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Cambridge Industrial Trust: 30 Teban Gardens.

Thursday, July 5, 2012

Cambridge Industrial Trust is looking at buying 30 Teban Gardens for S$41m.

"Cambridge Industrial said 30 Teban Gardens Crescent is a high quality asset, with prominent exposure to the Ayer Rajah Expressway. The acquisition will further reduce the reliance of the trust’s income stream on any single asset or tenant."

Eurosports Auto at 30 Teban Gardens distributes Lamborghinis.

What I am immediately interested in is how are they going to fund the purchase and how will it impact my income received from the REIT.

The REIT has a gearing level of some 35.9% as of March 2012. Not excessive but it is not low either.

The manager has said that the acquisition will be funded through a mixture of equity fund raising and debt. In what proportion and in what form is the equity fund raising going to take? I guess we will have to wait for more details.

If the acquisition goes through, the manager expects the net property income (NPI) of the trust to improve some 4.6%. If the acquisition is fully funded by debt, DPU could be impacted similarly but with equity fund raising involved, depending on how many new units are issued, DPU would probably not increase by as big a percentage. If a rights issue is involved, we would also have to see the asking price before we can calculate the distribution yield.

Cambridge Industrial Trust has improved on its DPU for four consecutive quarters and it seems like a relatively good investment for income. However, I am unable to forget Chris Calvert's spotted track record before this. So, this remains a smallish investment in my portfolio.

I have a nagging feeling that this acquisition is not a good idea. Although the acquisition would only go through on a condition that the vendor (seller) obtains a further 22 years lease from JTC, the initial lease term was for 10 years only (from 1 July 2007). This means that 5 years have lapsed. Even with a further 22 years of lease, it would mean a total of only 27 years is left to the lease and would expire in 2039.

Is the valuation overly optimistic and is the REIT overpaying?

Slides presentation 26 - 28 June 2012: Here.

See announcement on acquisition: Here.


CS said...

Yes, agreed that lease is a bit short. If funding is partially through equity, I suspect that it may go by private placement as the amount needed after bank loan could be relatively small. Another concern is that the property is built for specific purpose, in this case for luxurious cars showroom and offices. Is it easy to get a new tenant if the current one terminate the lease?
What is your view?


AK71 said...

Hi CS,

Yes, I suspect that it would be a private placement too if equity fund raising is required.

There will be an undertaking by the vendor for a leaseback period of 6 years, iirc. I doubt the vendor turned tenant would break the contract. After that, however, it would be hard to say if they would continue to stay on the premises.

Like you said, the building is purpose built. So, if the then tenant should decide to move out, it could be hard to find another tenant in the same industry.

I have my doubts about this acquisition. This is probably not in the best long term interest of unitholders.

spinfire said...

Hi, can you explain more about Calvert's spotted track record?

AK71 said...

Hi spinfire,

It is history and I have blogged about it before. If you are interested, you could comb my older blog posts on CIT and AIMS AMP Capital Industrial REIT and you would be able to find some details (some in the comments of these blog posts). This is going to involve quite a bit of work, of course.

Everyone has a past. I sincerely hope that Chris Calvert will do a better job now and in the future.

AK71 said...

DBS Vickers has downgraded its call on Cambridge Industrial Trust (CREIT) to hold with a target price of $0.78.

CREIT announced that it is proposing to divest Lam Soon Industrial Building (or 63 Hillview Avenue) for $140.8 million. The proposed selling price represents CREIT’s 69.4% stake in the strata share value of the property (97 out of 154 free freehold strata units) and is a 28% premium over the latest valued book value. The exit yield is estimated to be about 2.3%. The buyer is QF Properties Pte Ltd which is a JV set up by Enviro-Hub Holdings (listed on SGX) and BS Capital, a wholly owned company of its chairman Raymond Ng.

After two unsuccessful lengthy enbloc sale attempts aimed at maximising the value of the property, the manager has chosen to exit through the sale of its entire 69.4% stake to a single buyer, rather than holding on to its investment or through a strata-sale on a piecemeal basis.

“Despite settling for a lower selling price, the manager would be able to efficiently deploy proceeds to higher yielding sources (repay debt, which saves CREIT around 3.5% p.a. or part fund its various development projects which returns around 7.5%-8.0%) compared to the about 2.9% from Lam Soon Industrial Building based on its book value. In addition, we view that a strata-sale process is not optimal given that it is likely to be a lengthy process coupled with uncertainty regarding the eventual sale of its entire stake,” say analysts Derek Tan and Lock Mun Yee.

The Edge
Monday, 08 July 2013

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