MI-REIT – Phillip

3QFY08

MacarthurCook Industrial REIT (MIREIT) reported financial results for 3QFY08. MIREIT reported gross revenue of S$8.4 million and net property income of S$6.3 million. Distributable income amounts $5 million, translating to a DPU of 1.92 cents for the quarter and an annualised DPU of 7.62 cents.

Acquisitions during the quarter contributed to top-line growth. Gross rental revenue increased 14.5% compared to the last quarter and net property income rose 6.5%. However net income dropped 7.1% mainly due to higher management fee, borrowing cost and trust expense associated with an enlarged portfolio size. DPU for the quarter increased from 1.86 cents in 2QFY08 to 1.92 cents in 3QFY08.

MIREIT expanded its portfolio from 12 properties at IPO to 19 properties currently, with a further 3 in progress of completion. Asset size grew from S$316.2 million to S$512.6 million. NAV increased from $1.13 to $1.30. Current gearing stands at 34.4%. We note that gearing will increase to 40% upon completion of in-progress acquisitions.

Capital management. Including the completed acquisitions, MIREIT has debt of $176 million, which has an expected maturity in April 2009. MIREIT has in place derivative instruments to manage its borrowing costs.

If the base rate continues to stay low, we estimate that the effective interest rate will be 2.5%, however we have assumed a cost of debt of 3.5% in our valuation model to stay conservative.

Valuation and recommendations. MIREIT has no short term debt concern and the initial low gearing has given it the capability to expand with debt funding. Although it has delayed a capital raising exercise recently, there is no short term refinancing issue and gearing is within management’s target range of 40%-45%. We retain our revenue estimates at this point with a FY08F DPU of 7.76 cents, which would translate to a yield of 8.21%. We have raised the beta and risk premium used in our DCF model to account for investor’s lower risk appetite and the volatile market condition. Fair value derived from our model is lowered subsequently from $1.43 to $1.13. Maintain buy.