Cambridge Industrial Trust - Looking to optimise capital structure and portfolio

Cambridge Industrial Trust (CREIT) reported 1Q09 DPU of 1.3Scts (-19% y-y, -6% q-q), which met 27% of our FY09F DPU forecast of 4.9Scts and 29% of consensus FY09F DPU forecast of 4.5Scts. While core operating performance in 1Q09 was largely in line with expectation — gross rental revenue of S$18.4mn (+4% y-y, flat q-q) and NPI of S$16.1mn (+3% y-y, +6% q-q), both meeting 25% of our respective full-year forecasts — the variance from our projection came largely from finance expenses.

1Q09 finance expenses of S$13mn comprise S$4.9mn interest cost on borrowings, which met 23% of our FY09F forecast of S$21.4mn, and S$8.1mn fair value loss on financial derivatives booked during the quarter, which is a non-cash item and was not reflected in our forecast. CREIT’s weighted average all-in interest cost increased from 3.4% at the end of 4Q08 to 5.9% at the end of 1Q09, following the drawdown of the S$390.1mn three-year secured term loan in February. As such, the full impact from a higher cost of debt should be observed in subsequent quarters.
With refinancing concerns now out of the way, management has said that it plans to further improve liquidity and de-leverage its balance sheet to bring its gearing down from 39.9% at the end of 1Q09 to 30% over the medium term. We believe the plan to further de-leverage probably reflects the management’s cautious outlook on the industrial property market. On our numbers, we believe around S$305.1mn could potentially be written off CREIT’s current portfolio value of S$967.7mn over the cycle, which would push its gearing from the current 39.9% to 59% as a result.

Potential ways to further de-leverage include raising fresh equity and asset sales. We understand that notwithstanding the encumbrance of 42 out of the 43 properties in the portfolio, CREIT has an understanding with banks such that asset sales would still be possible. Management believes the current portfolio is not an optimised one and is looking to dispose some properties deemed to be of lesser quality.

Given the priority to conserve capital, we believe CREIT is unlikely to proceed with the Natural Cool Lifestyle Hub (NCLH) acquisition, the purchase option of which expires at the end of June. Besides the motivation to conserve capital, the agreed value of S$55.1mn (S$260psf; initial yield of 6.4% on our estimates) on NCLH also appears hard to justify in the current market. We understand CREIT is not liable for any penalty fee, should it decide not to exercise the purchase option.

We retain our FY09-11F DPU forecasts but roll over our intrinsic NAV estimate to reflect FY10F valuation — gross asset value estimate raised to S$662.6mn (from S$571.1mn), with core net asset value raised to S$0.36/unit (from S$0.25/unit). As highlighted in the previous section, we believe a non-cash revaluation deficit of S$305.1mn could potentially be booked over the cycle and consequently CREIT’s gearing could potentially rise from the current 39.9% to 59%. Our valuation methodology assumes new equity of S$125.1mn to be raised at the current share price to ensure gearing stays within 40% to quantify the fair discount to core NAV that reflects the potential dilution.

As the stock is trading at our core NAV estimate, there is theoretically no dilution to our core NAV estimate if CREIT were to raise new equity at the current share price. As such, we value the stock at our core NAV estimate and raise our price target from S$0.24 to S$0.36 accordingly. Our price target implies a potential total return of 13.9%, including our projected FY10F dividend yield of 13.9%, at the current share price. On a total return basis, the stock has done well YTD, up 43.9% vs the S-REITs universe’s weighted average gain of 39% and the benchmark FSSTI Index’s 32.5% gain over the same period. We maintain our NEUTRAL rating.

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