MI-REIT – Phillip
MacarthurCook Industrial REIT (MIREIT) reported gross revenue for 2QFY10 of $11.8 million (-4.5% y-o-y, +7.8% q-o-q)), net property income was $9.1 million (-2.7% y-o-y, -2.8% q-o-q). Distributable income was $5.2 million (- 26.2% y-o-y, +28.4% q-o-q). DPU for the quarter was 1.93 cents (-17.5% y-o-y, +28.4 q-o-q). MIREIT also announced a series of recapitalization measures.
Gross revenue for 2QFY10 was lower year-on-year due to lower recovery of property tax and land rent. However it was higher than 1QFY10F as there was a refund of service charges to tenants in 1QFY10. Underlying rental income from the properties remains stable as can be seen from the net property income. Portfolio occupancy rate for 2QFY10 was 98.8%. Distributable income was higher in 2QFY10 compared to the previous quarter, as the Trust did not make a claim for the industrial building allowance. Correspondingly, DPU and the distributable margin were better this quarter.
The REIT recorded a write-down of $37.1 million on its portfolio. Current gearing is 44.7%.
MIREIT announced a series of recapitalization measure to address its refinancing needs.
1. Rights issue of 975.6 million units to raise gross proceeds of $155.1 million.
2. Acquisition of 4 industrial properties for a consideration of $68.6 million.
3. Placement of 221.5 million new units to Cornerstone investors to raise $62 million.
4. A new 3 year term loan facility of $175 million
The rights issue is fully underwritten and the entitlement is 2 rights units for each existing unit. The rights unit is priced at $0.159. Through the rights issue and placement exercise, MIREIT will raise total gross proceeds of $217.1 million. The proceeds will be used to satisfy the acquisition of the 4 industrial properties and the 1A IBP building ($90.0 million), as well as partly reduce the outstanding debt of $226 million. The remaining debt will then be refinanced with the $175 term loan facility. After the whole recapitalization exercise, NAV is estimated at $0.34 and gearing improves to 29%. The total number of units outstanding assuming the recapitalization exercise is completed increases approximately 5.5 times. We estimate the incremental contribution of the 4 additional properties to DPU on a fully diluted basis is 0.4 cents. The rights issue, placement and acquisition are subject to unitholders’ approval.
Valuation and recommendation. MIREIT finally announces plans of its refinancing after months of uncertainty. Although the REIT will be in a much-improved financial state, it comes at a substantial dilution to existing unitholders. We adjusted our projections to factor in the recapitalization measures and arrive at a postrecapitalization fair value of $0.22 based on a WACC of 9.8%. Our 3-year DPU forecasts for FY10F – FY12F are reduced 15% – 60%. We would advise long term investors to take up the rights units as we estimate MIREIT offers a potential FY11F DPU of 1.89 cents, which translate to a dividend yield of 11% based on the rights price of $0.159. For investors who are not keen, we maintain our Sell recommendation.