New kid on the block. We met up with Macarthur Industrial REIT (MI-REIT) management yesterday, the new kid on the block. MI-REIT became the fourth listed industrial REIT on SGX in April 2007 with 12 industrial assets all located in Singapore. At listing, MI-REIT has a portfolio worth S$316m with an initial FY07/08 annualized yield of 6.18% (based on DPU of 7.41 cents and IPO price of S$1.20/unit). In terms of organic growth, there is some potential. MIREIT’s portfolio has an average rental rate of S$0.92 psf/month, and with passing rates at about S$1.0 psf/month, there is the possibility of positive rental reversion. However as the average lease expiry is only in 3 years time, we do not anticipate any meaningful organic growth in the immediate future.

Management expects S$500m of acquisitions by Mar 08. Even though MI-REIT’s current asset size is small at S$316m, management has ambitious growth plans. It sees S$500m of possible acquisitions by end Mar 08. Furthermore, it expects the bulk of these acquisitions to be from third party and not from the exercising of its first right of first refusal with its sponsor. This means its acquisition will likely be in direct competition with the 3 other REIT rivals in the industrial space. As we see little differentiating factors between all the REITs’ acquisition strategies, the only way we see MI-REIT to be able to achieve this target is via pricing. In that context, MI-REIT can afford to be very aggressive. Its gearing remains low at about 8%, meaning any acquisition is likely to be debt funded. We estimate MI-REIT has a debt capacity of about S$117m. More importantly, with its cost of debt at about 3.5%, and with market property being offered at just below 7.0%, MI-REIT has about 350bp to play. However, we do not see MI-REIT to be willing to use up all its ammunition in the short term. Acquisitions at property yields of about 6.0-6.5% are the more likely scenario.

Ideal candidate for takeover. MI-REIT has a fairly fragmented shareholding structure. Its largest shareholders have a stake of about 12.9% but with the majority in 5% range. Its sponsor Macarthurcook only has a 2.3% stake and the vendors collectively own a further 2.7% of the issued units. The implication of this loose shareholding structure is that if the right offer comes along, the possibility of shareholders taking profit is very high. Furthermore with a price to book of about 1.3 times, it remains fairly cheap relative to its larger rivals. We thus see MI-REIT to be an ideal takeover candidate. We do not have a rating on MI-REIT. (Winston Liew)