Re-financing outcome known by 4Q08

RESULTS REVIEW
Cambridge Industrial Trust (CIT) reported 3Q08 results with DPU of 1.49cts, which is 4.5% lower compared to 2Q08 DPU of 1.561cts and 12.3% lower compared to 3Q07 DPU of 1.7cts. The decline in DPU over 2Q08 was due to payment of 100% of management fees via cash in 3Q08, instead of the payment of 65% of management fee through units and 35% through cash in the previous quarters. If 65% of the management fees were paid via units as previously, 3Q08 DPU would have been marginally higher than 2Q08 DPU of 1.561cts.

Compared to 2Q08, net property income grew 2.2% to S$16.2m in 3Q08, largely in line with gross revenue growth of 2.1% to S$18.3m (3Q08), due to the full quarter impact of 2Q08 acquisitions as well as rental increase on 21 properties commencing July 2008.

NAV per share declined from S$0.79 in 2Q08 to S$0.76 in 3Q08. This is largely due to net loss in the fair value of financial derivative asset of S$3.3m in 3Q08, from S$20.0m in 2Q08, arising from the softening of market floating rate used in the valuation of interest swap, as compared to the fixed interest rate of 2.58% pa. on S$358m loan with a tenor of 5.5 years. The interest rate swap took effect in 1Q08 to hedge against interest rate risks.

KEY FOCUS ON REFINANCING CREDIT FACILITY DUE IN FEB 2009
Currently, management is actively in negotiations with bankers to refinance a S$400m credit facility with ABN due in Feb 2009, of which S$337m has been drawn down. Refinancing will stem from conventional financing arrangements (as opposed to Shariah-compliant loan arrangements which CIT has been vying for) in the form of syndicated loan. In light of the global credit crunch, the costs of financing, if obtained, is expected to be higher, leading to a corresponding deduction in distribution income.

In the event the refinancing of credit facility is unsuccessful, CIT can still fall back on an option attached to the current loan facility to extend for a further period of two years at a revised lending rate to be determined. Again, a higher lending rate can be expected and this will result in pressure in distribution income.

Management has indicated that they will confirm the refinancing plans by 4Q08 and as of now, all potential acquisition plans will be put on hold.

NEW MANAGEMENT OF REIT MANAGER FOCUSES ON DPU MAINTENANCE
Following an equity restructuring at Cambridge Industrial Trust Management (CITM), the manager of CIT, a joint venture between Oxley Group and National Australia Bank Ltd (nabInvest) now owns an 80% interest in CITM while Mitsui continues to own the other 20% interest. The focus, under the new management, is to consolidate the existing portfolio, enforce good asset management practice and improve cashflow management to ensure maintenance of DPU previously achieved.

EVICTION OF A TENANT
In September 2008, a main tenant, Olivine Magnetics Pte Ltd (Olivine) was evicted from 130 Joo Seng Road, a light industrial building owned by CIT. About 40% of the net lettable area (NLA) of 118,320 sqft, which was previously occupied by Olivine, is now available for lease. The remaining 60% of NLA is leased out to an existing sub-tenant which continues to operate in the building. As the lease commitment with Olivine was in 2006 when industrial rental rates were low, estimated at about S$0.85 psf per month, the potential new lease on the vacant space is expected to be committed at a higher rate, lifting gross revenue from the building.

VALUATION & RECOMMENDATION
CIT’s DPU is expected to be underpinned by long-term leases of approximately 5.9 years of remaining lease term as at 30 September 2008, high security rental deposit of 16 months and step-up rental terms structured on its 43 properties. However, in view of the global economic crisis, the stability and sustainability of the rental structure and rental reversion of the portfolio may be in question. We have factored these risks into account and have imposed more stringent assumptions in our valuation. We valued CIT at S$0.25, down from S$0.75 previously.

At S$0.24, CIT is trading at a steep 68% discount to asset value. The yield of about 25% (FY09F), the highest amongst the peers, also offers downside protection to share price. Although valuation is extremely attractive, we downgrade CIT to HOLD until the uncertainty surrounding debt refinancing is removed towards Nov or Dec 2008.