Category: MI-REIT
Macarthurcook Industrial REIT – OCBC
Macarthurcook Industrial REIT: Ideal candidate for takeover
Management expects S$500m of acquisitions by Mar 08. Even though MI-REIT’s current asset size is small at S$316m, management has ambitious growth plans. It sees S$500m of possible acquisitions by end Mar 08. Furthermore, it expects the bulk of these acquisitions to be from third party and not from the exercising of its first right of first refusal with its sponsor. This means its acquisition will likely be in direct competition with the 3 other REIT rivals in the industrial space. As we see little differentiating factors between all the REITs’ acquisition strategies, the only way we see MI-REIT to be able to achieve this target is via pricing. In that context, MI-REIT can afford to be very aggressive. Its gearing remains low at about 8%, meaning any acquisition is likely to be debt funded. We estimate MI-REIT has a debt capacity of about S$117m. More importantly, with its cost of debt at about 3.5%, and with market property being offered at just below 7.0%, MI-REIT has about 350bp to play. However, we do not see MI-REIT to be willing to use up all its ammunition in the short term. Acquisitions at property yields of about 6.0-6.5% are the more likely scenario.
Ideal candidate for takeover. MI-REIT has a fairly fragmented shareholding structure. Its largest shareholders have a stake of about 12.9% but with the majority in 5% range. Its sponsor Macarthurcook only has a 2.3% stake and the vendors collectively own a further 2.7% of the issued units. The implication of this loose shareholding structure is that if the right offer comes along, the possibility of shareholders taking profit is very high. Furthermore with a price to book of about 1.3 times, it remains fairly cheap relative to its larger rivals. We thus see MI-REIT to be an ideal takeover candidate. We do not have a rating on MI-REIT. (Winston Liew)
MI-REIT : BT
MACARTHURCOOK Industrial Reit (MI-Reit) has failed in a legal bid to have the termination of an option agreement on a proposed $32.5 million acquisition – Liang Huat Industrial Complex – declared invalid. But the Reit is considering an appeal.
Its manager, MacarthurCook Investment Managers (Asia), said yesterday the High Court has dismissed the Reit’s originating summons. The Reit and its trustee sought to set aside the termination of the option agreement by KWD, the vendor of Liang Huat.
The agreement comprised a call and put option. Under the call option, MI-Reit could exercise its right to buy Liang Huat for $32.5 million between Dec 5, 2006, and April 30, 2007. Under the put option, KWD had the right to sell the property during a period of one business day – or any other mutually agreed period – starting from the expiry of the call option.
Earlier this year, KWD sought to terminate the option agreement, alleging that certain pre-conditions were not satisfied within the required time period.
As mentioned in its IPO prospectus, MI-Reit started proceedings in the High Court in response, seeking a declaration that the termination by KWD was invalid. An MI-Reit spokeswoman said the Reit’s originating summons was dismissed by the court because of a technicality.
Chris Calvert, chief executive of MacarthurCook Investment Managers, said: ‘We are extremely disappointed with the result and are presently working through the judgment in detail in conjunction with our lawyers and considering any avenues of appeal that might be open to us. Any decision will be based on what we consider to be in the best interests of MI-Reit’s investors.’
MI-Reit’s manager also said the outcome of the proceedings is not expected to have a material impact on the Reit’s financial performance or results.
MI-Reit was listed on the Singapore Exchange in April this year. Its initial portfolio of 12 industrial properties in Singapore did not include Liang Huat.
In its prospectus, the Reit, which has forecast a distribution yield of 6.18 per cent based on this initial portfolio for the year ending March 2008, said the yield would be 6.45 per cent if Liang Huat were added on July 1, 2007, and 6.36 per cent if it were added on Oct 1, 2007.
For the year ending March 2009, the projected yield is 6.68 per cent if Liang Huat were in the portfolio, compared to the base case of 6.32 per cent.
MI-REIT : SGX
Singapore, 15 June 2007 – MacarthurCook Investment Managers (Asia) Limited (the “Manager”), the Manager of MacarthurCook Industrial REIT (“MI-REIT”) announced today that the High Court of Singapore (‘High Court”) had dismissed its Originating Summons in respect of MI-REIT’s proposed acquisition of Liang Huat Industrial Complex (“Liang Huat”).
As disclosed in its prospectus, MI-REIT and the Trustee had sought to set aside termination of the Put and Call Option Agreement by the vendor of Liang Huat.
Chris Calvert, Chief Executive Officer of the Manager, said, “We are extremely disappointed with the result and are presently working through the judgment in detail, and considering any avenues of appeal that might be open to us, in conjunction with our lawyers. Any decision will be based on what we consider to be in the best interests of MI-REIT’s investors.”
The Manager confirmed that the outcome of the proceedings was not expected to have a material impact on the financial performance or results of MI-REIT.
Source : SGX
SREITS – OCBC
Surprise rule change on REIT M&A. In our 2007 strategy report dated 11 Dec 2006 “M&A theme a strong possibility in 2007/08”, we had articulated that M&A could be another avenue for growth. This scenario is now coming closer to reality with the Securities Industry Council’s (SIC) surprise announcement on Friday that it will extend the Singapore Code of Takeover & Mergers to REITs. This move is significant as it means that there is now clarity on M&A rules for S-REITs. Now anyone who acquires 30% or more of any REIT must make a general offer (GO) for the remaining units. Furthermore, anyone who owns 30%-50% of any REIT and acquires a further 1% of the units must also make a GO for the rest of the units.
Market getting more competitive. The key issue with the high-beta REITs such as CCT, MLT, CMT, ART, AREIT is the ability of the managers to meet market growth expectation. This is particularly so in a property up-cycle where fewer properties are available to be acquired. Some are venturing overseas, while others remain domestic focus (AREIT, Cambridge). Another avenue for asset size growth is via own development (AREIT, CMT), but this is a riskier strategy and is constrained by REIT guidelines. However with the SIC rule change on M&A, the REIT manager has another avenue to meet market’s growth expectations
A function of risk appetite. In our opinion, the market has segmented SREITs into two camps, i.e. REITs with high and low growth expectations. The key differentiating factor is the P/B ratio. We see potential for both camps, and the choice for investors for either is a function of their risk appetite. The high-beta REITs are those with high P/B ratio. As the market has already priced in growth, the risks are higher. On the other hand lowbeta REITs, we see minimal downside risks. In fact with them now being eyed as targets for acquisitions, we see a strong upside possibilities.
Potential winners in M&A. We see the likely winners in the new M&A rules to be those trading with higher yield and low price to book relative to their peers in the same sector. We see these REITs to be Allco, Cambridge, Macarthur, MM Prime and First REIT. (Winston Liew)
MI-REIT : BT (HSBC)
June 7 close: $1.35
HSBC GLOBAL RESEARCH, June 7
MACARTHURCOOK Industrial Reit is the smallest industrial S-Reit with 12 quality Singapore properties set for steady contractual rental growth. We expect a re-rating once the manager demonstrates its ability to execute on acquisitions, which should amplify distribution per unit (DPU) growth on a small asset base and low gearing.
We initiate coverage with an Overweight (V) rating and target price of $1.57, implying 30.7 per cent total return potential.
Expect amplified DPU growth via acquisitions on a small asset base and low gearing. With a visible pipeline of over $150 million, MI-Reit aims to grow its assets by up to $500 million per annum over the next three years, implying a CAGR (compounded annual growth rate) of 79 per cent to end-FY10. We believe this target is achievable, given the asset-light trend in a fragmented industrial real estate environment and the company’s ability to tap into the networks of its parent and strategic partner.
With an initial gearing of 8.7 per cent and the ability to gear up to 60 per cent of gross assets (on receiving a credit rating from Moody’s), we estimate MI-Reit could acquire some $400 million of assets purely by debt, which could add 46 per cent to its FY08f DPU.
The portfolio has a weighted lease term to expiry of 6.7 years and occupancy of 100 per cent as at April 2007, with built-in weighted average rental escalation of 3.4 per cent per annum for the first four years. We believe MI-Reit could benefit from potential industry consolidation, in the event that the S-Reit takeover code is formalised in the medium term.
Target price of $1.57 including acquisition premium: We see this as an undervalued S-Reit trading at a large discount to its peers. Our target price comprises a base case DDM value of $1.22 on its existing portfolio, on an 8.0 per cent cost of equity and an acquisition premium of $0.35 assuming $500 million of acquisitions over FY08-09 (March) at 7.0 per cent average yield.
With a total return potential of 30.7 per cent (including 5.9 per cent FY08f yield), we initiate coverage of MI-Reit stock with an Overweight (V) rating.
Risks: The manager’s inability to execute on growth strategies, default risks by tenants or subtenants, competition for assets and interest rate risks.
OVERWEIGHT