REITs – OCBC
3Q review and lessons from MI-REIT
Results were largely in line. Most S-REITs under our coverage reported 3Q CY09 results within expectations. CapitaCommercial Trust (CCT) and Ascott Residence Trust (ART) were the sole out-performers thanks to strong gross margins at ART and positive rental reversions at CCT. In November, Mapletree Logistics Trust (MLT) raised S$79.4m from a private placement while Starhill Global REIT [NOT RATED] disclosed plans for S$571.3m worth of acquisitions.
Broader property trends unchanged The pace of rent declines for office space decelerated in 3Q09 but we believe we are approaching an inflection point where spot rents are now trending below the passing rent on expiring leases. Meanwhile, performance of retail REITs under our coverage was generally stable and we expect earnings to be supported by asset enhancement initiatives and potential acquisitions. Hospitality players reported stabilizing occupancy numbers but continued weakness in room rates. Year-end portfolio revaluations may be a key price driver for industrial REITs in the coming months with MI-REIT [NR] booking a 11.1% fall in asset values versus a March revaluation.
REIT re-structuring continues. Restructuring activity continues in the SREIT space as falling asset values ratchet up leverage. MI-REIT is a perfect case: high leverage; a chunky re-financing deadline; a weak sponsor (MacarthurCook pre-AIMS); and a contracted acquisition committed at peak prices. In the typical modus operandi of S-REIT players so far, control changed hands at the manager level when AIMS Financial Group stepped in. But for the first time, control was also contested at the REIT level with the intervention of Cambridge Industrial Trust [NR]. While its manager’s attempt to control two directly competing REITs was thwarted by the Monetary Authority of Singapore, several key lessons have emerged from this saga for both investors and REIT managers (in our opinion).
Lessons from MI-REIT. First, muted investor reception to the original MIREIT proposal indicates that attempts to restructure REITs through dilutive cash calls and acquisitions of sponsor-owned assets, however necessary, need to be more transparently communicated to the market. Secondly, successful execution of any M&A action at the REIT level is likely to require more careful understanding of the regulator’s position. Thirdly, further distinction needs to be made between the actions of (and the benefit to) the manager versus the REIT. Most importantly, existing investors in REITs with high leverage and weak sponsors need to be wary of the likelihood of potential dilution as more cash calls are likely – we see a better investment opportunity post-capital market activity and post-dilution. Maintain NEUTRAL view on S-REITs.
MI-REIT – BT
MI-Reit moves ahead with its plans
Its strategy will involve leaning on cornerstone investors
WITH the dust finally settling after the tumultuous past few weeks, the folks behind MacarthurCook Industrial Reit (MI-Reit) are understandably keen to leave the past behind them.
But, perhaps of greater interest to its unitholders are the plans that its managers have for the trust, which they shared with The Business Times yesterday.
‘I think it’s important that we draw a line across what has happened and leave the past behind us,’ said Nicholas McGrath, CEO of MI-Reit’s manager, referring to the very public spat that it had with rival and substantial shareholder, Cambridge Industrial Reit (CIT).
‘What we need to do now is look ahead and focus on our future plans. I believe we have a very strong platform for growth, thanks to our sponsors, as well as great intellectual capital and Reit management expertise from them, and now, a strong balance sheet,’ he said.
Mr McGrath’s first job would be to pay off the debt accumulated as a result of decisions undertaken by the previous management – namely, the $226 million in loans and the $90 million obligation to buy a property, for which MI-Reit had to recently mount a highly controversial refinancing plan.
This refinancing plan was heavily criticised by CIT, which had bought a near 10 per cent stake in MI-Reit after the latter announced plans to raise $217 million from a placement to cornerstone investors and $215 million from a rights issue. CIT said that the recapitalisation exercise destroyed value for unitholders as the discount to net asset value was too steep – and proposed itself as manager of MI-Reit. What followed was a weeks-long slugging match that saw both sides take out advertisements in the newspapers to defend their positions.
Eventually, CIT’s bid to take control of MI-Reit was blocked by the Monetary Authority of Singapore (MAS), and CIT’s chief, Chris Calvert, was forced to backtrack on what he had said. But disgruntled MI-Reit unitholders, already stirred up by the debate that had gone on before, continued to take MI-Reit’s managers to task at Monday’s extraordinary general meeting to vote on the refinancing plan. While the plan was voted through at the meeting, Mr McGrath recognises that the issue is not entirely resolved – and will need to be dealt with, along with his other plans for the Reit.
‘There will have to be lots of communication with our investors, both retail and institutional, over the next 12 months. We will maintain a very transparent and open environment,’ he said.
Desmond Ong, managing partner of Eversheds Singapore and adviser to the MI-Reit board, noted: ‘The board is determined to repay the faith shown in them by the majority of the unitholders after the events of last week.’
Mr McGrath believed that the Reit will have a better story to tell. Once its existing debt is cleared off its books, by the end of the year, MI-Reit will be left with a stronger capital position – with 29 per cent leverage.
Greg Bundy, deputy chairman of AIMS, added: ‘That will also coincide with a re-rating of property assets, when the economy recovers. Nicholas has been conservative in rating MI-Reit’s assets – booking a 16 per cent decrease in property values when others like CIT have gone with 10 per cent and Mapletree Logistics with 5 per cent. So, MI-Reit should benefit nicely when property assets appreciate.’
Mr McGrath said that he intends to pursue a ‘prudent capital management plan’ which includes keeping the trust’s leverage at between 29 and 35 per cent, and ensuring that it only invests in assets that will boost its yield.
‘I will guard the distribution (to investors) with my life,’ he told BT yesterday.
Part of that valiant strategy will involve leaning heavily on the Reit’s cornerstone investors, AMP Capital Holdings and present sponsor AIMS Financial Group. MI-Reit intends to capitalise on their connections to boost its yields.
Mr McGrath shared that AMP has a warehouse facility which MI-Reit could soon add to its portfolio. While AIMS, an Australian company focusing on funds management, investment banking and real estate investment, has a very strong relationship with Singapore’s United Engineers Limited – whose biggest asset is its UE Tech Park warehouse – which MI-Reit could benefit from.
‘We have a very good pipeline of assets in Singapore; we could easily do $200 million worth of transactions in the next year,’ Mr McGrath said.
He also shared that AIMS would be able to take MI-Reit beyond Singapore – to Vietnam and China.
AIMS executive chairman George Wang, who now personally owns 40 million shares in MI-Reit, told BT: ‘MI-Reit cannot just buy assets in Singapore. It has to look at growth potential beyond that. And I believe China is the future, with its booming economic growth and massive logistics and manufacturing potential.’
Mr Wang said that he looked to the example of market leaders such as CapitaLand, which have recognised China’s potential.
‘During my next two years as chairman of MI-Reit, I intend to bring my resources and contacts to the table, and help the trust’s management to understand the Chinese market. I will introduce my connections to them and help them to understand the Chinese system, the Chinese people and the sort of risks and investments they can undertake.’
Mr Wang, who was born in Hainan, works very closely with China’s Tianjin government – a region which sees 15 per cent annual growth. ‘Tianjin is the next Shanghai. Many large companies have set up there – Samsung, Motorola – and it has a lot of potential for growth,’ he said, adding that he intends to position MI-Reit to tap on that growth.
He said that he intends to hire more locals – more Singaporeans for MI-Reit’s presence in Singapore, and mainland Chinese for its future expansion into China – including for senior positions. ‘I believe that if you want to do business in Asia, you need to have people who understand Asia.’
‘When I step down as chairman in two years’ time, there will be a difference in MI-Reit. I intend to work very hard for shareholders,’ Mr Wang said.
MI-REIT – BT
MI-Reit gets its way after sound and fury
Resolutions passed despite noise from unhappy minority
MacArthurCook Industrial Reit (MI-Reit) hired pistol-toting security guards to keep the peace at an acrimonious meeting of unitholders yesterday – but other than the customary dash for the buffet line, no violence broke out.
The meeting approved a controversial plan to recapitalise the troubled real estate investment trust but failed to satisfy querulous minority shareholders.
MI-Reit needs $315 million by the end of the year to stave off liquidation, and earlier this month unveiled a combined debt-and-equity-raising plan involving the placement of new shares to new investors AMP Capital Holdings, present sponsor AIMS Financial Group and other cornerstone investors, followed by a rights issue and a new term loan.
The plan would raise $430 million, part of which would be used to buy four properties from AMP, which would come in as a co-sponsor. But it has attracted heavy criticism from unitholders because of the heavily preferential prices given to the new investors, which would dilute existing unitholders.
The five resolutions were passed by margins of 4 to 30 per cent but there were suggestions that MI-Reit should have introduced just one resolution since all five were interdependent.
MI-Reit’s manager’s chief executive Nicholas McGrath told unitholders they came as a complete package and that a vote against any one of them was a vote against all the resolutions.
But small unitholder Ang Kong Meng said splitting up the resolutions allowed interested parties – such as AIMS and some of the cornerstone investors – to vote in support of resolutions which did not directly concern them, but which still had to be approved so that their investments could go ahead.
The sharpest opposition was to the proposal to buy four properties from AMP at a slight discount to market value. One shareholder said that was just moving money from one pocket to another, since AMP would recoup whatever equity it had pumped in.
Many were furious that they were being asked to approve what amounted to a fait accompli. ‘Everything is timed so properly that we have no choice,’ said one.
Unitholders said selling some of the Reit’s properties to raise money to pay down $226 million in debt and meet a $90 million obligation to buy an industrial building was far preferable, given the Reit’s net asset value of 94 cents a unit – far above the share placement price of 28 cents a unit. MI-Reit last traded at 35 cents.
‘We’ve considered all the options,’ Mr McGrath said. He said it was not feasible to sell assets at a decent price and that other options, including an issue of convertibles and private equity funding, were all unworkable.
Cambridge Industrial Reit (CIT), which owns just under 10 per cent of MI-Reit, led a vocal week-long campaign to get unitholders to reject the plan and install CIT’s manager to manage MI-Reit instead. But it remained largely on the sidelines yesterday.
Chris Calvert, who runs CIT’s manager, was in attendance but said little beyond a short prepared comment. He said CIT had bought into MI-Reit ‘to pursue a strategy which included becoming manager of MI-Reit’. But the plan was blocked last Friday by the Monetary Authority of Singapore because of possible conflicts of interest if a single manager took charge of two industrial Reits.
REITs – BT
Reits still a good bet but issues remain
REAL estate investment trusts (Reits) are still a good bet for the most part, but issues remain that must be cleared up, said panellists at a roundtable yesterday.
For one, a reform in the debt maturity profile for Reits is needed, said JPMorgan analyst Christopher Gee. The roundtable on Reits and the future of real estate finance in Asia was organised by Singapore Management University’s (SMU) Centre for Asset Securitisation in Asia.
Some Asian Reits pursued an aggressive acquisition strategy during the boom period of 2006-2007 as the low cost of financing tempted them to buy quality assets despite compressed entry yields, said Mr Gee.
This pushed Reits (including many in Singapore) to borrow and increase their gearings to high levels in order to make their acquisitions. They could have been ‘gearing up’ with the intention of raising equity later, he said.
However, the current financial crisis has affected many plans.
By and large, all of the debt used by the Reits is in the form of bullet repayment loans (where the payment for the entire loan and sometimes the interest as well is due only at the end of the loan term) or bonds, which can be ‘lethal’ if debt rollover coincides with financial market stress, said Mr Gee.
JPMorgan’s estimates show that for Singapore-listed Reits, 37 per cent and 41 per cent of total debt outstanding will be maturing in 2011 and 2012 respectively.
‘What if the current recovery is a W-shaped recovery and debt capital markets come under stress at that point in time?’ Mr Gee asked.
Instead, he said, Reits should consider a ‘through-the-cycle’ (TTC) investment hurdle to justify an acquisition.
For one S-Reit, for example, a TTC analysis of the weighted-average cost of capital would have highlighted the end of value accretive acquisitions after early 2007.
The Reit should have then lowered its gearing levels at that point in time by taking advantage of cheap equity cost, Mr Gee said. Instead, the Reit (Mapletree Logistics Trust) continued making acquisitions well into 2008.
Another concern that was raised was that in a downturn, good asset managers are essential for a Reit to do well. However, most Reit managers today started managing their trusts at a time when the asset market was booming. So they are still untested, the panellists said.
But Reits are still considered attractive investments as they are transparent and pay out the bulk of their income as dividends to unitholders, said Michael Smith, head of Asia real estate investment banking at Goldman Sachs.