Cambridge Industrial Trust (CREIT SP) - DBS Research 2017-04-26: New Sponsor ESR Increased Skin In The Game

Cambridge Industrial Trust (CREIT SP) - DBS Vickers 2017-04-26: New Sponsor ESR Increased Skin In The Game CAMBRIDGE INDUSTRIAL TRUST J91U.SI

Cambridge Industrial Trust (CREIT SP) - New Sponsor ESR Increased Skin In The Game

  • 1Q17 DPU decline due to loss of efficiency from conversion of single to multi-tenants, in line.
  • Sponsor E-Shang Redwood increased skin in the game and new CEO was appointed by the board.
  • Reiterate BUY.

What’s New 

Lease conversion from master to multi continue to pull down performance. 

  • 1Q17 gross revenue was S$27.7m, down 2.2% y-o-y, mainly attributed to the loss of efficiency from several lease conversions from master to multi-tenanted as well as divestment of properties. 
  • Single vs multi-tenanted properties by rental income dropped to 40.5% vs 59.5% compared to 48.3% vs 51.7% a year ago. As the number of multi-tenanted buildings in the portfolio increased from 20 to 23 over FY16, this has also resulted in an increase in property tax, land rental and other property expenses by 17.1% to S$8.0m. 
  • NPI was down by 8.4% to S$19.7m. 
  • DPU was 1.00 Scts, down 9.7% y-o-y, and represents 25.1% of our full year FY17 forecast, in line.

New sponsor increased skin in on the game. 

  • On 7 Feb 2017, E-Shang Redwood (ESR) acquired 10.7% stake of the REIT’s units and continued to add to its position since, to reach the current 12.0% - effectively becoming its second largest unitholder after Mr Tong.

New CEO appointed. 

  • CREIT announced the appointment of ex-StanChart banker Adrian Chui as CEO of Executive Director on 25 March 2017. 
  • Mr Shane Hagan, who served as the Acting CEO since Mr Philip Levinson’s resignation in November 2016, will now resume his original role of Chief Operating Officer and Chief Financial Officer.

Focus on occupancy as opposed to rental. 

  • 326,870 sqft of NLA was renewed in 1Q17 with reversion rate of -18.9%, the glaring negative number was mainly resulted from a master lease renewed at a much lower rate for six years, albeit in line with market rents. Excluding which, the remaining reversion rates were largely flat. Tenant retention rate was 61.7% due to non-renewal of a short-term lease.
  • Management continued to trade off rental with occupancy - the portfolio occupancy increased by 70ppt to 95.4%, two master leases renewed during the quarter. 
  • Looking forward, c.18% of CIT’s leases by rental revenue are due for renewal in FY2017, of which only 3.3% (three properties) of revenue is from single-tenanted buildings while 14.4% is from multi-tenanted buildings. This signals a positive shift in focus for the Manager as compared to the past few years where there was a higher proportion of single-tenanted buildings expiring. 
  • Out of the three single-tenanted buildings due for expiry in the second half of FY2017, the Manager currently expects to renew or enter into new leases for two properties and to divest the other.
  • No major refinancing until 2H18, 90% of interest rates fixed for next 2.7 years.


Reiterate BUY. 

  • We upgraded our recommendation to BUY on 26 January 2017 and raised TP to S$0.60 from S$0.57. 
  • We reiterate our call as we believe the acquisition of the trust manager removed some of the overhanging risks. At present, four assets have been identified for potential divestments and the Manager is still keen to look for acquisition opportunities, particularly in Australia. 
  • Further potential re-rating is possible once a detailed blueprint from its new Sponsor ESR is communicated to the investors given the Sponsor’s large asset portfolio in North Asia.
  • In addition, we maintain a close watch of a potential giant industrial REIT that could emerge from a series of M&As on the back of the dynamic activities of CREIT’s new sponsor, ESR, a consolidation in industrial REITs could re-rate share prices. Please refer to our report: Catalyst Abound, published on 17 March 2017.

Singapore Research Team DBS Vickers | Derek TAN DBS Vickers | http://www.dbsvickers.com/ 2017-04-26
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