Cambridge Industrial Trust again

Share price has been hammered to sub 30c recently. Market must be afraid they cannot obtain financing. A quick review of their numbers:

1) Their 2H08 earnings (for 6 months) summarized in 4 lines:

Rental revenue: 35.5
Non-finance costs: 7.1m
Borrowing costs: 5.5m
============================
Operating Profit 23m
============================

This excludes interest rate hedging and change in investment property value (which they do not pay out in DPUs anyway).



2) Assume recession, deduct 10% from their revenue. I am assuming that 1 in ten business go under, as they are renting out to SMEs.

Rental revenue: 31.2
Non-finance costs: 7.1m
Borrowing costs: 5.5m
============================
Operating Profit 18.6m
============================

Assuming 800m units issued, DPU would be 2.3c per share (annualized: 4.6c).



3) Their current weighted average interest rate is currently 3.1%. What happens when this changes?

a) Assume interest costs double to 6.2%
Operating profit (excluding hedging) comes to 13.1, which gives 1.6c DPU (3.2c annualised). At a share price of 30c, this is a 10% yield

b) Assume Interest costs go up to 10%
Operating profit (excluding hedging) comes to 6.4, which gives 0.8c DPU (1.6c annualised). At a share price of 30c, this is a 5% yield.

4) Another way of looking at this is to assume someone wants to buy the entire assets of the company. Benjamin Graham: buying $1 for 50c. I don't look at NAV because this is a meaningless number that may change - the reason to buy the buildings is to get an income from them.

Lets remove the finance costs from the equation.


Rental revenue: 31.2
Non-finance costs: 7.1m
============================
Operating Profit 24.1
============================

48.2m annualized.

At a share price of 30c, Market cap is 240m. Buy it all. Then pay off the debt of 370m. Your total cost is 610m. With 48m annual profit, you would get your money back in 12 years. Most of the buildings have 40 years remaining on the lease (the shortest has 24).


Conclusion
I believe the market is pricing in scenario 3a (about a 6% borrowing cost). Their (potential) problems finding funding and the recession do not justify the low price, assuming that the credit crisis does resolve.

I will buy abt 3K worth. Not more, in case there is something wrong with it, and I need to be able to sleep at night if I lose the 3K.