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.

Big recapitalisation exercise at MI-Reit

$217.1m from AMP Capital, cornerstone investors and a rights issue; $214.9m from term and bridge loans

MACARTHURCOOK Industrial Reit (MI-Reit) has announced a slew of measures to recapitalise and refinance its debts and contractual obligations.

It has proposed to raise gross proceeds of $217.1 million through the issue of new units to AMP Capital Holdings and ‘cornerstone investors’ and followed by a rights issue. In addition, it has secured credit agreements for a term loan of $175 million and a bridge loan of $39.9 million.

With these transactions, the Reit’s short-term borrowings of $226 million due to mature by the end of this year will be fully refinanced.

Under the unit placement, AMP Capital is buying a 16.1 per cent stake in MI-Reit for $22 million. MI-Reit will issue 78.6 million new units to AMP Capital at $0.28 each. The issue price is at a 31.7 per cent discount to the closing price of $0.41 on Thursday.

This will usher in the Australian investment manager as a co-sponsor of MI-Reit to join hands with existing sponsor AIMS Financial Group.

MI-Reit is also issuing 142.9 million new and fully underwritten units to certain ‘cornerstone investors’, including 9.8 million units to its principal sponsor AIMS Financial Group at $0.28 apiece. The gross proceeds of $40 million will be partially used to meet a contractual obligation to pay $90 million for a private lot at 1A International Business Park.

Following these placements, MI-Reit will undertake a two-for-one rights issue, which is also fully underwritten. It will issue 975.6 million new units at $0.159 apiece to raise $155.1 million. The proceeds will be used to pay down debts and acquire properties from AMP Capital.

MI-Reit has agreed to acquire four industrial properties in Singapore from AMP Capital for $68.6 million to diversify its sources of income. These properties have initial yields of between 8.2 and 9.6 per cent.

‘The transactions are critical for MI-Reit and will restore MI-Reit to a stable platform,’ said Nicholas McGrath, CEO of the Reit manager. ‘The key benefits will outweigh the dilutive effects of the transactions on MI-Reit’s distribution per unit and net asset value per unit, and are in the best interests of unitholders.’

Speaking at a briefing yesterday, Mr McGrath said that he expects the rights issue to enjoy a good take-up as it is attractively priced.

MI-Reit will seek shareholders’ approval for these transactions at an extraordinary general meeting on Nov 23. MI-Reit will be rebranded as AIMS AMP Capital Industrial Reit.

Mr McGrath termed the transactions ‘transformational’ for MI-Reit. The Reit will enjoy support from the new sponsor AMP Capital, whose expertise in asset management and exposure in Asia Pacific complements AIMS’s direct fund management experience and presence in Australia and China.

MI-Reit will also have the first right of refusal to acquire AMP Capital’s logistics complex at 27 Penjuru Lane in Singapore, Mr McGrath said. There are opportunities over the next eight to 12 months for asset acquisitions given the properties identified under AMP Capital and other parties, Mr McGrath added.

To show its commitment, AMP will acquire 50 per cent of the Reit’s manager from AIMS and has committed to sub-underwrite a portion of the rights issue, bringing its total investment in MI-Reit to $54.1 million. This marks its first investment in an Asian Reit.

MI-Reit has separately signed a three-year term loan of $175 million with three banks – Standard Chartered Bank, Commonwealth Bank of Australia and National Australia Bank – and a bridge loan of $39.9 million with Standard Chartered Bank. These credit facilities will be used to partially refinance a Singapore dollar term loan.

The transactions are expected to pare down the Reit’s leverage from 44.7 per cent as at Sept 30 to 29 per cent on a proforma basis, Mr McGrath said.

MI-Reit posts 16% fall in Q2 income distribution

MACARTHURCOOK Industrial Reit (MI-Reit) reported a 16 per cent decline in income distribution to $5.17 million for its fiscal second quarter ended Sept 30 due to higher borrowing costs.

Distribution per unit (DPU) thus fell 17.5 per cent from a year ago to 1.939 cents. The Q2 distribution represents 100 per cent of the taxable income available for distribution. Gross revenue dipped 4.6 per cent to $11.83 million largely due to a reduction in service charge revenue.

MI-Reit said its income stream continues to be supported by a 98.8 per cent portfolio occupancy rate, with a weighted average lease duration of 4.2 years.

As at Sept 30, it holds 21 properties in Singapore and Japan with a total carrying value of $490.6 million and revalued net asset value of $0.94 per unit.

Ten properties are scheduled for rental rise ranging from 1.5 per cent to 5 per cent in fiscal 2010 ending March 31.

Its manager said it expects the economic outlook to remain challenging for the rest of this calendar year.

‘With the higher cost of borrowing, the income available for distribution in fiscal 2010 will be lower than in fiscal 2009,’ it added. But rental income is expected to remain stable.

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.