MI-Reit signs AMP Capital as co-sponsor, seeks new capital

MacarthurCook Industrial Reit (MI-Reit) has announced a series of fundraising measures that will allow it to repay a portion of its borrowings that expire in December and at the same time buy five new properties. The combined measures, which include a rights issue, the introduction of a new strategic investor and the sale of new shares to eight cornerstone investors, will bring in S$217.1 million ($155.5 million) in fresh funds and will position the Singapore-listed real estate investment trust (Reit) "to take advantage of further growth opportunities in Singapore and Asia", it said in a statement on Friday.

AMP Capital Investors, one of the largest real estate fund managers in Australia and New Zealand, will buy S$22 million ($15.8 million) worth of new units in MI-Reit, which will give it a 16.1% stake in the Reit. It will also underwrite a portion of the rights issue -- on top of its entitlement, which it will take up in full -- that could increase its direct stake in MI-Reit to a maximum 19.1%. Perhaps more importantly though, AMP Capital will buy 50% of MI-Reit's management and property management companies from MacarthurCook Limited, which will make it a joint sponsor and give it a key role in the day-to-day operations of the Reit.

The principal sponsor of MI-Reit at present, with a 15.7% stake, is another Australian non-bank financial services and investment group -- AIMS Financial Group -- which also controls MacarthurCook. AIMS will buy further MI-Reit units as part of the cornerstone tranche, which will leave it with a 10.6% stake in the Reit before the rights issue.

Following these transactions, MI-Reit will be renamed AIMS AMP Capital Industrial Reit and the composition of the management company's board of directors will be altered to reflect AMP Capital's investment, with two directors from AMP Capital, two from AIMS and two who are independent.

"This is an excellent opportunity for AMP Capital to enter the Singapore Reit market by taking a cornerstone stake in MI-Reit, and at the same time leverage our property investment expertise through forming a long-term joint venture with a property management company which has a strong track record in real estate funds management in Asia-Pacific," Simon Vinson, the head of Asian property at AMP Capital, said in a separate release issued by AMP Capital.

The investment is also crucial for MI-Reit which could have ended up in real trouble had it not been able to raise new capital. The trust has $226 million of gross borrowings, which will all mature in December. In addition to that, it has a contractual obligation, as per an agreement entered into in August 2007, to buy a property lot in the International Business Park in Singapore from Eurochem Corp at a cost of S$90 million. MI-Reit said it currently doesn't have the funds to complete this acquisition.

The MI-Reit management company, MacarthurCook Investment Managers (Asia), said it believes it is "critical" that the trust obtains refinancing of its maturing debt and funding for the business park acquisition for it to remain a going concern. And after extensively considering various options the company is of the view that the proposed transactions are the most viable option to ensure the refinancing and funding are successful. In the statement it noted that the capital injections will remove MI-Reit's financing risk, reduce its aggregate leverage to 29% from 44.7% (as of September 30) and strengthen its balance sheet.

In addition to the business park acquisition, MI-Reit will use part of the proceeds from these fundraisings to buy four industrial properties, also in Singapore, from AMP Capital at a total cost of $68.6 million. The combined property acquisitions will increase the number of income-producing industrial properties in MI-Reit's portfolio to 26, of which all but one is in Singapore, and boost the net lettable area by 21%.

"The proposed transactions have many benefits for MI-Reit. We will be recapitalised, we will have a much stronger asset portfolio as well as cornerstone investors who like our business model and who will give us long-term support," said Nicholas McGrath, CEO of MI-Reit. He added that "the key benefits will outweigh the dilutive effects of the transactions on MI-Reit's distribution per unit (DPU) and net asset value (NAV) per unit".

However, the capital injection comes at a significant discount to the Reit's current unit price and NAV per unit and Friday's announcement saw the unit price tumble 13.4% as investors digested the new reality. Including the five new properties, the capital injections and the repayment of S$35.2 million of debt, the proforma NAV will increase by 85% to S$452.2 million. However, due to the issuance of new units, the proforma NAV per unit will fall to S$0.31 from S$0.92, the distribution per unit (for the six months to September 2009) will fall to S$1.04 from S$3.45, and the annualised distribution yield will drop to 9.3% from 16.8%.

With part of the capital injection coming from a two-for-one rights issue, existing investors have the opportunity to limit the dilution by taking up their entitlements, and indeed, the drop in the share price -- however sharp -- still left the current market price well above both the rights issue price and the theoretical ex-rights price (Terp). The various transactions will need the approval of existing unitholders at an extraordinary general meeting scheduled for November 23.

The renounceable rights issue will comprise approximately 975.6 million new shares that will be offered to existing unitholders at a price of S$0.159 apiece, resulting in a total deal size of S$155.1 million ($111 million). Like the cornerstone tranche, the rights issue is fully underwritten by Cazenove Asia (wholly-owned by Standard Chartered), Macquarie Capital Securities (Singapore) and National Australia Bank. Some of the cornerstone investors, including AIMS, have committed to take up their entitlements in the rights issue and four of them will also sub-underwrite part of the deal in exchange for a 2% fee.

After deducting the various sub-underwriting commitments and entitlements taken up by the sponsors and cornerstone investors, the underwriting banks will be left to cover 29.2% of the issue, in case of insufficient demand from other investors.

The rights issue price represents a 61.2% discount to Thursday's closing price of S$0.41 (before the announcement) and a 55% discount to Friday's close. It also comes at a 28.7% discount to the theoretical ex-rights price of S$0.223.

Existing unitholders (or investors who choose to buy the rights in the open market) will be able to buy new units at a discount to the investments by AMP Capital and the cornerstone investors, which will pay S$0.28 per unit -- a 31.7% discount to the last closing price before the announcement. Based on that price, the cornerstone investment will bring in S$40 million of new capital.

Aside from the debt repayment of S$35.2 million, MI-Reit has entered into an agreement with Standard Chartered and National Australia Bank for a new three-year term loan of S$175 million to refinance a maturing S$202.3 million term loan from NAB and Commonwealth Bank of Australia. It is also in advanced negotiations with two Japanese lenders for a new ¥1 billion (S$15.8 million) facility to refinance part of a ¥1.5 billion loan that is also due in December.

Separately, AMP Capital said Friday that it has hired Anthony Fasso as managing director for the firm's international business from early next year. In this Hong Kong-based role he will continue AMP Capital's expansion into Asia as well as its strategic growth aspirations by offering investment opportunities across a range of asset classes to its clients.

He will take over next year from Michael Clarke who, after five years as head of the international business, will become a strategic adviser to the group on Asia-related issues.

Fasso was most recently CEO of Australia-based Axa Rosenberg Asia-Pacific and Axa Investment Managers Asia-Pacific, where he was responsible for A$40 billion of assets under management. He joined Axa in February 2005. During his 27-year career in financial services, he has also worked with Deutsche Asset Management in Australia and as CEO and head of institutional asset management at Bank Julius Baer & Co.

"To achieve our growth objectives, we need to further expand outside our traditional Australasian markets to grow our business and provide clients with access to high value-add investment opportunities," said AMP.

Axa spokeswoman Monique Inge said the firm has not named a replacement yet, but hopes to make an announcement in the coming weeks.