Cambridge Industrial Trust: Equity fund raising again.

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.

Cambridge Industrial Trust to launch an equity fund raising comprising of the private placement of 56.5 million new units to raise gross proceeds of $30 million; and a preferential offering of up to 38.5 million new units to raise gross proceeds of up to $20.4 million.
Thursday, 21 October 2010

© 2010 - The Edge Singapore

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