REIT Financial News - MacarthurCook Industrial REIT becomes AIMS-AMP Capital Industrial REIT

MacarthurCook Industrial Reit has been renamed AIMS-AMP Capital Industrial REIT. The name change was effective last Thursday (Dec 24). See related report.

Today is the first day the Reit is being traded under this new counter name.

The 975,627,332 new units from the recent rights issue exercise also started trading today. The total number of units in issue for the Reit is now 1,463,440,998 Units. See related report.

From the report:
"The Rights Units will rank pari passu in all respects with the existing Units in issue as at the date of issue of the Rights Units, including the right to any distributions which may accrue for the period from 24 November 2009 to 31 December 2009, as well as all distributions thereafter."

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.

Stock Movement - MacArthurCook Reit and MacArthurCook Rights

Shares of MacArthurCook Reit were trading at a narrow range of 0.195 - 0.200, while the MacArthurCook rights were trading at around 0.030 - 0.035. The trading of rights commenced on Dec 3 and will end on Dec 11.

Author's Note
There was a arbitrage opportunity today. If you had wanted to buy the shares directly at say S$0.200, you could have bought the rights at S$0.035 and subscribed for the rights shares at the Rights Issue Price of S$0.159 per unit, which will then cost you a total of S$0.194 per share, a discount of S$0.006 per share. Of course you must remember to subscribe to the rights shares before the deadline on Dec 17. Note that commission has not been factored in, but you would have incurred commission charges anyway whether you are buying the shares or the rights. Big shareholders could have make use of this opportunity to sell the mother shares and buy the rights to pocket the difference in pricing. Of course the number of shares and rights transacted have to be substantial to make a significant difference.

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 and subscribing to rights shares, the pro forma yield will be about 10.7%, and at a discount of about 37.4% to the NAV.

Things to take note:
- Above figures may not hold if industrial properties continue to devalue and rental income continue to decline.
- 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.

REIT Financial News - Cambridge reduces stake in MacArthurCook Reit

MACARTHURCOOK INDUSTRIAL REIT - NOTICE OF CESSATION OF SUBSTANTIAL SHAREHOLDING by Cambridge Industrial Trust Management Limited.


Date & Time of Broadcast: 30-Nov-2009 17:09:49
Date of change of Interest:     24-11-2009 
The change in the percentage level:    From 9.76 % To 2.73 %

CIT bought 26 million MI-Reit shares at an average of about 40 cents each early last month following news that MI-Reit was issuing new shares at a steep discount to market price and net asset value. Following this reduction of stake, CIT is now left with 13.3 million units or 2.73 per cent of total holdings, from 9.76 per cent previously. The sales of about 12.7 million units were at an undisclosed price.

Commentary - MacArthur, Cambridge, and a joke

I read with interest the response of MI-REIT to CIT filed in SGX, in that MI-REIT was rather direct in finger pointing the current CEO of CITM, who was also the previous CEO of MI-REIT, as the cause of the major problems MI-REIT is currently facing. The root of the problem, according to the response, was because this previous CEO has decided to purchase the S$90.2 million property in International Business Park before securing any funding. This has actually reminded me of a joke I heard recently:

A new CEO was about to take over a company, and he asked the previous CEO for advice. The previous CEO handed him 3 letters numbered from 1 to 3. The new CEO was asked to open one letter, in sequence, each time the company faces big problems that cause the company share price to plunge deeply . So the new CEO took over the company, and all was well for the first 6 months. Then, problems started to surface, causing the share price to plunge deeply. Then he remembered the letters, and so he opened letter No. 1. The letter says "Blame the previous CEO". So the new CEO did accordly, and it really helped the share price to rebound, and all was well again.

After another 6 months, problems arise again, sending the share price all the way down. So the new CEO opened letter No. 2. The letter says "Reorganize". So he did accordingly, reorganizing all the departments he can find in the company. Again, it really helped the share price to rebound again.

Another 6 months passed by, and once again the share price plunges due to more problems. So the CEO opened letter No. 3. The letter says "Prepare another 3 letters" ...

In this MacArthur vs Cambridge saga, so far we have seen "Blame the previous CEO". If M&A really takes place, then we will see "Reorganize". How about "Prepare another 3 letters"?