Cambridge Industrial Trust - 2Q09 results - Above expectations

DPU above expectation. 2Q09 results are in line with consensus forecast but 6% above our expectation. Distribution of S$10.7m (-13.8% yoy) and DPU of 1.35cts (-13.8% yoy) form 31% of our FY09 forecasts. 1H09 DPU of 2.64cts represents 60% of our full-year forecast. The yoy decrease in distribution can be traced to higher management fees paid in cash and higher borrowing costs. Net property income of S$16m was flat (-0.3% qoq), while portfolio occupancy was stable at 99.5% (+0.3% pt qoq) as at Jun 09.

Assets devalued by 9%. In 2Q09, the manager commissioned a full valuation of CREIT’s assets, with a 9% fall in asset value to S$880.3m. This was mainly due to higher cap rates and lower rents used by the valuers. After the valuation, asset leverage rose to 43.8% from 39.9%, while NAV/unit decreased to S$0.62 from S$0.73cts. Management anticipates flat valuation by the end of the year.

Private placement of S$28m diluted DPU by 8%. On 27 Jul, management announced a private placement of 71.1m units to raise gross proceeds of S$28m. This represented 9% of the units in issue as at 31 Dec 08. Assuming no other changes, DPU would be diluted by 8%. About 23% of the privately placed units will go to its sponsors NAB (19%) and Oxley (4%). Units issued to NAB and Oxley will be priced at S$ 0.399/unit, based on the adjusted volume-weighted average price (VWAP) of units for the full market day on 24 Jul 09. Units issued to other investors will be priced at S$0.392, a 5% discount to VWAP.

Changes to our estimates. We reduce our rental decline assumptions for CREIT in FY09 to -2% (from -5%), in view of the stable performance in 1H09. Additionally, we adjust the number of units to factor in the private placement, and add back the amortised loan transaction cost to distributable income. The net result for our FY09-11 DPU forecasts is an upgrade of 12-18%.

Maintain Outperform; higher target price of S$0.52 (from S$0.48). Our target price rises in tandem with our increased DPU forecasts to S$0.52 (from S$0.48), still based on DDM-valuation (discount rate 9.4%). We maintain our Outperform rating given its shareprice upside potential and forward yields of 12%.

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Cambridge Industrial Trust - lower our rating from Buy to Hold

Cambridge Industrial Trust reported results for 2Q09. CIT recorded gross revenue of $18.5 million (+2.8% yoy, flat qoq), net property income of $16.0 million (+0.9% yoy, flat qoq) and distributable income of $10.7 million (-13.8% yoy, +0.04% qoq). DPU for 2Q09 is 1.345 cents.
Gross revenue is stable with slight growth over the quarters. Occupancy rate improves slightly from 99.2% in 1Q09 to 99.5% in 2Q09. Distributable income has however decreased since 1Q08 to 1Q09 before improving slightly in 2Q09. The main reason for the decrease is the progressively higher interest cost CIT paid on its loans. CIT has maintained a gross margin of approximately 0.9x. Distributable income margin dropped from 0.7 in 1Q08 to the 0.6x level. We expect it to maintain at this level as interest payment should not varies much for the remaining term of loan.

Property portfolio was revalued downwards by 9%. Portfolio value fell from $967.7 million to $880.3 million. Correspondingly, gearing rises from 39.8% to 43.8%. CIT single loan maturity of $390 million is due in 2012. A point of concern is that further portfolio valuation drop may starts to breach bank covenants. CIT needs to maintain a LTV ratio below 0.55 and interest cover above 2.2x. Currently CIT has a LTV of 0.46 and interest cover of 3.2x. We estimate portfolio value will have to fall a further 17% before the LTV covenant is breached.

Our revenue forecasts have assumed a portfolio vacancy of 3%. Portfolio performance in the last two quarters was lower than our assumptions. We thus revise our vacancy assumption to 1%, still slightly conservative compared to CIT actual occupancy rate. We have also revised down the management fee following the downward revaluation of the portfolio. We raise our DPU forecast from 4.73 cents to 4.93 cents. Fair value is raised marginally from $0.44 to $0.45. In view of the recent run-up in price, we lower our rating from Buy to Hold.

Cambridge Industrial Trust has no near term refinancing worries

CIT has no near term refinancing worries, as its single loan maturity of $390 million is due in 2012. The current gearing is 40%. Although it has not mention any plans of acquisition, CIT has a LTV covenant of 50%, which effectively allows it to gear up a further $200 million. However we feel that acquisition using pure debt to push the gearing limit is not a prudent move as seen in the last round of panic refinancing in the REIT sector. Therefore we believe with the three years time frame to the next loan maturity date, CIT will undertake some form of recapitalization measures to fuel its growth plans.

Property portfolio continues to perform within expectations. Occupancy rate for 1Q09 was 99.2%. The current focus for management is to actively manage its property portfolio so as to maximize the usage of space and renegotiate leases to dilute expiry profile concentration. Management has also indicated asset rebalancing whereby the REIT divests smaller underperforming assets.
We had assumed a 3% vacancy rate for 2009F and 2010F. Demand for industrial space should be buoyant from 2011 as supply is expected to stay flat according to URA schedule of industrial space. We raise the fair value estimate from $0.31 to $0.44 on lower assumption of WACC at 9.96 versus our previous assumption of 11.4. We upgrade our recommendation from Hold to Buy.

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.