MI-REIT – Phillip

We review MacarthurCook Industrial REIT (MIREIT) maiden full year results for FY08. MIREIT reported gross revenue of S$32.2 million and net property income of S$25.1 million. Distributable income amounts $19.6 million, translating to a full year DPU of 7.52 cents.

Full year gross revenue is 20.7% higher than our forecast mainly because we do not include service charge and reimbursement in our modeling as these components of revenue have no effect on the net property income. Net property income, distributable income and DPU are respectively 1.9% lower, 3.1% lower and 3.0% lower than our forecast.

MIREIT was listed on SGX on 19 April 2007. The property portfolio grew from the initial 12 properties to the current 21 properties, which include one industrial warehouse in Japan. Asset size expanded from S$316.5 million to S$555.4 million. By the same account, NAV per share increased from $1.13 to $1.29.

Capital management. MIREIT has total debt of S$222 million, of which S$201 million will be due in April 2009. The remainder is Japan bank loan used in the acquisition of the Asahi Ohmiya warehouse, which matures in Dec 2009. Current gearing is 40%. It has S$20 million left in available facility to fund capex requirements or acquisitions. The manager has already begun refinancing talks with financial institutions.

Three main objectives for FY09. Firstly, active management of property portfolio. The manager will look at ways to improve the properties in terms of cosmetic upgrade or increasing the lease area from available spaces. Secondly, although the manager does not expect much acquisition activities in the near term, it is still exploring opportunities both locally and in the regional markets. Regional acquisitions will be transacted through strategic alliance with local partners. Thirdly, the manager hopes to conclude talks of refinancing plans.

Tenant diversification. The biggest tenant’s rental contribution has fallen from the initial 33.6% to 20.3% as at FY08. We estimate this will drop to 18.5% in FY11F. Similarly, the ten biggest tenants account for 66.7% of rental income in FY08, dropping from 94.2% initially. However with the projected contribution from IBP Techpark kicking in from Dec 2009, we estimate that the ten biggest tenants will account for 70.3% at FY11F. Diversification by sector will improve from the current 54.6%, 35.9% and 9.4% for Warehouse and Logistics, Manufacturing and Research & Technology respectively to 49.3%, 28.8%, 7.6% and 14.3% with the addition of the Office & Tech Park sector.

Investment risks. The inherent risk faced by all REITs is the ability to raise capital in order to grow the property portfolio. Although MIREIT will not be making any acquisition in the near term and thus has no urgency in funding requirement, it will have a capital outlay of S$91 million in Dec 2009 upon completion of construction of the IBP Tech Park it is schedule to acquire. It will therefore need to increase its credit facility or raise equity for the acquisition. In the event that the acquisition is debtfunded, gearing will rise to 48.5% from the current 40%. Depending on market conditions, we believe MIREIT will prefer to acquire through equity as it then leaves it with the flexibility for further acquisitions.

Valuation and recommendations. For the full year FY2008, MIREIT paid out 7.52 cents in distribution, which translate to a distribution yield of 6.25% relative to 6.18% as projected in the IPO prospectus, based on the IPO price of $1.20. Since IPO, MIREIT share price has fallen 20%. We attribute this weakness to the general sentiment surrounding the REIT sector. We roll over our valuation and forecast a 3- year CAGR DPU growth of 13.4%. Our DPU forecast of 9.61 cents for FY09F translates to a distribution yield of 10.01%, among the highest in the S-REITs universe. Fair value derived from our DCF model is $1.18. With an attractive 10.01%
distribution yield and trading at 25% discount to NAV, we maintain our BUY
recommendation.