Moody’s rates MI-Reit as ‘developing’

CREDIT rating agency, Moody’s Investors Service, yesterday changed Macarthurcook Industrial Reit’s (MI-Reit) Baa3 rating outlook to developing from stable.

The change came after the announcement that AMP Capital Investors made a proposal to acquire the entire capital of MacarthurCook for A$1.35 per share.

MacarthurCook owns 92.5 per cent of the manager of MI-Reit, MacarthurCook Investment Managers (Asia), and has direct and indirect interest of about 13 per cent in MI-Reit.

The conditions of the proposal have not been revealed.

AMP became a substantial shareholder in MacarthurCook through the entry into a pre-bid acceptance agreement with Ascalon Capital Managers in respect to their 18.4 per cent shareholding in Macarthurcook. AMP is one of the principal operating subsidiaries of AMP Group Holdings of Australia.

Moody’s said it expects a resolution of the developing outlook would occur once it becomes clear if the takeover is going to proceed and whether this will result in changes in respect of the strategic direction and medium-term operating and financial outlook for MI-Reit.

MI-Reit reported total assets of $569 million and revenues of $32 million for the fiscal year ending March 31, 2008.

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.

MI-Reit sees organic growth driving returns

Fresh acquisitions limited in a weak capital market

A SERIES of acquisitions boosted fourth-quarter results for MacarthurCook Industrial Reit (MI-Reit), but weak capital market conditions will limit fresh opportunities in the short term.

MI-Reit purchased nine properties in FY2008, five of them in Q4 alone.

‘Since MI-Reit’s listing in April 2007 we have successfully executed our strategy to grow MI-Reit through yield-accretive acquisitions,’ said acting CEO of MacarthurCook Investment Managers Craig Dunstan.

Rental contributions from the acquisitions translated to distributable income of $5.8 million for Q4 ended March 31, 2008 – 19.9 per cent higher than the forecast $4.8 million.

Going forward though, MI-Reit expects economic growth in Asia to moderate, and says organic growth may soon become the bigger driver of returns.

On the trust’s outlook for FY2009, Mr Dunstan said: ‘We will focus on optimising yield from MI-Reit’s existing portfolio through active asset management.’

He added that ‘we expect to resume our active acquisition growth strategy once capital market conditions improve’.

Weak markets have hampered MI-Reit’s plans to issue equity.

In January it postponed a $200 million equity fund-raising exercise and said yesterday it is unlikely to revisit this plan until early next year.

As part of the strategy to extract greater value from its existing portfolio, MI-Reit has identified properties with built-up plot ratios below the maximum allowable plot ratio of up to 2.5 per cent under the Urban Redevelopment Authority’s Master Plan.

The trust said at a media briefing yesterday: ‘Returns from such additional space additions are likely to provide higher than normal property yields, as they are not subject to land costs.’

The manager of MI-Reit has also been searching for a CEO since the previous CEO, Chris Calvert, left in March.

According to Mr Dunstan, it has been challenging finding a high-quality candidate who knows how to run a Reit and knows about real estate in Asia.

Nevertheless, the temporary absence of a CEO has not evolved into a worrying issue, as MI-Reit has no plans to undertake strategic initiatives in a weak market.

MI-Reit’s distributable income rises

Q4’s $5.8m boosted by rentals from new properties

STRONG rental contributions from its new properties lifted Macarthurcook Industrial Reit’s (MI-Reit) distributable income in the fourth quarter to $5.8 million, with distribution per unit (DPU) coming in at 2.22 cents.

Q4 distributable income was 19.9 per cent higher than its initial forecast, while DPU was 19.4 per cent ahead of estimates.

‘The 19.4 per cent higher than forecast DPU for 4Q FY08 was largely due to rental contributions from our acquisitions of nine yield accretive properties during the year. Of these nine properties, five were acquired during the fourth quarter,’ said Craig Dunstan, chief executive officer of the manager for MI-Reit.

These acquisitions increased the total value of MI-Reit’s investment properties by 75.5 per cent to $555.4 million, compared with its initial portfolio value of $316.5 million, he added.

MI-Reit’s net property income for the fourth quarter ended March 31 stood at $8.21 million, 38.1 per cent higher than forecast. Taking an earlier revaluation gain from its 12 properties into account, its net asset value per unit (NAV) was $1.29 at the end of March, 7.5 per cent higher than the NAV of $1.20 at its initial public offer in April 2007, it said in a statement yesterday.

Annualised DPU came in at 7.91 cents for the full financial year, beating forecasts by 6.7 per cent. The annualised yield worked out to be 8.03 per cent, based on the closing price of $0.985 per unit at the end of March. Full-year distributable income also beat estimates at $19.61 million.

Properties acquired in the last six months include new warehouse and logistics facilities in Yishun Industrial Park A and Defu Lane 10, as well as a manufacturing complex in Kallang Way which was acquired through a sale and leaseback agreement with Xpress Holdings.

Besides lifting rentals, these acquisitions also helped to reduce the reliance on a single property or tenant, said MI-Reit. As testament to the results, it said no single tenant contributed more than 20.3 per cent to total rental income in March this year.

Looking ahead, Mr Dunstan expects economic growth in the region to be moderated as a result of the US mortgage crisis and this may put a temporary halt to MI-Reit’s acquisition plans. However, he expects demand for industrial properties to remain strong across Asia.

MI-Reit shares closed at 96 cents yesterday, down 1.5 cents.