 and a 13.7% discount to TERP of S$0.497), with the remainder from debt. Based on a projected yield of 8%, we estimate mild accretion to earnings from the above properties. Distributions will instead be boosted by interest savings from a recently secured S$320m loan facility, which will shave off over 150 bps in expenses (all in cost of 4.4% vs 5.9% previously).

Near term dilution, but stock still offers yields >10%, BUY. As the acquisitions are expected to complete towards 3Q11 while the rights units are expected to be issued in Apr 2011, our DPU estimates will be reduced by 5% in FY11 to 4.7 Scts but lifted by c1% to 5.1 Scts in FY12, translating to yields of over 9.3-10.1%. Maintain BUY.

Full Year 2010 Results

•Full year revenue of $74.2 million, net property income of $65.1 million, distributable income of $44.7 million.

•4Q10 DPU of 1.193 cents, bringing full year DPU to 4.892 cents.

•Buy for attractive yield of 9.4%, maintain target price of $0.61

Results slightly better than forecast

Results came in slightly better than our forecast. Revenue and DPU came in 2.3% and 4.8% higher than our forecasts respectively. However growth was flat on a y-y basis. Full year revenue was $74.2 million (-0.3% y-y), net property income was $65.1 million (flat y-y) and distributable income was $44.7 million (+1.1% y-y). Full year DPU was 4.892 cents (-8.7% yy). The flat to slight y-y drop was mainly attributed to the loss of revenue from the divested assets. During the year, Cambridge sold $68.1 million worth of assets. On the other hand, the decline was mitigated through addition of $70.8 million of properties Cambridge purchased. DPU dropped mainly due to larger unit base arising from two rounds of private placement to raised $$90.4 million with the issuance of 178 million units.

Quarterly results review

Revenue was affected in FY10 due to the gradual divestment of assets. However revenue rebounded in 4Q10 from the contribution of the acquisitions. Quarterly DPU displayed a corresponding trend. DPU was also affected due to the larger unit base arising from the private placement.

Portfolio update

Property portfolio value stands at $928.5 million as at 31 Dec 2010. This follows a $48.2 million upward yearly revaluation of the portfolio, consisting of 43 properties. Cambridge still has $22 million of assets earmark for divestment. Gearing is 34.7% with total debt of $339.2 million and will reduce to 33.4% as the manager has committed to pay down $20 million on 17 Feb 2011.

On a separate note, 3 properties are affected in varying degrees due to the construction of the Tuas West MRT extension and will be repossessed by the Singapore Land Authorities by 2013. We estimate the pro-rated valuation of the affected land area is $54.5 million.

Conclusion

Results came in within our expectations. We had noted the impact of lower DPU due to loss of income from divested assets as well as dilution from a larger unit base in our previous reports. Cambridge is almost done with the divestment program. The REIT should begin accretion from 2011 given that management had outlined their expansion strategy. We felt the compulsory land acquisition came as a derailment to the strategy as we do not think the 3 properties are part of the intended divestment assets. Nevertheless we are forecasting this year DPU to be 4.864 cents which translate to an attractive 9.4% dividend yield. We are maintaining our target price of $0.61, but upgrading our recommendation to buy in view of the high yield.

Like a high yielding bond

At a Glance

• Stronger financials with gearing heading towards 33.3% target

• More acquisitions to boost earnings in 2011

• Attractive and highest yield in SREIT sector. BUY and TP S$0.58 maintained

Comment on Results

4Q10 results in line with expectations. Cambridge REIT (“CREIT”) posted gross revenues and net property income of S$19.1m (+1%yoy) and S$16.8m (+0.7% yoy) respectively. The slight uplift in rental income was attributed to contributions from 3 new properties acquired in 4Q, offsetting income loss from certain properties and strata units in Enterprise Hub divested in the FY. Distributable income fell 0.4% to S$12.0m, translating to a DPU of 1.14Scts. CREIT also reported a 5.7% increase in portfolio valuation compared to Jun 10 and raised NAV slightly to 60.7 Scts.

Gearing level to head towards 33.3% target. CREIT has lowered its gearing through periodic repayment of debts with monies from its divestment activities. It will further lower its current gearing of 34.7%, after repaying S$20m loans.

Acquisition strategy to continue in 2011. CREIT will complete the acquisition of 2 assets and embark on its first built-to-suit project in coming months, funded by the placement proceeds raised in 4Q10. The manager is likely to seek out more acquisitions in 2011 backed by its improved financial flexibility and lower gearing position.

Recommendation

BUY, TP S$0.58 based on DCF. CREIT continues to offer an attractive FY11-12F yield of 9.5-9.7%, the highest in the S-REIT sector. With improved income visibility post restructuring, we believe CREIT deserves higher valuation. Maintain BUY and TP of S$0.58, offering a total return of 20%.