Compelling BUY Due To Attractive Distribution Yield

Defensive strength from earnings visibility. Cambridge Industrial Trust’s (CIT) weighted average lease term to expiry was 6.4 years as at Jun 08. There are no expiries from 2008 to 2010. The bulk of the leases will expire in 2013 and beyond. CIT is well protected by security deposits averaging 17 months in the form of bankers’ guarantees. Leases are structured with periodic rental step-ups of 5% every two years or 7% every three years, thus providing steady organic growth of 2.5% p.a. Its top 10 tenants accounted for 62.6% of gross rent in Jun 08. Its largest tenant, CWT Limited, accounts for 14.1% of gross rent. Management expects current occupancy of 100% to be maintained in 2H08.

Seeking refinancing via Islamic finance. CIT plans to refinance S$390m variable funding notes expiring in Feb 09 with Shariah-compliant three-year syndicated Ijara (Islamic sale & leaseback). The transaction is subject to approval by unitholders and is expected to be completed by 3Q08. Management expects Islamic Finance to reduce cost of borrowings by at least 20bp compared with conventional banking facilities. CIT will be the first Shariah-compliant real estate investment trust (REIT) listed in Singapore after completing the conversion process.

CIT provides distribution yield of 10.3% for 2009, an attractive spread of 7.2% over 10-year Singapore government bond yield of 3.1%. Its share price has also corrected 39.3% from the peak of S$0.98 in mid-07 and is trading at 12.5% below the price of S$0.68 during the IPO in Jul 06. We have conservatively factored in cost of borrowings of 4.5% to reflect the risk of refinancing short-term borrowings. Initiate coverage with a BUY recommendation and target price of S$0.89 based on the two-stage dividend discount model (required rate of return: 8.5%, growth: 2.8%).

CIT seeks conversion to become Syariah Reit

With change, it will be the first such listed Reit here

CAMBRIDGE Industrial Trust (CIT) is seeking unitholders’ approval to convert the real estate investment trust into a Syariah-compliant Reit to capitalise on the growing wealth in the Middle East and cultivate a new investor pool when raising capital or issuing debt.

‘In the long term, the diversification and broadening of the investor pool may deliver more cost-efficient capital and provide optimal funding options for CIT’s growth plans,’ CIT’s manager, Cambridge Industrial Trust Management Ltd (CITML), said in a release to the SGX yesterday evening.

Upon conversion, CIT will become Singapore’s first publicly-listed Syariah-compliant Reit and the world’s first listed Syariah-compliant industrial Reit, CITML said.

The fundamental difference between a Syariah-compliant Reit and a conventional Reit is in ensuring that the revenue of the Syariah-compliant Reit is derived from halal or permissible activities and its funds are managed in accordance with Syariah principles, CITML noted.

CIT has a portfolio of 43 properties valued at $966.8 million. The Islamic Bank of Asia has been appointed to act as Syariah adviser for the proposed conversion. HSBC will advise on, and arrange, a Syariah-compliant financing solution for CIT to refinance its existing interest-bearing loans. A fundamental tenet of a Syariah-compliant Reit is that it should not pay or receive interest. CIT currently has $369.3 million of interest-bearing loans.

The trust’s cash and liquid assets will also have to be invested in Syariah-compliant products and CITML is reviewing the alternatives in this regard.

‘A due diligence review on the use by the tenants of the properties in the CIT property portfolio has been undertaken to ascertain whether the tenants operate permissible activities. We are pleased to advise that 98.86 per cent of the rental income received by CIT has been derived from permissible sources,’ CITML said.

After conversion of CIT to a Syariah-compliant Reit, the usage of the properties by the trust’s new tenants must be fully Syariah-compliant.

CIT to acquire Natural Cool Lifestyle Hub for S$55.2m; to turn Shariah Compliant

Story: Cambridge REIT ( CIT ) announced that it has entered into a put & call agreement to purchase another industrial asset, Natural Cool Lifestyle Hub located at 29 Tai Seng Avenue for S$55.2m. This asset is the first out of two assets (total S$63.8m) that CIT has lined up for future injection into its portfolio and was already highlighted in our initiation report dated 02 July 08.

Point: When completed, CIT’s portfolio will grow to 44 assets with a combined appraised asset value of c S$1.02bn. Post completion of the sale, Natural Cool Investments Holdings Ltd will lease back the asset for a period of 7 years.

We have assumed both assets to be injected into the portfolio by year end. Hence, our FY09 DPU estimate is adjusted upwards by 3% to 6.5 cts, while maintaining our FY08 forecast of 6.2cts.

Relevance: Maintain BUY on CIT with TP revised upwards to $0.92 (from S$0.88). At the current price of $0.64, CIT offers an attractive FY08-FY09 DPU yield of 9.6% and 10.2% respectively.

CIT to turn into a Shariah Compliant REIT In a separate announcement, CIT is seeking
unitholders approval to convert itself into a Shariah compliant REIT.

CIT cites the following benefits:
(a) Capitalising on the rising demand for such products in the REIT domain.
(b) Creating a new investor pool for the REIT.

We note that under Shariah law, CIT will not be able to pay or receive interest. In this regard, CIT has about $369m worth of interest bearing loans and will be seeking advise on arranging a Shariah compliant financing solution in this matter. We await management to advise further on this proposed change.

Forum takeaways
From the Nomura Asia Equity Forum: management indicated that Cambridge Industrial Trust is making significant progress in refinancing and terming out its short-term debt. Given current market conditions and an annualised DPU yield of about 10%, near-term yield-accretive acquisitive growth prospects appear muted.

Stable cashflow and capital management