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Cambridge Industrial Trust: Equity fund raising again.

Thursday, October 21, 2010

Very quickly on the heels of its dismal third quarter results, Chris Calvert, the CEO of CIT, has given me more writing material.  This time, it is an equity fund raising which includes private placement (Oh, why am I not surprised?) of 56,498,000 new units at 53.1c per unit and a 1 for 25 "preferential offering" for a total of 38,483,354 new units to existing unitholders also at 53.1c.

The whole engineering effort plus the proposed acquisitions would increase the REIT's total assets by 7.5% from $926.2m to $995.9m.  However, the number of units in issue would increase 10.4% from 909,988,000 units to 1,004,969,000 units! This would lead to a further dilution of NAV/unit from 57.6c to 57c!

It is claimed that the distributable income would increase from S$10,813,000 to S$12,126,000 for a 12.14% increase after the acquisitions are completed.  DPU would, however, increase 1.5% from 1.187c per quarter to 1.205c per quarter. Annualised DPU is estimated at 4.82c which means that the yield based on the "preferential" price of 53.1c is 9.08% and, if based on the last closing price of 56.5c, it would be 8.53%.

Gearing is supposed to reduce from 39.2% to 38.6% after the transactions are completed. This is not genius but simple mathematics.  If we increase the size of assets under management by 7.5%, without paying down or taking on more debts, gearing which is a function of debt to asset size would reduce. CIT is, however, taking on more debt to fund the proposed acquisitions and the resulting decrease in gearing level is not significant.

Existing unitholders should feel indignant because:

1. Most of the funds would be raised through private placement.

2. Existing unitholders are only given 1 "preferential unit" for every 25 units they hold.  Why not enlarge this to 3 units for every 25 units they hold and do away with the private placement (point 1 above)? This would be more equitable and would raise more funds.

3. The "preferential units" are different from "rights".  There is no window period for unitholders who might not want to subscribe to these "preferential units" to gain some compensation by selling away their entitlements, which they could do if they were issued rights instead.  Why did CIT not issue rights instead? (As informed by Musicwhiz in the comments section, CIT is issuing rights but they have chosen to call them "preferential units" and the difference is that these rights are non-transferable which means there is no window period to sell them away as nil-paid rights if unitholders choose not to subscribe and pay for them.)

4. The dismal third quarter results announced yesterday would likely have some downward pressure on the REIT's market price anyway and the offer price of 53.1c per "preferential unit" is not very attractive.

Unitholders would end up having their stakes diluted.  There is a promise of a "higher" quarterly DPU but seeing how the management could not deliver on promises made earlier in August as seen in the disappointing third quarter results announced yesterday, one could not be faulted for being unsure this time round.  This leads me to add one more point:

5. The DPU of CIT was 5.36c before all the recent placements and acquisitions were announced (starting in August 2010).  It would become 4.82c after this latest round of equity fund raising and acquisitions. This is more than 10% in reduction. It is immediately apparent that all the recent proposals by CIT's management have been value destructive for shareholders despite any claim to the contrary.

Read announcement here.

Related posts:
Cambridge Industrial Trust: Fails to deliver.
Cambridge Industrial Trust: Acquisitions and private placement.


Musicwhiz said...

Preferential offering simply means "rights issue"; 1 for 25 in this case. CIT should call a spade a spade, for goodness sake!

AK71 said...

Hi MW,

I am used to seeing rights issue having a window period to sell away nil paid rights. This option is not available for CIT's "preferential offering".

So, I suppose this "preferential offering" means unitholders are getting rights but they are non-transferable in nature.

Thanks for the correction. :)

Zelphon said...

CIT is also pulling a "Mapletree Logistic Trust" stunt...

But it appears that MLT is doing it better..

Go check it out and you will see why..

AK71 said...

Hi Zelphon,

Whatever stunt they are pulling, if they are not pulling it off well, it could very well stunt the REIT's ambitions. ;)

Could you share with us what stunt this might be? Thanks. :)

Zelphon said...

On 21 Sep 2010, MLT carried out an equity fund raising comprising:

(i) a private placement for up to 207,317,073 New Units at an issue price of S$0.825
(the “Private Placement") to raise gross
proceeds of approximately S$170 million
(ii) a pro-rata and non-renounceable preferential offering of 164,345,224 New Units on the
basis of two New Units for every 25 existing units (fractions of a New Unit to be
disregarded) held on Books Closure. Date to entitled Unitholders at the issue price of
between S$0.815 (the “Preferential Offering")

The bulk of the money is mainly used to reduce gearing from 44% back to 38%. MLT has been aggressively seeking yield accreditive acquisition.

Price of MLT was $0.850 prior to th announcement and thus the preferential rights is not offered at deep discounts.

However, today's share price is $0.905 and the latest result released is also better than last quarter. 1.54 cts DPU VS 1.48 cts DPU last quarter.

left_ray said...

Just plain incredible I would so. I sold it at a loss long ago. Gees.

AK71 said...

Hi Zelphon,

Thanks for sharing this. :)

MLT is so much bigger and it also has a pedigree. It is perceived as a lower risk REIT in many ways and assumed to have a stronger management too. The recent listing of MIT could have given MLT's unit price a lift as well.

Let us see how things turn out for CIT. After all, Mr. Market might not care for what we think. ;)

AK71 said...

Hi left_ray,

Perhaps, CIT is gonna pull a hat trick like what Zelphon mentioned. The market is not the most rational place on earth. ;)

I too divested my entire stake in CIT but I was a bit luckier and was in the black.

left_ray said...

Hat trick? I only see the same trick over and over again, raise money from private placement. I knew it will keep it coming and just could not take it anymore so I sold it in May.

AK71 said...

Hi left_ray,

Haha... I guess you caught the pun in my earlier comment. ;p

I have friends and relatives who still have investments in CIT. So, for their sake, I hope CIT does well. This, we can always do: hope. ;)

Derek said...

Hi AK and MW,

Thanks for highlighting that this is another rights issue. I was almost taken in by the word 'preferential'. It has been a waste of time for me to subscribe to the dividend reinvestment scheme. Now I will have a hard time selling those odd lots.

I will probably sell it off soon. Time for SGX.

AK71 said...

Hi Derek,

The scrip dividends offered by CIT were not at a discount big enough to be attractive. So, I rejected the offer when I was still a unitholder. Took cash instead. :)

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