Macquarie Supports Strategic Review of Macquarie MEAG Prime REIT

Macquarie Real Estate Singapore (MRES) advised today it supported the decision of the Board of Macquarie Pacific Star Prime REIT Management Limited (the Manager of Macquarie MEAG Prime REIT (MMP) (SGX: MMPR.SI)) to conduct a review of strategic options with the specific objective of enhancing value for all MMP Reit unitholders.

MRES is a substantial unitholder of the REIT with a 26 per cent holding. Another Macquarie Group entity has an indirect 50 per cent interest in the REIT’s Manager.

MRES supports the Board’s decision to undertake the strategic review because it has received a number of offers for its 26 per cent interest in MMP REIT units, and in the interests of all MMP unitholders, would like for all unitholders to be able to participate in any proposal on the same basis as Macquarie.

While MRES has made no final decision in relation to its stake in MMP as this is dependent on the outcome of the strategic review, it is committed to seeking to find ways to provide all MMP unitholders with access to value-maximising proposals.

Macquarie may sell Reit stake after review

MACQUARIE MEAG Prime Reit is expected to undergo a strategic review soon that may result in the Macquarie group selling its 26 per cent stake in the Singapore-listed Reit, industry sources said.

The move is believed to be prompted by the trust trading at a steep discount to its net asset value (NAV). MMP last traded at $1.06, compared with its NAV of $1.61 as at Dec 31, 2007. Among MMP’s current assets are Wisma Atria and Ngee Ann City.

Macquarie, it seems, has floated the ‘strategic review’ proposal to the other two shareholders of the Reit’s manager Macquarie Pacific Star Prime Reit Management – MEAG Munich ERGO Asset Management GmbH and Investmore Enterprises Ltd – both of which are likely to have reservations about the move.

MEAG is part of the Munich Re group, one of the largest reinsurance groups in Germany, while Investmore belongs to the fast-growing Pacific Star group founded by Singaporean entrepreneur Jeff Tay.

Industry observers said that since Macquarie bought into the Reit during the IPO, it has been calling the shots at the Reit and its strategy for growing the Reit’s footprint in Asia does not always agree with those of the other two shareholders.

In the event of a sale, unitholders may raise the question of a potential conflict of interest as Macquarie is the single largest unit holder of the Reit, as well as manager of the Reit and its properties.

Also, some feel that if Macquarie wishes to divest, it should get its own investment bank to carry out a private tender rather than have the Reit manager do so in a public manner that may create uncertainty for tenants, employees and business associates during the review period, expected to take a few months.

Who will mine the Orchard Gold ?

Story: According to news reports today, it has been quoted that sponsor Macquarie Group could be reviewing its 26% stake in MMP with a possible divestment in the works. The news report also cited that there could also be potential differences between Macquarie and other main shareholders within the MMP REIT manager in terms of strategic direction that may also see some resistance for any potential divestment.

Point: The above piece of news is likely to cast doubts on the cohesiveness of the REIT manager. In the near term, this piece of news may also result some overhang on the unit price. However, this supports our earlier view that M&A could emerge as a positive catalyst for the stock and MMP to be a likely target due to the following : i) MMP has a relatively fragmented ownership structure; ii) its position as an independent REIT without a developer as a sponsor; iii) Attractive yield spreads of c.200 bps compared to its Singapore-listed peers which supports MMP’s attractiveness as a takeover target; and iv) MMP’s portfolio is backed by prime assets in Singapore such as Wisma Atria (41% of portfolio value) and Ngee Ann City (47% of portfolio value) and is currently trading at an attractive 34% discount to NAV.

Relevance: We are maintaining our BUY on MMP which is currently trading at an attractive 7.0% FY08 yield and 7.3% FY09 yield and at an attractive 34% discount to NAV backed by prime retail assets. Target price is S$1.63 based on DCF.

MMP Reit posts 15.7% rise in distributable income for Q4

MACQUARIE MEAG Prime Real Estate Investment Trust (MMP Reit) has reported a 15.7 per cent year-on-year rise in distributable income to $16.2 million for the fourth quarter ended Dec 31, 2007. The Q4 distribution brought 2007 full year’s distributable income to $59 million, up 7.5 per cent.

Distribution per unit (DPU) for the quarter rose 14.3 per cent to 1.68 cents, bringing full-year DPU to 6.19 cents, a rise of 6.9 per cent. ‘This is a result of our regional diversification strategy and focused asset management efforts,’ said Franklin Heng, CEO of MMP Reit’s manager Macquarie Pacific Star.

On an annualised basis, the latest distribution represents a yield of 6.06 per cent based on MMP Reit’s traded unit price of $1.10 on Dec 31, 2007. An increase in the valuations of MMP Reit’s portfolio of 10 properties raised group net asset value (NAV) per unit to $1.61 as at Dec 31, 2007, up 38.8 per cent from end-2006’s $1.16.

Gross revenue for Q4 2007 was $29.8 million, up 32.1 per cent year-on-year. This was due to higher rental rates from renewals, new leases and revenue from new acquisitions. Full-year gross revenue rose 14.6 per cent to $103 million. Net property income for Q4 rose 29.1 per cent to $22.1 million, despite higher year-on-year expenses. This brought full year’s net property income to $76.8 million, up 10.9 per cent. Mr Heng said: ‘As at Dec 31, 2007, our Singapore properties enjoyed full occupancy for retail space and 99 per cent occupancy for office space. The 79,100 square feet of office leases which expired in 2007 had average quarterly passing rents of $4.90 to $5.30 per square foot per month (psfpm) and these were renewed or contracted at average rents of $7.70 to $12.10 psfpm.’

MMP Reit’s portfolio includes a 74.23 per cent strata title interest in Wisma Atria and a 27.23 per cent strata title interest in Ngee Ann City. In 2007, it acquired seven prime properties in Tokyo and a retail property in Chengdu in China, growing its asset portfolio to $2.2 billion.

The Reit said it continues to exercise prudent capital management by maintaining a low gearing and strong balance sheet. ‘Our gearing of 29 per cent is at a healthy level. To shield MMP Reit from interest rate volatility, 89 per cent of our debt is fixed and the average interest rate is 2.69 per cent. Interest cover is 4.4 times. The recent establishment of a $2 billion multi-currency medium term note (MTN) programme will provide additional sources of funding,’ said Mr Heng.

On MMP Reit’s outlook, Stephen Girdis, chairman of Macquarie Pacific Star, said: ‘MMP Reit has in the past year laid the foundations for strong organic growth for the next couple of years, through its maiden acquisitions in Japan and China, and its tenancy remix and asset enhancement initiatives for MMP Reits’s Singapore properties, Wisma Atria and Ngee Ann City.’

SINGAPORE, 16 January 2008 – Macquarie Pacific Star, Manager of MMP REIT – the S-REIT with the largest presence in Orchard Road – is pleased to announce that Moody’s Investors Service (Moody’s) has assigned a ‘Baa2’ rating to the S$2 billion multi-currency Medium Term Note (MTN) programme set up for MMP REIT on 8 January 2008. Moody’s corporate family rating of ‘Baa1’ with a stable outlook for MMP REIT remains unchanged. The corporate family rating was first assigned to MMP REIT in July 2006 and reaffirmed in May 2007.