MI-Reit unitholders left with one hard option

CIT looks even poorer, having bet on an unwinnable gamble

NOBODY looks pretty after a fight. Two Reit managers, Cambridge Industrial Trust Management (CITM) and MacArthurCook Investment Managers (MIM), have been battling for control of MacArthurCook Industrial Reit ahead of its crucial extraordinary general meeting today.

On Friday, CITM’s bid was scuppered by the Monetary Authority of Singapore – due to potential conflicts of interest – so it seems that MIM, MI-Reit’s present manager, has won. Its controversial plan to recapitalise the Reit will probably get passed today. Unitholders have no other options now that CITM is out of the picture.

Indeed, MI-Reit’s unit price fell almost 9 per cent on the news. The Reit’s price had been supported this past week by the hope that CITM had a viable alternative. That’s because the refinancing plan is heavily stacked in favour of a group of new investors. AMP Capital Holdings, present sponsor AIMS Financial Group and other ‘cornerstone’ investors, would be getting 221 million new units at 28 cents a unit. That’s 83 per cent of existing units outstanding priced at 70 per cent off net asset value, 24 per cent off Friday’s closing price, and about 32 per cent from its traded price before the announcement. A two-for-one rights issue at 15.9 cents apiece will also follow the placement.

By any measure, that’s a lot of wealth destroyed. How much exactly? If unitholders take up their rights entitlement, in return for only halving their stake they’ll be paying 31.8 cents for every unit they now hold.

In terms of distribution, they could lose one fifth of their annual yield, according to BT calculations. Not subscribing to the rights issue could cost them 75 per cent of their present annual distribution, and 80 per cent of their stakes. No wonder existing unitholders are up in arms. MIM’s chief executive Nicholas McGrath says the discounts were necessary to raise the cash it needed – $217 million from the placement and a subsequent two-for-one rights issue plus another $215 million in loans. The Reit desperately needs emergency funds to pay off $226 million in loans and $90 million to buy a property and would have to be liquidated if the plan was rejected, Mr McGrath said. It has already survived two close encounters with death.

Unitholders, pointing to its net asset value of 94 cents a unit, say that’s not such a bad thing, really. But MIM says its $490 million portfolio would not have fetched anything close to NAV in a firesale.

Is that true? Unitholders are suspicious and blame MIM’s mismanagement, grumbling that if the Reit survives, it will continue to reap management fees. We’ll never know; perhaps to support its case MIM could have hired independent consultants to estimate a break-up value.

But it is too late now. MIM’s plan is the worst available; it is also the only one available. The new investors had the bargaining power and they have used it well for their own benefit.

CIT, if anything, comes off looking even poorer. Its appearance on the scene on Monday saw a spike in MI-Reit’s unit price. Then, it was hinting at a merger – it said its analysis valued MI-Reit at about 47.9 cents, or 1.1 CIT units, comfortably above the then market price. It also released documents suggesting that a takeover offer for MI-Reit was under serious discussion. Chris Calvert, its CEO, told reporters that consolidation of the two Reits was an option. If not a merger outright, then having it as a manager of both Reits would mean cost savings, while MI-Reit could for a time live off CIT’s debt facilities. Investors bought the story.

CIT soon had to backtrack. That bit about consolidation – that was just ‘misinterpretation’. It was quickly forced to state openly that it would not launch an offer for MI-Reit.

And on Friday, no doubt under pressure from the authorities, it had to make the humiliating admission that it couldn’t take over as manager and that it otherwise had no feasible plans for the rescue of MI-Reit.

And the worst of it was, it was totally unnecessary. CIT only bought its close to 10 per cent stake the previous week, after announcement of the share placement. It could have quietly sat out the whole saga with no loss.

The fact is, CIT has now spent $10.3 million of its unitholders’ cash on a gamble we now know it could never have won (and likely thousands more on professional fees and attack advertisements).

Its own unitholders have started grumbling – that money, over a third of the $28 million raised in a recent private placement, was for asset enhancement and working capital, not a speculative venture that was at best, ill-advised. At worst? Your conspiracy theory is as good as mine.

MI-Reit manager seeks clarification from CIT directors

It points out potential conflicts of interest as the two linked to NAB – lender to both Reits

THE manager of MacarthurCook Industrial Reit (MI-Reit) issued a statement yesterday seeking clarifications from two directors of Cambridge Industrial Trust (CIT).

MacarthurCook Investment Managers Asia, MI-Reit’s manager, spelt out the potential conflicts of interest facing Ian Smith and John Wood, two non-executive directors of CIT’s manager. Both Mr Smith and Mr Wood are representatives of nabInvest’s effective 56 per cent controlling stake in CIT. nabInvest is, in turn, a wholly owned unit of National Australia Bank (NAB), which is an existing lender to both CIT and MI-Reit.

The issue arises following a revelation last week by Chris Calvert, CEO of CIT’s manager. Mr Calvert, formerly the CEO of MI-Reit’s manager, said that his company is in talks to secure financing from NAB, and that CIT could use its own debt facility to fund some of MI-Reit’s most immediate needs. Although NAB has financing links to both trusts, it said in a Dow Jones article that there are appropriate measures to prevent conflicts of interest.

MI-Reit took CIT to task for the statements made in the Dow Jones article. It said they may have misled readers to believe that NAB was supportive of CIT’s initiative. However, the bank has written to it on Oct 2 that ‘it has a principled view of not funding hostile takeover bids against client entities’.

Among other things, MI-Reit also questioned if the two directors have performed their fiduciary duty to nabInvest’s clients. It asked if Mr Smith and Mr Wood had sought authorisation from NAB for Mr Calvert to make the statements he did, and to be involved in the discussion about a merger suggestion thrown up by Mr Calvert earlier.

MI-Reit also made another call for the board and managers of CIT to declare its position regarding the resolutions that will be proposed at an extraordinary general meeting today, after the latter withdrew some of the alternatives raised by itself last week.

Although CIT, which owns 9.76 per cent of MI-Reit, has maintained its intention to vote against the resolutions, it is quiet on its recommendations to other MI-Reit’s unitholders, who had earlier been urged to vote against the resolutions as well.

MI-Reit’s manager gave CIT a deadline which ended at 2 pm yesterday, to explain the basis of its recommendation to other unitholders. However, CIT did not respond to that call by press time yesterday.

Over the past week, managers of the two trusts had been locked in a tussle over a recapitalisation deal which MacarthurCook Investment Managers Asia said will help avert a liquidation of the Reit’s assets. With $226 million worth of loans maturing by the end of the year, and a $90 million obligation to meet, MI-Reit is seeking to raise cash by issuing 221 million units – 83 per cent of existing units outstanding – to AMP Capital Holdings, present sponsor AIMS Financial Group and other ‘cornerstone’ investors, at 28 cents a unit.

The price, representing a 70 per cent discount to MI-Reit’s net asset value, is the bugbear of CIT, which is arguing that the share placement would destroy value for present unitholders.

In MI-Reit’s filing to the Singapore Exchange last Saturday, it took CIT to task for the less than concrete alternatives. It noted that CIT’s manager (CITM) has no financing arrangement in place for MI-Reit and that ‘CITM’s discussions on the alternative options are currently only preliminary and exploratory in nature’.

At the same time, the Monetary Authority of Singapore has indicated that it will not approve CITM managing both CIT and MI-Reit, a scenario suggested by CIT early last week. MI-Reit wants CIT to state its recommendation to MI-Reit unitholders clearly, and to back it up by a quantitative analysis.

Transparency questions

MI-Reit managers make statements about rival CIT

Over the weekend, the tension amid the ongoing corporate tussle between two real estate investment trusts was raised a notch higher. This came when the managers of MacarthurCook Industrial Reit (MI-Reit) made statements questioning the transparency of its rival, Cambridge Industrial Trust (CIT).

On top of formally asking CIT to disclose details as to why it is opposing MI Reit’s proposed recapitalisation plans, MI Reit has also raised the possibility that there could have already been instances of conflicts of interests.

Both sides are in a tussle to win the votes of other unitholders of MI-Reit, who will be voting at an extraordinary general meeting (EGM) today as to whether or not to accept the proposed rights issue and share placement.

CIT – which holds a near 10-per-cent stake in MI-Reit – last Friday said it continues to oppose the proposed recapitalisation plans, which it described earlier as being massively value-destructive.

“If (the manager of CIT) is still maintaining its earlier recommendation to MI-Reit’s unitholders as to how they should vote, we believe that our unitholders deserve to be treated fairly and that the board of CITM must explain in detail and clearly the justifications for its recommendation to them,” said MI-Reit’s chief executive Nick McGrath, in a statement to the Singapore Exchange last Saturday evening.

Mr McGrath added that CIT should provide details – like a quantitative analysis – supporting the latter’s recommendation to other MI-Reit unitholders by 2pm yesterday, which was 24 hours ahead of the EGM today.

Was there conflict of interest?

Meanwhile, in a separate statement issued yesterday, MI-Reit also sought clarifications from two non-executive directors of CIT, who are also directors of an entity belonging to National Australia Bank.

The bank is a senior debt-refinancier to both MI-Reit and CIT, as well as an adviser and underwriter to MI-Reit’s ongoing recapitalisation exercise.

MI-Reit has asked Mr Ian Smith and Mr John Wood, the two non-executive directors of CIT, to confirm that they did not use their position as directors in the bank’s division to obtain information about MI-Reit.

CIT and both non-executive directors have not issued any response as at press time yesterday.

Earlier last week, CIT said that it would oppose the proposed recapitalisation plan and had tried to gain control of MI-Reit’s management and assets. But the Monetary Authority of Singapore said last Friday it disapproved CIT’s bid to be a manager for both Reits, due to potential conflicts of interest.

MI-Reit is in urgent need of funds: It has to refinance $226 million in loans, which would mature by next month, and pay for a property in the International Business Park and four other industrial assets in Singapore.

It is at risk of liquidation if its unitholders fail to support its proposed recapitalisation plan, said MI-Reit early last week.