Commentary - Bought and Subscribed the MacArthurCook Reit Rights

The MacArthurCook Reit has never really been under my investment radar. Its gearing was too high at over 40%. Its asset value was the lowest among the industrial Reits, only slightly more than half of that of Cambridge Industrial Trust. Its properties were relatively small industrial buildings with non blue-chip tenants. It was also under an Australian sponsor, and in 2008 and early 2009 period, this Reit, along with Allco Commercial Trust (now Frasers Commercial Trust) and Macquarie Prime REIT (now Starhill Global Reit), all under Australian sponsors, were apparently struggling much harder than the other S-Reits. There was also the overhang of its ability to finance the acquisition of 1A International Business Park, which it has agree to purchase in 25 August 2007.

However, when its share price dropped to the 0.200 level during its trading of rights period couple of weeks back, and with the rights trading at a discount to the mother share (0.030 to 0.045 when mother share was 0.195 to 0.205, with the price to subscribe for rights share at 0.159), it has prompted me to study the recapitalization plans, especially the pro forma figures, in more details:


Pro Forma Figures
With reference to the section on PRO FORMA IMPACT OF THE PROPOSED TRANSACTIONS in the CIRCULAR TO UNITHOLDERS on Nov 6, following are some of the pro forma figures:

- DPU for 1H 2010 (01 Apr 2009 to 30 Sep 2009) = 1.04 cents
- NAV per unit as at 30 Sep 2009 = $0.31
- Total Debt as at 30 Sep 2009 = $190,758,000
- Appraised value/purchase price of portfolio for 1H 2010 = $652,866,000
- Gearing as at 30 Sep 2009 = 29.0%
- Units in issue = 1,465,308,000

Base on the pro forma DPU for 1H 2010 of 1.04 cents, and NAV of $0.31, at the price of $0.194 via buying of rights at 0.035 and subscribing to rights shares at 0.159, the pro forma yield will be about 10.7%, and at a discount of about 37.4% to the NAV.

The Positives

Base on the above pro forma figures, following are some positive factors that I have considered:

• Pro forma yield is still above 10%, still one of the highest among the Reits.
• Still at significant discount to the NAV.
• Overhang over acquisition of 1A International Business Park will be cleared following the recapitalization.
• Gearing will be reduced significantly to 29%, which is a healthy figure.
• Assuming price is maintained above 0.200, buying and subscribing to the rights offers an immediate break even, perhaps even a profit.

The Negatives
The following are some negative factors:

• The asset value is still way smaller than the rest of the industrial Reits after the new acquisitions.
• The sponsor, AIMS Financial Group, is not the likes of Capitaland or Kepland, which are blue chip companies that are more established here.
• With reference to the CIRCULAR TO UNITHOLDERS on Nov 6, under section 11 on Financing, there are some agreements over the S$ Refinancing Facility that restricts the gearing to 38%. Following is the related section:   "On 5 November 2009, the Trustee entered into a facility agreement with Standard Chartered Bank, CBA and NAB for a term loan of S$175.0 million.
  
  The S$ Refinancing Facility, together with the proceeds from the Rights Issue, will be used to partially refinance the existing S$ Term Loan. The S$ Refinancing Facility is conditional, amongst others, on the completion of the AMP Capital Investment, the Cornerstone Investments, the acquisition of 1A IBP and the Rights Issue.
  
  The Manager intends to draw down on the S$ Refinancing Facility after completion of the Rights Issue. The right to draw down the S$ Refinancing Facility is subject to MI-REIT’s Aggregate Leverage being less than 33.0%. The maximum allowable Aggregate Leverage of MI-REIT under the S$ Refinancing Facility is 38.0%. In addition, the minimum interest cover ratio of MI-REIT during the life of the S$ Refinancing Facility is 2.5 times.
  
  The S$ Refinancing Facility will bear interest at the relevant Singapore dollar swap offer rate plus (a) a margin of 3.5% where leverage is less than 35.0% or (b) a margin of 4.5% where leverage is equal to or greater than 35.0%. Under the terms of the S$ Refinancing Facility, the Manager is required to hedge at least 80.0% of the floating rate exposure (which is equivalent to S$140.0 million). MI-REIT currently has in place an interest rate swap facility for a notional sum of S$100.0 million and will be entering into additional derivative financial instruments contracts such that it hedges at least 80% of the floating rate exposure. The S$ Refinancing Facility has a term of three years from the date of first drawdown and will be secured by the Existing Portfolio and 1A IBP."
• There are some issues affecting the newly acquired AMP Capital Properties. Details in section 9.2 of the CIRCULAR TO UNITHOLDERS on Nov 6. Issues are relating to occupancy requirements, subletting approvals, and building approvals. Of course the manager has put in some clauses to protect the Reit in these acquisitions.
• The purchase price of 1A International Business Park (1A IBP) of S$90.0 million was agreed upon in 25 August 2007. Current valuation is S$73.0 million, according to the letter to unit holders on Nov 16.

Decision
After weighing some of the above factors, I have decided to go for the rights, subscribe for the rights shares and also the excess rights to lower the average price. The yield of most of the Reits have started to move lower with the rise in their prices, so the 10% yield, at a healthy gearing of 29%, is simply too hard to resist. But because of the risks involved, this will only form a very small part of my overall portfolio.

By the time I have decided to move in, the rights price has moved up to the 0.040 - 0.045 range. I got the rights on the last day of rights trading at 0.045.

Aftermath
Right after the trading of rights period, there seems to be strong support at the 0.200 level. The price has in fact moved up slowly to as high as 0.215. We will have to see what will happen to the share price after the rights shares have been issued.