MI-REIT – Phillip

MacarthurCook Industrial REIT (MIREIT) reported gross revenue for 1QFY10 of $11.0 million (-11.8% y-o-y, -16.1% q-o-q)), net property income was $9.3 million(+3.2% y-o-y, flat q-o-q). Distributable income was $4.0 million(-39.2% y-o-y, -19.5% q-o-q). DPU for the quarter was 1.51 cents (35.7% y-o-y, -19.2 qo-q).

Gross revenue was lower in 1Q10 mainly because of a refund of service charges to tenants. Service charge is a reimbursable item by tenant and does not affect the actual revenue. Underlying rental revenue from tenants remains stable with portfolio occupancy rate of 98.64%. Net property income stays fairly constant, but distributable income has fallen since 4Q09 because of a claim for industrial building allowance and also higher interest cost in 1Q10. In FY09, MIREIT had maintained a quarterly payout of 2.35 cents for the first three quarters while any retained income was distributed in 4Q09. For 1Q10, it is paying out 100% of the distributable income. However distributable margin has fallen from 0.5 in 1Q09 to 0.36 in 1Q10 due to the reasons mentioned above.

The REIT manager wrote down the asset value of its Japan property by 9.5% and subsequently portfolio value decreased from $530.3 million at 31st March 2009 to $526.4 million at 30 June 2009. The current gearing is 41.8% with total debt of $225 million that is due in Dec 2009.

We keep our revenue forecasts as we believe the portfolio is able to maintain its occupancy. However we factor in the decreased in distributable income arising from the claim for industrial building allowance which results in a downward revision of our FY10F DPU forecast by 30% to 5.82 cents. We raised the weighted average cost of capital (WACC) in our DCF model from 9.8% to 10.6%. Our fair value is thus lowered from $0.39 to $0.26. The impending refinancing need still poses a big certainty to us. We downgrade our recommendation from Hold to Sell.