Cambridge Industrial Trust - CIMB Research 2016-07-22: 2H16 could pose some earnings volatility

CAMBRIDGE INDUSTRIAL TRUST J91U.SI

Cambridge Industrial Trust - 2H16 could pose some earnings volatility

1HFY16 DPU of 2.19 Scts (-10.6% yoy) was within consensus and our expectation, forming 50% of our full-year forecast. 2Q16 DPU of 1.078 Scts at 24% of our FY16F.
Excluding management fees paid in units and one-off capital distribution in 1H15, 1H16 DPU would have grown 1.9% yoy.
Due to the conversion of 4/6 Clementi Loop from master lease to MTB, portfolio occupancy dipped to 93.4%, and CREIT experienced -15.8% rental reversion in 1H

2Q16 revenue climbed up 2.5% yoy due to acquisitions over the past year. However, NPI was down marginally at 0.4% yoy due to higher operating expenses incurred for new and renewed leases, as well as the ongoing conversion of assets from single-tenant buildings (STBs) to multi-tenant buildings (MTBs).
1H16 NPI margin came in at 74.3% (1H15: 77.2%).
CREIT also completed the divestment of 23 Tuas Avenue 10 for S$16.5m

Portfolio occupancy slipped 0.7% pt qoq to 93.4% with a WALE of 3.6 years.
CREIT renewed 626k sq ft of space in 1H16 and achieved a tenant retention rate of 71.4%. It reduced GRI for renewal for 2016 to 10.3% (end-2015: 22.2%). Of which, 6.3% pertains to five STBs.
We expect one of the properties to be renewed, two to be divested and two to be converted into MTB/improvement works. As a result, there could be some earnings vacuum in 2H.

The main reason for the occupancy slippage stemmed from 4/6 Clementi Loop (contributed to c.5% of FY15 GRI). The warehouse was converted to a MTB with the end of the master lease, and the existing master tenant significantly downscaled its space requirements (some of the other space has been sub-tenanted).
Plus, CREIT experienced a like-for-like negative rental reversion of 15.8% due to the conversion of the master lease to MTB.
We expect the conversion to impact CREIT’s results in 2H16.

As at 1H16, CREIT’s gearing was 37.4%.
All-in cost of debt is 3.68% p.a. and a weighted average debt expiry of 3.1 years. 86.6% of the trust’s interest rate exposure is fixed, insulating the trust from rate hikes.
During the quarter, CREIT issued S$50m 7- year MTN at 3.95%.

We cut our FY16 DPU by 1% to factor in the earnings vacuum and negative rental reversion to be felt in 2H; and our FY17-18 DPU by 4% on lower NPI margins.
Our DDM-based target price is partially increased (to S$0.59) due to an across-the-board cut in the risk free rate.
We keep a Hold call on CREIT as we see earnings volatility in 2H16.

YEO Zhi Bin CIMB Securities | LOCK Mun Yee CIMB Securities | http://research.itradecimb.com/ 2016-07-22

CIMB Securities SGX Stock Analyst Report HOLD Maintain HOLD 0.59 Up 0.57