Macarthurcook Industrial REIT: Ideal candidate for takeover

Summary: We visited Macarthurcook Industrial REIT and were impressed by management's ambition to grow its assets from S$316m by $500m and within current FY ending Mar 2008. However as these acquisitions are likely to be from third party, MI-REIT is likely to face severe competition from other industrial REITs. Hence we anticipate property yields in the industrial sector to continue to compress. But in MI-REIT's favour is its low gearing and low cost of debt. This means that it will be able to pay above the current property yields and still be accretive to its unitholders. Finally, MI-REIT has a fairly fragmented shareholding structure with many shareholders holding around 5% stake each. Its largest shareholders have a stake of about 12.9%. The implication of this loose shareholding structure is that it is vulnerable to be taken over. Furthermore with a price to book of about 1.3 times, it remains fairly cheap relative to its larger REIT rivals. We thus see MI-REIT to be an ideal takeover candidate. We do not have a rating on MI-REIT.

New kid on the block. We met up with Macarthur Industrial REIT (MI-REIT)
management yesterday, the new kid on the block. MI-REIT became the fourth
listed industrial REIT on SGX in April 2007 with 12 industrial assets all located
in Singapore. At listing, MI-REIT has a portfolio worth S$316m with an initial
FY07/08 annualized yield of 6.18% (based on DPU of 7.41 cents and IPO
price of S$1.20/unit). In terms of organic growth, there is some potential. MI-
REIT's portfolio has an average rental rate of S$0.92 psf/month, and with passing
rates at about S$1.0 psf/month, there is the possibility of positive rental
reversion. However as the average lease expiry is only in 3 years time, we do
not anticipate any meaningful organic growth in the immediate future.
Management expects S$500m of acquisitions by Mar 08. Even though
MI-REIT's current asset size is small at S$316m, management has ambitious
growth plans. It sees S$500m of possible acquisitions by end Mar 08.
Furthermore, it expects the bulk of these acquisitions to be from third party and
not from the exercising of its first right of first refusal with its sponsor. This
means its acquisition will likely be in direct competition with the 3 other REIT
rivals in the industrial space. As we see little differentiating factors between all
the REITs' acquisition strategies, the only way we see MI-REIT to be able to
achieve this target is via pricing. In that context, MI-REIT can afford to be very
aggressive. Its gearing remains low at about 8%, meaning any acquisition is
likely to be debt funded. We estimate MI-REIT has a debt capacity of about
S$117m. More importantly, with its cost of debt at about 3.5%, and with market
property being offered at just below 7.0%, MI-REIT has about 350bp to play.
However, we do not see MI-REIT to be willing to use up all its ammunition in the
short term. Acquisitions at property yields of about 6.0-6.5% are the more likely
scenario.
Ideal candidate for takeover. MI-REIT has a fairly fragmented shareholding
structure. Its largest shareholders have a stake of about 12.9% but with the
majority in 5% range. Its sponsor Macarthurcook only has a 2.3% stake and
the vendors collectively own a further 2.7% of the issued units. The implication
of this loose shareholding structure is that if the right offer comes along, the
possibility of shareholders taking profit is very high. Furthermore with a price
to book of about 1.3 times, it remains fairly cheap relative to its larger rivals.
We thus see MI-REIT to be an ideal takeover candidate. We do not have a
rating on MI-REIT.