Monday, November 24, 2008

CIT again

Quick update. Two points:

First, outlook from S&P downgraded from 'positive' to 'stable'. Dependent upon:

"(1) CIT’s strong business profile; (2) the expected strong support from the local banking community; (3) adequate liquidity in the domestic credit market; and (3) the significant progress that CIT has made in achieving Sharia-compliant status, which would further diversify its refinancing sources."

Basically no effect. But everything depends on them obtaining credit.

Second, 3Q DPUs were down because management took their fees in cash, instead of shares. I should have accounted for this when calculating the yield in my previous post. The new calculations for 3Q08 are:

Rental revenue: 18.3m
Non-finance costs: 3.8m (includes the new management fees)
Borrowing costs: 3.1m
Operating Profit 11.4m

Excludes profits/loss from revaluation and interest rate swaps, as this is not counted in DPUs.

After cutting revenue by 10% (due to SMEs going bust in a recession) and doubling the future finance costs (to 6.2%, due to credit crisis), we get 6.5m. Annualise (times 4) to get 26m. Divided by 800m units issued, gives 3.25c per share.

At a price of 22c, thats almost a 15% yield.

The assumptions are very conservative:

  • 1 in 10 businesses going bust: even if it does happen, they should be able to rent the buildings out again.

  • Doubling the interest rate (to 6.2) is also on the high side. A 14th Nov Phillip's report has estimated their interest rate cost at 4.78%. From an Oct report by DMG on Fraser's CT looking for financing: "management cited spreads of 200 – 250 bps over SIBOR", which in Sept (the height of the credit crisis) was 5.5-6%.


SGDividends said...

You know something Black Cat,

If management takes fees in cash instead of shares, its a bad signal they are showing.

This means the shares are overvalued thats why they prefer to take cash.

Unless they did state some credible reason for doing so?

Black Cat said...

Yeah, the thought had crossed my mind. I don't know of any reason.

But I'm swayed by the numbers. Renting out property is not a complex or risky business (like, for example, banking, trading commodities or constructing oil rigs), and there isn't so much opportunity to cook the books.

Still, any share you buy *can* go to zero. I manage this risk by diversifying a little - for Cambridge, I won't make it more thna 8% of my portfolio.


num13er said...

if I remember correctly, they did mention that by taking new units for compensation, it will dilute existing unit holder interest. Why?

Their managment fee is about S$2.5mio each yr (approx 0.25% of AUM)
at $0.25 per share (approx, I know it is lower), this represent almost 3% of the REIT outstanding shares.

On the other hand, the new owner of the Manager, Oxley, could be thinking of getting some of the cash back hahaha.

Still no news about their re-financing.

Zhuangzi at

maybe you should do something about the comment system, it kind of force you to have a Blogger account or some of the other. Prefer the newer version where you can input your website url.

Black Cat said...

Hi num13er,

Thanks for the advice. I set to allow anyone to comment.