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Saturday, 20 September 2008

I bought Cambridge Industrial Trust on 18th September 2008

About Cambridge Industrial Trust

Cambridge Industrial Trust is a real estate investment trust (REIT) with a portfolio of 43 industrial properties spread across Singapore. The REIT have diversified property types and tenant base in various sectors such as logistics, warehousing, industrial, car showroom and workshop. The trust is currently seeking Shariah compliance to tap into a wider capital market.

Once in a life time buying opportunity

The subprime induced string of failures in giant financial institutions in the United States in a matter of weeks, the bailout of Freddie Mac and Fannie Mae, the collapse of Lehman Brothers, the sale of Merrill Lynch to Bank of America and climaxed (temporary?) on brink of collapse of AIG, helped to create rare buying opportunities. Almost every business, good or bad, are on sale. Almost a fire sale. Akin to a genuine closing down sale where everything must go.

How can I miss such a good opportunity. A better opportunity might come later (i.e. things could go even cheaper if the US government rescue initiaitve doesn't really work) but I'm enticed (and contented) by the sale right now, greed has no end.

Unfortunately, I do not have the cash and scanning through my portfolio, I decided to liquidate my remaining Super Coffeemix shares, currently still sitting on (declining) paper profit, to fund my new acquisition.

Rationale

I highlighted my renewed interest in REITs sometime back in July 2008, and raised a few attractive attributes about Cambridge Industrial Trust (CIT):
  1. Diversified industrial portfolio in many sectors, manufacturing, service & commerce etc.
  2. Long term lease of 5 to 15 years
  3. Strategically located properties in key industrial zones spread across Singapore
  4. Built-in rental escalations to provide organic growth
The yield then was already close to 10% and but I was hoping something higher. At 12.5% yield at the price I got, I am satisfied.

Dilemma

In fact, 2 opportunities cried out for my attention that day, namely CIT and First Ship Lease Trust. The latter plunged more than 10% that day, pushing the yield to a ridiculous high exceeding 20%!!! I was actually more tempted to buy into First Ship Lease Trust than CIT. Troubled AIG held about 8% of First Ship Lease Trust and this might had contributed to the drop but without concrete statements, no one know for sure.

Based on raw yield, I could have chosen First Ship Lease Trust. But I already had quite a bit of it. I do not want to end up in a situation where my portfolio is dominated by one company, not matter how good it is. My personal strategy, philosophy , principle is diversification. The last thing I want is to be caught off guard if that one dominating brilliant company in my portfolio collapse because of some bizarre reason beyond my control.

Thus after intense internal fighting going through my brain, the policy division in me triumph and I proceed to welcome CIT into my portfolio.

Risk

Nothing comes without risk. Both REITs and shipping trust are intrinsically debt funded vehicles. Given the current credit crunch, both will face severe resistance for growth in the best case case scenario and survival in the worse case scenario.

Syarish Compliance

Though CIT tried to seek syariah compliance to tap into a huge capital market, whether it could do so successfully and whether achieving that status will actually help CIT is a big question mark for now.

Refinance risk

CIT will need to refinance all its outstanding debt and negotiation with HSBC is currently underway. It is expected to complete it in 3rd quarter 2008. Under current liquidity crisis plaguing the market, credit will neither come cheap nor easy.

Conclusion

No one knows for sure how long the current credit crunch will last and whether the slew of government, central bank actions around the world will really help restore confidence in the finance sector. But what I do know is this crisis open up huge buying opportunities not seen since the Asian financial crisis. While many are bailing out, it is those who dare to invest, stay vested and hold till the next crazy boom in market that will walk away with handsome rewards.

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7 Comments:

Anonymous Anonymous said...

yo mkt uncle,
wat's the current gearing ratio for cambridge trust and what are their target gearing ratio?

20 September 2008 at 16:56  
Blogger Market Uncle said...

According to its 2Q results presentation, its gearing ratio on 30th June 2008 is 36.9% and the target ratio is 40 to 45%.

20 September 2008 at 23:28  
Anonymous Touzi said...

Hi Mkt Uncle,
Under current condition, are you not concerned that CIT would have difficulty borrowing from banks?

30 September 2008 at 13:08  
Blogger Market Uncle said...

Yes, I am indeed concerned. Any debt based instruments, REITS, shipping trusts etc faced the same problem.

However, it is during such (financial) crisis that opportunities arose. A (diversified) calculated risk made now could reap some handsome rewards when the storm subside some years later, provided the company pulls through.

Anyway, on the company itself, if it is able to tap capital market offered by Islamic finance, then it should be in a better shape to survive current storm better than its peers.

30 September 2008 at 22:57  
Blogger SGDividends said...

Hi Market uncle,

I read your FSLT first before reading this article on CIT. In FSLT you mentioned about the FSLT's customers and you gave a damn solid comparison of these customers, in addition to their risk.

CIT comprises of a LOT of small scale businesses and frankly, this would impose additional risk from the customer side.

Wouldn't buying into Maple Reit ( understandably this less lower yield) be safer due to their relatively more robust clients?

Unless, as i had commented in FSL article, you are highly risk taking..guess you are uncle..but that said you rock in your analysis!

25 October 2008 at 20:17  
Blogger Market Uncle said...

Hi sgdividend,
Before this credit crunch, I had actually hope to buy BOTH cambridge and Maple Log.

However, as this storm rages on, it becomes clear either I (avoid debt based instruments (risk in refinancing) totally or take one with sufficiently high return.

Comparing maple and cambridge. Both actually have long term lease contracts. Their diversified client base, whether big or small, already minimized their risk of client default and any difference is not as material, compared to refinancing risk both are exposed to.

But comparing their refinancing risk, cambridge had an extra potential card to play over maple --- islamic financing. If they could really realise this, their credit war chest will triumph many in their field. They hope to secure islamic compliance by 3Q 2008. However, without news on it till now, I'm not optimistic they could see they could get it.

Whether cambridge or maple is better hence depends on the last card- islamic finance, that cambridge could potentially play.

29 October 2008 at 21:27  
Anonymous Penny Stock Newsletter said...

I believe buying real estate investment trusts is an excellent way to get income along with captial growth. I would only buy real estate investment trusts that invest in brick and mortar buildings.

2 December 2011 at 14:52  

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