Moody’s cuts MI-Reit’s ratings; review for possible downgrade

Moody’s Investors Service has on Wednesday downgraded Macarthurcook Industrial REIT’s (‘MI-REIT’) corporate family rating (‘CFR’) to Ba2. The rating remains on review for possible downgrade.

‘The downgrade reflects Moody’s views that MI-REIT is not likely to meet the scale and diversity targets that were built into its original rating when it was first assigned ‘, says Kathleen Lee, Moody’s lead analyst for the trust.

‘As a result MI-REIT shows high levels of asset and tenant concentration, more consistent with a Ba2 rating,’ adds Lee.

‘In addition, the trust has an outstanding sale & lease-back arrangement with a call and put option in respect of 4A International Business Park (entered into since August 2007) which if completed by end-December 2009, on fully-debt financed terms, would result in a material weakening of its credit metrics’, continues Lee.

‘There also remains considerable uncertainty as to how this acquisition will be funded if the put option is exercised by the vendor,’ she added.

‘The rating remains on review for downgrade primarily reflecting ongoing concerns surrounding MI-REIT’s significant refinancing risk with 91% of its total debts, or S$201 million, falling due in April 2009, amid very challenging credit markets conditions’, says Ms Lee.

‘The absence of available committed facilities and the REIT’s lack of extensive relationships with banks have significantly constrained MI-REIT’s liquidity profile and increase the risk of further downgrades’ adds Ms Lee.

Moody’s acknowledges that MI-REIT’s rating continues to be supported by its steady revenue streams supported by a relatively long lease maturity profile and adequate lease deposits that partially mitigates the trust’s low asset diversification and moderate tenant concentration.

The review will continue to focus on:

1) MI-REIT’s progress in securing committed financing to meet its debt maturities in April 2009 as well as the final contracted terms & conditions once refinancing is raised, and

2) the funding plan for the committed acquisition. The ratings could decline rapidly if material progress on securing committed financing for its April 2009 debt maturities is not made over the course of the next 2 months.

Headquartered in Singapore, MI-REIT is a real estate unit trust that was formed primarily to own and invest in a diversified portfolio of industrial properties. The company reported total assets of approximately S$568 million and gross revenue of $12.4 million for the first quarter ended 30 September 2008.

Marginal fall in value of 5 MI-Reit properties here

Its only warehouse property in Japan revalued upwards by 13.4%

MACARTHURCOOK Industrial Reit (MI-Reit) has seen the valuations of five Singapore properties fall 1.3 per cent to $141.6 million from $143.4 million a year ago.

The properties are at Joo Seng Rd, Gul Way, Changi South Lane, Changi South Avenue and Tuas Avenue 20.

In a statement yesterday, MI-Reit said it recently obtained new independent valuations for eight properties – seven in Singapore and one in Japan.

The other two Singapore properties – at Tuas Avenue 2 and Admiralty Rd – in this revaluation exercise were unchanged in value at $23 million and $14.8 million respectively.

The Japanese property – Asahi Ohmiya Warehouse in Japan – was revalued 13.4 per cent higher at $33.1 million, up from $29.2 million a year ago.

MI-Reit has 21 properties – 20 in Singapore and one in Japan.

It said the valuation exercise increased its portfolio value to $559.9 million as at Nov 15. A year ago, when it had 13 income-producing properties, the portfolio was valued at $370.8 million.

In September, MI-Reit said it had obtained valuations for seven other Singapore properties. None of these had fallen in value, though four were unchanged. Collectively, the seven properties had a total value of $227.6 million at Sept 1, up from $226.3 million a year earlier. This was a 0.6 per cent increase.

According to a report by Colliers International, average capital values of prime freehold factory space and warehouse space in Q3 2008 remained largely unchanged.

Colliers estimated prime freehold factory space to have remained at $548 per sq ft (psf) and $437 psf for ground and upper-floor space respectively. Prime freehold ground and upper-floor warehouse space was estimated at $521 psf and $392 psf respectively.

Latest 2QFY09 results were within expectations without much surprise. MacarthurCook Industrial REIT (MIREIT) reported gross rental revenue of S$12.4m (68.8% YoY, 0% QoQ), distributable income of S$6.9m (44.2% yoY, +5.6% QoQ) and DPU of 2.35 cents (26.3% YoY, 0% QoQ).

Since 1QFY09, MIREIT has paid out approximately 90.16% of the distributable income and had maintained the same quantum of 2.35 cents for both 1QFY09 and 2QFY09. The REIT Manager has indicated that it will pay out all retained amounts for the full year and therefore we do not expect much variant of the DPU amount for the second half of the year.

MIREIT has 91% of its debt due in April 2009. Negotiations are underway and our general view is refinancing will take place with a much higher margin. The remaining of its debt relate to the Japanese debt that is due in Dec 2009. MIREIT will also face significant financing requirement in Dec 2009 for the purchase of the business park development at Plot 4A, IBP.

The property portfolio maintains 100% occupancy and is fairly well diverse across the sub sectors. The biggest tenant contributes 20.3% of rental income and top ten tenants account for 66.6% of total income, contrasting with the 33.6% and 94.2% at the time of IPO. The portfolio registered an S$1.5m accretion in asset value from a property valuation done on 13 of the properties on 6 Nov 2008.

Valuation and recommendation. Our revenue projections remained intact because there is a built-in rental escalation component. We have however increased our borrowing cost assumptions and reduced our DPU projections from FY10F onwards. We adjusted our DCF parameters to factor in higher risk premium and our DCF derived fair value is lowered to S$0.60 from S$1.18 previously. Maintain Buy with a long-term view.