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Interview – Christ Calvert, CEO and Executive Director Cambridge Industrial Trust Management Limited

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Cambridge Industrial Trust (CIT) is Singapore’s first independent industrial real estate investment trust (REIT).

For the past few months, the trust has been active in the market as it announced new acquisitions and divestment of industrial properties in Singapore.

Chris Calvert, CEO and Executive Director of the manager of CIT, explained to Biz Daily his group’s recent transactions in the market, and how does it plan to address the current challenge to Singapore’s electronics industry which is one of the group’s target markets for its industrial properties in the country.

Cambridge Industrial Trust (CIT) proposed to sell 97 units at 63 Hillview Avenue, Lam Soon Industrial Building via a collective sale. What’s the strategy behind this?

CIT owns 97 freehold strata units in the 63 Hillview Avenue property which represents about 69.44 per cent of the building’s total share value. The Hillview area was re-zoned for residential use and we have taken the decision to sign a Collective Sale Agreement with respect to our strata-titled interests in the property. Our objective is to unlock value for Unitholders through generating a higher sale price based on a residential value, versus its current industrial use. However, we must highlight the highly conditional nature of the proposed disposal, and the sensitive nature of discussions precludes disclosure of further information at this point in time.


On the other hand, CIT recently completed the acquisition of 25 Pioneer Crescent & 3C Toh Guan Road East in March and January, respectively. How do these latest acquisitions play a part in boosting the overall value of the whole portfolio?

Both of these yield-accretive acquisitions are value-enhancing properties which are 100 per cent leased to high quality tenants.

3C Toh Guan Road East is a five-storey warehouse (GFA of approx. 192,864 sq ft) which has been leased back to Tye Soon Limited (Tye Soon) for three years, with an option to renew for a further three years. Tye Soon is a public company listed on the SGX, and deals with automotive parts for a number of the premium automobile marques such as Mercedes Benz and Lexus.

25 Pioneer Crescent is a purpose built four storey factory-cum-warehouse (GFA of approx. 76,003 sq ft) with ancillary office on two floors. It is fully tenanted to Kalzip Asia Pte Ltd, which is part of the Tata Steel Group, for a term of 15 years from 17 December 2009 with three five-year options for renewal. The balance land lease for this asset was 58 years.

In the case of 25 Pioneer Crescent, this asset essentially replaced the sale of a non core asset which, in comparison was in need of capital upgrading, had less than two years remaining on its property lease term, and 13 years remaining on its land lease term. This was therefore an example of replacing a non core asset with a premium quality property, with both a longer property and land tenure, which will generate a superior total return to the Trust.


You signed an option to buy the property at 16 Tai Seng Street for S$59.25 million. But the book value of this property is only S$17.8 million. Why pay such a huge amount on this building?

Based on valuation by Colliers as at 22 February 2012, the appraised value of 16 Tai Seng Street is about S$72.33 million, taking into account the alteration and additions (“A&A”) works that Nobel Design Holdings Ltd will bear, to construct additional floors which will increase the GFA of the property from 16,282 square metres to 19,878 square metres.

It would not be appropriate to look at Nobel Design Holding’s net book value of $17.8 million as that is the company’s cost of the asset minus accumulated depreciation, and would not be reflective of the property’s market investment value, which is based on a leaseback scenario to the vendor.

This acquisition is yield accretive, and is a strategic purchase as it complements and enhances the quality of the Trust’s portfolio. On completion of the acquisition, Nobel Design Holdings will leaseback the property for a period of six years.

Assuming that the acquisition, including A&A Works, had been effected on 1 January 2011, the pro forma financial impact on both the earnings per unit and distribution per unit for FY2011 are 0.16 S-cents.

The property also offers the potential for future capital appreciation as it is well located in a recognised and established industrial precinct – the up-and-coming Paya Lebar iPark, and in close proximity to the Tai Seng MRT station and easily accessible by the Central Expressway and Pan Island Expressway.


What is CIT’s strategy in selecting investment properties? What are your latest acquisition targets?

We have been very deliberate and disciplined about which assets we select for the Trust. We will continue to identify opportunities to acquire assets which are yield-accretive and value-enhancing for the Trust portfolio. The overarching intent is to improve our overall portfolio quality, as well as to increase tenant and income diversification. We have a pipeline of interesting acquisition opportunities for the Trust which we hope are successful in acquiring.


How do you intend to fund these acquisitions? And with 36 per cent gearing ratio as at 1Q2012, are you comfortable at this level?

We intend to fund future acquisitions with a combination of existing cash and debt. Regarding the latter, we have maintained a strong balance sheet through prudent capital and risk management and with our S$500 million multicurrency Medium Term Note programme in place, we have further headroom to purchase additional high quality industrial assets.

Our interest coverage ratio is 5.1 times and interest rate exposure is fixed on 88.8 per cent of total debt for the next 2.8 years.

As for the gearing ratio, 36 per cent is within our long term target to keep the gearing ratio between 30-40 per cent.


In your latest 1Q2012 presentation, you expect that at 2014, total leases expiring will exceed 25 per cent. What is your strategy to ensure that number will fall below your targeted 25 per cent level?

Yes. One of the Trust’s core strategies is to proactively manage our assets. At the operational level, we are actively engaging tenants on lease extensions/restructuring and to secure new leases for multi-tenanted properties. Our objective is to materially reduce this percentage of leases expiring in 2014. It is worth highlighting that originally the combined lease expiries in 2013/14 were over 70 per cent, now this number has been reduced to less than 50 per cent.


Singapore is projected to have a marginal GDP growth of 1-3 per cent for this year, and electronics is expected to drag on growth. How would this affect your business considering that you serve the industrial sector in Singapore?

Notwithstanding the uncertainties in the global economic markets, we believe that capital values for the industrial sector will remain generally stable in the next 12 months.

According to the Colliers’ International Knowledge Report, capital values for industrial properties are expected to hold relatively stable in 2012.

Singapore’s manufacturing sector expanded for a second consecutive month in March 2012 after having previously recorded seven months of continuous contraction. The PMI for the electronics sector rose to 51.5 in March 2012, up from 51.0 in February 2012 due to further expansion in new orders from overseas and domestic markets. It was the third consecutive month of expansion for the sector.

Based on the Ministry of Trade and Industry’s latest figures in May, the Singapore economy expanded by 10.0 per cent on a quarter-on-quarter seasonally-adjusted annualised basis, reversing the 2.5 per cent contraction in the previous quarter. The improved growth momentum was largely attributable to the upturn in the manufacturing sector. On a sequential basis, the manufacturing sector expanded by an annualised rate of 19.8 per cent, reversing the 11.1 per cent contraction in the previous quarter. This turnaround was driven by increased production across all key manufacturing clusters, notably electronics and precision engineering.

We recognise that Singapore’s industrial sector may undergo cycles, and hence we focus on ensuring our Trust has a diversified tenant base from a wide range of trade sectors.


Are you looking at acquiring properties abroad? How soon do you expect to go in this direction?

Presently, we see good opportunities in Singapore and do not have immediate plans to make acquisitions abroad. Our current focus is to continue to source for quality assets at attractive valuations in Singapore.

For us to go offshore, it must be compelling. Going offshore will introduce new risks to Unitholders, such as currency, foreign exchange and political risk. To some extent, these risks can be hedged, but usually at a cost.

Bearing in mind that we have a Pan-Asian investment mandate, we are consistently looking at opportunities to acquire assets in other Asian countries, but again, they must be compelling, and in the Unitholders’ interest.


With most of your property serving industrial needs, how do you see the outlook of the industrial market in the next five years and what are the possible implications?

In the longer horizon, we continue to see the demand of the industrial markets in Singapore to remain robust and to grow in a measured way. As the Manager of the Trust, we will do our best to represent the interests of the Unitholders and continue to bring quality and yield accretive assets into the Trust.


What can the investors expect from CIT going forward?

CIT will continue to focus on increasing Unitholder value via our four-pronged strategy of proactively managing our assets, divesting non-core assets, acquiring value-enhancing assets, and prudently managing capital and risk.

The Trust is in good shape as our portfolio of assets are near full occupancy. We have a strong balance sheet and are therefore poised to take advantage of value-adding opportunities. We are working to grow the average size of our assets from S$25 million currently, to between S$30 – S$40 million. By moving to larger assets, we can lower the cost of maintenance on a per asset basis and at the same time, generate better return.

By the end of this year, we will complete our two built-to-suit projects at Tuas View Circuit and Seletar Aerospace Park, which would contribute positively to the Trust. Our asset enhancement initiatives (AEI) for two assets located at 4 and 6 Clementi Loop, 30 Toh Guan Road are targeted to be completed by 4Q2012, while our third AEI at 88 International Road will be completed by 4Q2013. Upon completion, these projects will yield a combined additional GFA of approximately 227,025 sq ft to our portfolio.