Highlights
1Q13 results in line. Cambridge REIT (CREIT) reported a 18.6% and 17.6% y-o-y rise in its topline and net property income to S$24.8m and S$21.3m, respectively. Growth was largely attributable to the additional income from the acquisitions, periodic rental escalations and higher income from its multi-tenanted properties. This more than offsets the loss of income from its divestments. Portfolio occupancy remained high at 98.6%. Distributable income rose 8.4% y-o-y to S$15.1m, translating to a DPU of 1.234 Scts (+5.4% y-o-y).
Our View
Completed acquisitions and AEIs to contribute positively; more development and enhancement opportunities to come. CREIT’s completed acquisitions totaling S$73m in 1Q13 (three properties) which is likely to more than offset the loss of income from SLA’s compulsory acquisition of 30 Tuas Road and 1 Tuas Ave 3. In addition, the completion of various asset enhancement initiatives and development projects over the course of 2013 will mean incremental growth in revenues and distribution in the medium term. In addition, we see further divestment opportunities in the coming year as the manager looks to keep its portfolio contemporary and relevant.
Potential conversions of rental reversions in
2013-2014 likely to remain stable. While a significant 44.6% of its leases are up for renewal (15% in FY13; 29.6%) where close to two-thirds are from its single-tenanted properties. While we note potential risks that some of these master-leases might not roll over, this is mitigated by the fact that
(i) expiring rents are lower than market levels, which means that these properties should see a net uplift in rental income eventually if they are fully let-out on a multi-tenanted basis
(ii) seethrough occupancy for those properties are fairly high. Moreover, the manager is in active negotiation with vendors to renew leases ahead of their expiry.
Recommendation
BUY call maintained, TP S$0.93. Our target price of S$0.93 is based on
(i) CREIT fully maximizing its under-utilized GFA and
(ii) implied value assuming an enbloc sale of Lam Soon Building.
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