I bought Cambridge Industrial Trust ... again on 12th December 2008

Update

On 11th December 2008, after trading hours, Cambridge Industrial Trust announced their successful refinancing deal of 390m, 3 year tenor term loan at an effective interest rate of 6.6% per annum.

Rationale

Qualitative Assurance - fear allayed

By 2009, many REITs would have hefty term loans due for refinance, Cambridge Industrial Trust is one of them. The on-going credit crunch saw many banks cutting back on their lending. They would rather earn less than to suffer potential loss if the money lent cannot be recovered. One REIT in Japan had collapse after it had trouble repaying its debt. I was afraid Cambridge Industrial Trust could also face trouble refinancing its loan. I excited Cambridge in October 2008 at a significant loss (I sold at 30.5 cts comparing to acquisition cost of 49.5 cts). Looking back, I wonder whether my fear then had been irrational. Fortunately (or not?) I manage to get it lower now, at 22.5 cts.

My fear is allayed when Cambridge managed to refinance all its debt. While there is no foreseeable respite to the credit crunch in the near term. I am quite confident the credit market should stablise within 3 years, when its term loan is due again.

Quantitative Assurance - Impact on forward DPU for 2009 and beyond

I compared the new term loan facility with the existing one found in 3Q 2008 results:

Existing loan (At 30 September 2008):

Amount: 369.3m
Effective interest rate: 3.19% p.a.
Estimated borrowing cost per annum: $11.78m
Estimated borrowing cost per quarter: $2.945m
Actual borrowing cost in 3Q 2008: $3.126m ~ $3m

New loan facility

Amount: 390.1m
Effective interest rate: 6.6% p.a.
Estimated borrowing cost per annum: $25.75m
Estimated borrowing cost per quarter: $6.437m ~ $6.5m
Estimated additional borrowing cost: $6.5 - $3 = $3.5m

Impact on DPU

Using 2Q and 3Q results as a guide, quarterly distributable income is about 12m.

Estimated quarterly distributable income: $12m
Estimated additional quarterly borrowing cost: $3.5m
Estimated new quarterly distributable income: $12m - $3.5m = $8.5m
No. of units (At 30 September 2008): 796,405,934
Estimated DPU per quarter: 1.067cts
Estimated annual DPU: 1.067 x 4 = 4.269cts
Estimated yield (using purchased price of 22.5 cts): 18.97%


Current DPU per quarter (3Q 2008): 1.49cts
Estimated annual DPU: 1.49 * 4 = 5.96cts
Estimated yield: 5.96/22.5 = 26.49%

Estimated reduction in forward DPU: 5.96 - 4.269 = 1.691 cts
Estimated reduction in yield: 26.49 - 18.97 = 7.5%

According to the new debt facility announcement, the DPU impact is about 0.9 cts. But my estimation showed a higher cut of 1.691 cts. Anyway, after factoring the higher effective interest of the debt facility, the projected yield of 18.97% is still very attractive. (Could have been more attractive, but I didn't notice the annoucement until 12th December 2008. After digesting the news and doing my sums, I could only get it at 22.5 cts).

Risk

At 18.97% yield, the yield is still high or the assumed risk is high. There are quite a number of events that could affect the future payouts, i.e. DPU:

1. Term loan failure - The loan is still subject to completion and part of the loan is subjected to syndication on normal market conditions. Nobody will know what can happen is the last minute to scuttle the deal.
   
2. Declining rental income - Whether by defaulting or exiting tenants, this risk is mitigated by the relatively long term lease contract of average 5 years or more and average security deposits of 16 months.
3. Loan covenants - There is a gearing limit of 60% imposed on REITs in Singapore. Cambridge's gearing ratio is currently 37.6% and hence there is still significant margin for a downward revaluation of its assets.
4. Bank failure - Even though HSBC, RBS and National Australia Bank are huge banks, there is no certainty these will not fail under existing climate. (Seems to be over paranoid in thinking). Creditors of failing banks can force Cambrige to repay its loan or liquidate its assets, a near impossiblity in the current market condition.
   

Conclusion

Though Cambridge had to refinance its debt at a signifcantly higher interest rate (6.6% compared to 3.19% previously), they were relieved borrowing is still possible under the current credit crunch. Other REITs with debt due for refinancing in 2009 will also face the same problem and similar, if not higher, cost of debt. Their yield across the board should be reduced significantly.