Cambridge Industrial Trust

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1 l Equity Research l Singapore l Real Estate Investment Trusts 17 January 2014 Cambridge Industrial Trust Limited upside after recent outperformance Cambridge Industrial Trust s (CREIT) 4Q13 DPU of S 1.25 was flat q/q, in line with our and consensus estimates. CREIT s latest acquisition could take months to ramp up, due to occupancy of 77%. We believe CREIT s catalysts are fully priced in. Among industrial REITs, we prefer MLT given its offshore exposure and higher potential to surprise. We lower our price target to SGD 0.68 and reiterate our In- Line rating results in line, NPI margin likely to continue declining: CREIT s 4Q13 DPU of S 1.25 was flat q/q and in line with our and consensus estimates. NPI of SGD 19.0mn was 9% lower y/y, 4% below our estimates and 9% below consensus. NPI margin was flat q/q but 5ppt lower y/y due to the conversion of expiring master leases to multi-tenanted ones. We expect same-store NPI to remain largely flat as more single leases expire and asset occupancies fall to 90% from 100%, as we expect these assets are c.10% under-rented. Latest acquisition could take months to reach 7% NPI yield: CREIT announced its SGD 32mn acquisition of 11 Chang Charn Road last month, which we expect to be funded with 60:40 cash:debt. We estimate the acquisition NPI yield to be c.5%, based on its current occupancy of 77%. We have assumed the property achieves 95% occupancy over the next two years, with average passing rents rising c.10% through positive rental reversions. We expect this to bring the asset NPI yield to c.7% in months, making the transaction c.1.5% accretive. Limited upside from here: CREIT has outperformed industrial REITs by 7-8% in the past three months. Among industrial REITs, we prefer Mapletree Logistics Trust (MLT) for its ability to grow regionally. While we continue to expect CREIT to be a potential candidate for an internalisation of management, this is less likely at present in our view, given the trust is trading at 1.0x P/B. Lower PT to SGD 0.68; reiterate In-Line: We lower our E DPU estimates and PT by 3%. Our DDM-derived valuation uses a risk-free rate of 3.0%, market risk premium of 6.5%, beta of 1.0 and a terminal growth rate of 0.75%. IN-LINE (unchanged) PRICE as of 16 Jan 2014 SGD 0.70 Bloomberg code CREIT SP Source: Company, Standard Chartered Research estimates Share price performance Source: Company, FactSet PRICE TARGET SGD 0.68 Reuters code CMIT.SI Market cap 12-month range SGD 855mn (USD 672mn) SGD EPU adj. est. change 2013E 0.3% 2014E -3.5% Year-end: December 2013E 2014E 2015E 2016E Revenue (SGD mn) Net property income (SGD mn) NPI margin (%) Associates and JCEs (SGD mn) Revaluation gains (SGD mn) Interest expense (SGD mn) (24) (16) (17) (18) Management fees (SGD mn) (20) (6) (6) (7) Net profit (SGD mn) Net profit adj. (SGD mn) Net profit adj. growth (%) EPU (S ) EPU adj. (S ) EPU growth adj. (%) DPU (S ) DPU growth (%) EV/EBIT (x) Net debt / assets (%) PBR (x) PER adj. (x) Dividend yield (%) Net asset value/unit (S ) Prem./(disc.) to NAV (%) Cambridge Industrial Trust STRAITS TIMES INDEX (rebased) 0.60 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Share price (%) -1 mth -3 mth -12 mth Ordinary shares Relative to index Relative to sector Major shareholder National Australia Bank/Mitsui & Co/Oxle (4.0%) Free float 96% Average turnover (USD) 1,256,206 Kai Yip Kai.Yip@sc.com Regina Lim Regina.Lim@sc.com Important disclosures can be found in the Disclosures Appendix All rights reserved. Standard Chartered Bank

2 We lower our E DPU/EPU estimates by 3% to account for CREIT s latest operational performance. We cut our PT by 3% to SGD 0.68/unit from SGD 0.70/unit. Figure 1: E DPU/EPU estimates Year ending December 2014E 2015E 2016E DPU new (S ) DPU old (S ) % change -3% -3% -3% EPU new (S ) EPU old (S ) % change -3% -3% -3% Source: Standard Chartered Research estimates NPI margins could continue to decline CREIT s portfolio NPI margin has declined to 81.4% in 4Q13 from 86.4% in 4Q12. This is largely due to the increasing conversions of expiring master leases, which are being converted to multi-tenanted ones. The majority of these expiring master leases are from CREIT s IPO portfolio, and had leases of six to seven years. We expect multi-tenanted leases to make up an increasingly big proportion of CREIT s portfolio, particularly if new acquisitions continue to come with multi-tenanted leases. We have assumed a decline in occupancy to 90% from 100% when master-leased assets convert to multi-tenanted. While gross rent rises with these conversions, property expenses rise faster as rents are no longer on a triple-net basis. We continue to expect the NPI margin to decline over the next three years to 75%, from 81%, as more of CREIT s master leases expire. As a result, we expect same-store NPI to remain largely flat despite revenue growth. Figure 2: Portfolio lease breakdown by rental income and NPI margin Single tenanted Multi-tenanted NPI margin (RHS) 100% 90% 80% 70% 17% 19% 29% 45% 50% 84.7% 86.4% 81.4% 88% 86% 84% 82% 60% 78.0% 80% 50% 40% 30% 20% 83% 81% 71% 55% 75.0% 50% 78% 76% 74% 72% 10% 70% 0% 4Q12 2Q13 4Q13 4Q14E 4Q15E 68% Source: Company, Standard Chartered Research estimates 17 January

3 Portfolio update acquisitions and divestments Latest acquisition could take months to reach 7% NPI yield CREIT announced on 23 December 2013 that it had entered into a conditional sale and purchase agreement with Shriro Property (Singapore) Pte Ltd for 11 Chang Charn Road. The 6-storey 97,500sf GFA warehouse cum light industrial building has remaining land tenure of c.43 years. Shriro will take a partial leaseback of approximately 25% of the property. Existing tenants include importer/distributor brands such as Ricola, St Dalfour and Zeiss. The acquisition is expected to be completed in 1Q14 and we estimate 60:40 cash: debt-funding as CREIT has yet to fully utilise its proceeds from the divestment of 63 Hillview Ave. We expect CREIT to be able to raise occupancy over the next two years to 95% from 75% currently, while raising average passing rents by c.10% as the property achieves positive rental reversions to market rates. This could potentially see NPI yield rise to c.7% in months time from c.5% currently. Figure 3: Acquisition details of 11 Chang Charn Road Acquisition 11 Chang Charn Road Property type Warehouse/industrial GFA (sf) 97,500 Land lease expiry 43 years Vendor Shriro Property Pte Ltd (Singapore) Expected completion 1Q14 Purchase price (SGDmn) 32.0 Valuation (SGDmn) 32.0 Estimated occupancy 77% Acquisition NPI yield 5% (based on current occupancy) Source: Company, Standard Chartered Research Divestment of 361 Ubi Road 3 aligned with portfolio remix strategy In 4Q13, CREIT had divested 361 Ubi Road 3 for SGD 18.5mn, after the expiry of the master lease in-place. The divestment price was 3% above latest valuation of SGD 18.0mn, and translates to a c.6-7% divestment yield based on expiring rent. However, the manager estimates the current market rent to be c.20% below the expiring rent after annual escalations over the expiring 10-year lease. Management expects CREIT s leverage to remain flat at c.29% following the two transactions. We now expect CREIT to acquire a further c.sgd 50mn of assets in the next nine months at 6.5% NPI yield. We expect this to bring CREIT s leverage up to c.34% after accounting for capital expenditure commitments for ongoing asset enhancement works and factoring in these acquisition assumptions. 17 January

4 15-Oct 18-Oct 21-Oct 24-Oct 27-Oct 30-Oct 2-Nov 5-Nov 8-Nov 11-Nov 14-Nov 17-Nov 20-Nov 23-Nov 26-Nov 29-Nov 2-Dec 5-Dec 8-Dec 11-Dec 14-Dec 17-Dec 20-Dec 23-Dec 26-Dec 29-Dec 1-Jan 4-Jan 7-Jan 10-Jan 13-Jan 16-Jan Equity Research l Cambridge Industrial Trust CREIT has outperformed SREITs and industrial REITs CREIT has outperformed small-cap industrial REITs and the overall industrial REIT sector by 7-8% in the past three months. The FSTREI declined 4%, while CREIT rose 3% over the same period. Figure 4: Outperformance of CREIT in the past three months CREIT Industrial SREITs Small cap industrial SREITs FSTREI 90 Source: Bloomberg, Standard Chartered Research CREIT s manager owns just 4% of the trust, making it one of the few SREITs that does not have its REIT manager as its largest unitholder. While we continue to think CREIT could be a good candidate to be internalised, we believe this is less likely at present in our view, given the trust is trading at 1.0x P/B. New CEO to be announced soon CEO Chris Calvert has announced his resignation from Cambridge Industrial Trust management, citing his family being abroad as the key reason. The incoming CEO has yet to be announced as regulatory approvals have yet to be finalised. Mr. Calvert will be in place until a smooth handover is done. 17 January

5 4Q13 results in line CREIT s 4Q13 DPU of S 1.25 was flat q/q and in line with our and consensus estimates. NPI of SGD 19.0mn was 2% lower q/q, 9% lower y/y and 9% lower than consensus estimates. Interest expense of SGD 5.0mn was above our estimates due to the timing of debt repayment during the quarter. NPI margin of 81% was flat q/q but 5ppt lower y/y, due to the conversion of expiring master leases to multi-tenanted leases. Leverage as of December 2013 was 28.7% and is expected to remain flat following the transactions. CREIT s property portfolio saw a 4% valuation increase from June 2013, with an average cap rate of 6.7%. Figure 5: 4Q13 results 4Q13 3Q13 % q/q 4Q12 % y/y Our estimates % diff Gross revenue % % % Net property income % % % Manager's management fees % % % Trust expenses % % -0.1 NA Interest income NA 0.0 NA 0.0 NA Borrowing costs % % % Non-property expenses % % % Net income % % % EBIT % % % Revaluation of derivatives % 0.2 NA 0.0 NA Property revaluation NA % 24.3 NA Gain/(loss) on sale of investment properties % -0.1 NA 0.0 NA Other income % 0.0 NA 0.0 NA Profit before tax % % % Income tax expense NA 0.0 NA 0.0 NA Profit after tax % % % Non-tax deductible items % % % Net income available for distribution % % % Distribution paid % % % DPU (S ) % % % EPU adj (S ) % % % NAV (SGD/unit) % % % Source: Company, Standard Chartered Research estimates 17 January

6 Income statement (SGD mn) Cash flow statement (SGD mn) Year-end: Dec E 2014E 2015E 2016E Year-end: Dec E 2014E 2015E 2016E Revenue EBIT Property expenses (13) (16) (24) (26) (31) Depreciation & amortisation Net property income Net interest NPI growth (%) Tax paid Management fees (10) (20) (6) (6) (7) Changes in working capital Other income Others (18) (24) (19) (21) (23) Other expenses (2) (2) (1) (1) (1) Cash flow from operations EBIT Capex (15) (45) (53) (7) (7) Interest expense (20) (24) (16) (17) (18) Acquisitions & Investments (120) 174 (124) 0 0 Interest income Disposals Associates Others (1) (1) JCEs Cash flow from investing (135) 129 (176) (7) (7) Property reval. gain/(loss) Other exceptional items Dividends (41) (44) (54) (61) (61) Pre-tax profit Issue of shares (0) (0) Taxation Change in debt 118 (163) 99 (11) (11) Minority interests Other financing cash flow Cash flow from financing 78 (207) 45 (72) (71) Net profit Net profit adj Change in cash 11 (16) (54) 8 5 Distributable income Exchange rate effect Distributed income Free cash flow Balance sheet (SGD mn) Financial ratios and other Year-end: Dec E 2014E 2015E 2016E Year-end: Dec E 2014E 2015E 2016E Investment properties 1,014 1,178 1,362 1,396 1,431 Operating ratios PP&E EBIT margin (%) Associates and JCEs Net margin adj. (%) Other non-current assets Sales growth (%) Total non-current assets 1,014 1,178 1,362 1,396 1,431 Net income growth (%) Cash & equivalents EPU growth (%) Short-term investments EPU growth adj. (%) Prop. under dev./held for sale DPU growth (%) Inventory DPU/EPU (%) Trade and other receivables Other current assets Efficiency ratios Total current assets ROE (%) Total assets 1,305 1,261 1,391 1,432 1,472 ROCE (%) ROA (%) Short-term debt Pre-sale deposits Leverage ratios Trade and other payables Net gearing (%) Income taxes payable Net debt/assets (%) Other current liabilities Net asset value/unit (S ) Total current liabilities Debt/capital (%) Long-term debt Interest cover (x) Deferred tax Current ratio (x) Other long-term liabilities Total long-term liabilities Per share Total liabilities EPU (S ) Shareholders' funds EPU adj. (S ) Minority interests DPU (S ) Total equity Total liabilities and equity 1,305 1,261 1,391 1,432 1,472 Valuation EV/EBIT (x) Gross debt PER (x) Net debt (cash) PBR (x) YE fully diluted units (mn) 1,216 1,239 1,249 1,259 1,270 Dividend yield (%) Source: Company, Standard Chartered Research estimates 17 January

7 Disclosures appendix The information and opinions in this report were prepared by Standard Chartered Bank (Hong Kong) Limited, Standard Chartered Bank Singapore Branch, Standard Chartered Securities (India) Limited, Standard Chartered Securities Korea Limited and/or one or more of its affiliates (together with its group of companies, SCB ) and the research analyst(s) named in this report. THIS RESEARCH HAS NOT BEEN PRODUCED IN THE UNITED STATES. Analyst Certification Disclosure: The research analyst or analysts responsible for the content of this research report certify that: (1) the views expressed and attributed to the research analyst or analysts in the research report accurately reflect their personal opinion(s) about the subject securities and issuers and/or other subject matter as appropriate; and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views contained in this research report. On a general basis, the efficacy of recommendations is a factor in the performance appraisals of analysts. Where disclosure date appears below, this means the day prior to the report date. All share prices quoted are the closing price for the business day prior to the date of the report, unless otherwise stated May 13 IN-LINE 0.84 Source: FactSet prices, SCB recommendations and price targets SGD 0.43 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13 Nov-13 Feb SGD Recommendation and price target history for Mapletree Logistics Trust Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-1 Date Recommendation Price target Date Recommendation Price target Date Recommendation Price target 1 21 Jan 11 OUTPERFORM May 12 IN-LINE May 13 IN-LINE Apr 11 IN-LINE Jun 12 OUTPERFORM Jun 13 IN-LINE Jul 11 IN-LINE Jul 12 OUTPERFORM Jul 13 UNDERPERFORM Oct 11 IN-LINE Nov 12 IN-LINE Oct 13 IN-LINE Nov 11 OUTPERFORM Jan 13 IN-LINE Nov 13 OUTPERFORM Mar 12 OUTPERFORM Mar 13 IN-LINE 1.29 Source: FactSet prices, SCB recommendations and price targets Recommendation Distribution and Investment Banking Relationships % of covered companies currently assigned this rating % of companies assigned this rating with which SCB has provided investment banking services over the past 12 months OUTPERFORM 53.2% 14.5% IN-LINE 35.2% 12.8% UNDERPERFORM 11.6% 8.3% As of 31 December 2013 Research Recommendation Recommendation and price target history for Cambridge Industrial Trust Date Recommendation Price target Date Recommendation Price target Date Recommendation Price target 1 8 Feb 13 OUTPERFORM Jun 13 OUTPERFORM Nov 13 OUTPERFORM Mar 13 OUTPERFORM Jul 13 OUTPERFORM Jan 14 IN-LINE Terminology OUTPERFORM (OP) IN-LINE (IL) UNDERPERFORM (UP) Definitions The total return on the security is expected to outperform the relevant market index by 5% or more over the next 12 months The total return on the security is not expected to outperform or underperform the relevant market index by 5% or more over the next 12 months The total return on the security is expected to underperform the relevant market index by 5% or more over the next 12 months SCB uses an investment horizon of 12 months for its price targets. 17 January

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