MI-REIT – Phillip

Expansion Within Sight

We are initiating coverage on MacarthurCook Industrial REIT (MIREIT) with a BUY call and a 12 month fair value of $1.39/share. The counter is currently trading at a discount of 15% to our fair value. With a projected FY08 DPU of 7.43 cents, MI-REIT offers a yield of 6.35%. We expect the Manager to annouce further acquisitions in the coming months in anticipation of its target of $500 million of acquisitions a year.

Diverse Industrial Portfolio. The initial property portfolio consists of a diversified portfolio of 12 industrial properties located in Singapore. MIREIT’s investment objective is to pursue acquisition opportunities locally as well as across Asia. Recently MI-REIT annouces the acquisition of 2 additional properties. MI-REIT will add an office park, which is in increasing
demand to its portfolio. With the increased diversification, it reduces the reliance on any one sub-sector or tenant.

Lowest geared REIT. MI-REIT’s current gearing stands at 8.6% which is the lowest among the S-REIT. MI-REIT had obtained a corporate rating of Baa3 from Moody’s in June, which will increase its gearing limit to 60%. This provides substantial capability for future acquisitions. Currently MIREIT has an available $193 million of corporate debt facility to utilise.

Stable income. MI-REIT’s properties has a 100% occupancy rate with an average lease term of 6.3 years. The leases have a built-in rental escalation component which ensures rentals are up to market. 70.8% of tenants are SGX listed companies or subsidiaries of SGX listed companies. With a security deposit ranging from 3 months to 24 months, it reduces the risk of income variability in the event of any lease termination.

Valuation. Our DCF model gives us a fair value of $1.39. MI-REIT compares attractively in terms of yield and P/NAV to the other listed SREIT. With a forecasted distribution of 7.43 cents, MI-REIT offers an attractive yield of 6.35%, which is higher than the average S-REIT yield of 5.05% and a spread of 366bp over Singapore 10-yr bond yield of 2.69%(as at 14 Sep 2007). MI-REIT also trades at a lower P/NAV of 1.03 to the SREIT average of 1.23. We believed regional acquisitions would provide a near term catalyst to the share price.