SINGAPORE – Cambridge Industrial Trust Management (CITM) on Feb 18 announced that it has successfully completed and fully drawn the $390.1 million syndicated term loan transaction announced in Dec 2008.

For FY08, CIT recorded 36.4% rise in revenue, 37.1% rise in net property income
and a 4% drop in DPU. Full year revenue is $72.3 million and DPU is 6.012 cents.

Revenue analysis. Revenues over FY07 and FY08 have increased steadily which reflect the contribution from acquisition as well as the rental escalation component of leases. Net property income is very much in line with revenue growth, however distributable income starts showing a decline from 2Q08 onwards. DPU on the other hand is dismal and has been declining since 4Q07, partly due to the dilutive effect of the equity fund raising carried out in October 2007.

CIT has secured refinancing for its debt of $369 million through a 3 year term loan of $390.1 million. The current gearing is 37.8%. The loan comes at a substantially higher interest of 6.6%(including amortization of upfront cost). We estimate the cash interest circa 5.0%.

Changes at the top. Chris Calvert (former CEO of MacCarthurCook Industrial REIT) was appointed the CEO in Dec 2008 in place of Wilson Ang. Through a series of transaction, NabInvest and Oxley Group have bought over the 80% ownership of the REIT manager with the remaining 20% still under Mitsui Limited. We remain hopeful that the new management team will do more to add value to investors.

Valuation. We think the higher borrowing cost will continue to be a drag on distribution. We are also factoring in higher tenant vacancies to reflect the macro economic conditions. We revise down our gross revenue forecast for FY09F and FY10F by 3% each and assume a borrowing cost of 5.0%. Accordingly, our DPU forecasts for FY09F and FY10F fall 12% and 11% to 4.73cents and 4.99 cents. Fair value is also lowered to $0.27. We lower our call from Buy to Hold.

Safe for now

• Met expectations; NPI margin declined. 4Q08 DPU of 1.37cts and FY08 DPU of 6.01cts were in line with Street and our expectations. Full-year gross revenue of S$72.3m was up 36.3% yoy on increased contributions from earlier acquisitions. 4Q08 NPI margins declined 6.3% pts qoq to 82.2% on higher property expenses, doubtful debt provisions and Shariah compliance fees. Distributable income in 4Q08 declined 7.8% qoq owing to increased borrowing costs. Occupancy remained high at 99.5%

• Refinancing woes over. In Dec 08, management successfully secured refinancing for debt due in Feb 09 with a S$390.1m syndicated 3-year loan from HSBC, RBS and its parent NAB. Including the amortisation of upfront costs, all-in interest cost is estimated at 6.6%. With this refinancing, CIT has no debt due till 2011, with a gearing of 37.8%

• Changes at the helm. CEO Mr Wilson Ang has stepped down after the refinancing exercise and Mr Chris Calvert (ex-CEO of MacarthurCook Industrial Trust) has taken over. Management foresees pressure on distribution mainly from higher interest costs.

• Maintain Outperform at higher target price of S$0.53 (from S$0.52), still based on DDM valuation (9.6% discount rate and 2% terminal growth). CIT has relatively high tenancy risks in view of its dependence on its top 10 tenants (which contribute more than 60% of revenue); its small number of tenants (under 100) compared with A-REIT (860) and MLT (224); and greater exposure to SME tenants. To account for possible defaults and lower occupancy levels, we reduce our growth assumptions to -2% for FY09 and 0% for FY10. On the other hand, we reduce our interest cost assumptions to 5.5% from 6.3% as amortised transaction costs included in total cost of debt are non-cash items. Our DPU estimate for FY09 increases 1.6% while our FY10 estimate declines by 1%. We also introduce FY11 forecasts. With forward yields of 16.6% and at 0.39x P/BV, CIT remains cheaper than the S-REIT average of 0.41x. Also, CIT’s main attractions remain its long weighted average lease expiry of 5.7 years, stepped-up increases for its leases, and 16 months of security deposits. Maintain Outperform.

Cambridge Ind’l Trust reports 4% fall in DPU

It hopes to deliver stable DPU this year with its long average lease expiry

CAMBRIDGE Industrial Trust (CIT) has announced a distribution of 1.373 cents per unit for the quarter ended Dec 31, 2008, said Reit manager Cambridge Industrial Trust Management Ltd (CITM).

The Q42008 DPU is 0.117 cent lower than the same period a year ago.

CIT’s total net distributable income for FY2008 was $47.9 million with an annual DPU of 6.012 cents. This represents an annual yield of 21.9 per cent based on the closing price of $0.275 per unit on Dec 31, 2008, said CITM.

The annual DPU for FY2008 of 6.012 cents was a decrease of 4.0 per cent from 6.262 cents in FY2007.

Said Chris Calvert, chief executive officer of CITM: ‘We are pleased to report a set of consistent results for FY2008 in this difficult economic environment.’

All its properties are signed with long leases of up to 15 years, with fixed rental escalation. The weighted average remaining lease term of CIT’s existing portfolio of 43 properties remained stable at 5.7 years as at December 2008, CIT said.

As at the end of 2008, CIT has a portfolio of 43 properties with 653,673.39 square metres of lettable area valued at $995.4 million. The weighted average land lease on these properties is 39.4 years, excluding freehold property which comprises 5.4 per cent of total lettable area. About 35 per cent of the portfolio of properties is in the logistics and warehousing sector, with the next significant segment in the light industrial space accounting for 34 per cent.

The occupancy of CIT’s portfolio was 99.5 per cent.

‘CIT continues to place prudent capital management at the centre of its business strategy as evidenced by recent signing of term sheets with three banks under which they will commit to provide a $390 million syndicated term loan,’ it said. The group’s gearing was 37.8 per cent, below its long-term leverage target of 40 per cent.

CIT said its future outlook will be determined by the severity of the impact of the current financial crisis. ‘However, for this financial year, CIT believes itself to be well-positioned to deliver stable DPU, with its relatively long average lease expiry of 5.7 years on top of a high 16-month security deposit,’ it added.

First look

Following its announcement of a new CEO, Cambridge announced after market close it had agreed to the terms of a 3-year syndicated loan to refinance all existing debt facilities. While the eventual cost is higher than our expectation, it is far lower than the market was pricing in prior to the announcement. This development should allay much of the refinancing concern over the S-REITs. Pending drawdown of this loan, we keep our DPU forecasts and other assumptions unchanged.

Refinancing at higher cost, but risk largely abated