Reit managers need to grasp regulator’s position

Source : Business Times – 28 Nov 2009

Muted investor response to MI-Reit proposal indicates restructuring needs to be communicated transparently

THOSE seeking to handle mergers and acquisitions of real estate investment trusts (Reits) will have to develop a better understanding of the regulator’s position, OCBC Investment Research said in a report this week.

Earlier this month, the manager of Cambridge Industrial Trust failed to take control of a competing Reit, MacArthurCook Industrial Reit (MI-Reit), after the Monetary Authority of Singapore (MAS) stepped in due to potential conflicts of interest.

Appendix 2 of MAS’s Code on Collective Investment Schemes sets out the responsibilities of property funds, and it is understood that this was the basis for MAS’s decision.

OCBC analyst Meenal Kumar said that control of most Reits changes hands at manager level, and this was the first time that control was also contested at unit-holder level.

According to Ms Kumar, muted investor response to the original MI-Reit proposal also indicates that attempts to restructure Reits through dilutive cash calls and acquisitions of sponsor-owned assets, however necessary, need to be communicated to the market more transparently.

MI-Reit finally succeeded – by margins of just a few percentage points in some cases – in pushing through a restructuring plan on Monday under which it will issue new units to investors including AMP Capital as a co-sponsor, present sponsor AIMS Financial Group and other cornerstone investors, followed by a rights issue and a new debt facility.

But unit-holders said that the exercise severely diluted their holdings. CIT’s manager led a week-long campaign to oust MI-Reit’s manager and install itself instead, but the attempt was blocked by the authorities.

‘To be fair, we could see where CIT was coming from (at least on the surface),’ Min Chow Sai said in a Nomura report released on Wednesday. ‘Prior to the recapitalisation announcement, MI-Reit was trading at a 56.4 per cent discount to its book value, which would have been the valuation at which CIT’s $10.3 million investment was made.

‘If CIT’s management had succeeded in taking over as MI-Reit’s manager, it could have potentially unlocked the value of MI-Reit’s portfolio at a narrower discount to book. The investment, which we view as somewhat opportunistic, did not work out as planned.

‘There now appears little CIT can do besides subscribing for its pro rata rights to prevent further dilution. This means the bulk of CIT’s July placement proceeds will now be invested in MI-Reit, instead of de-leveraging its own portfolio.’

Nomura said that allowing for the proposed additions to MI-Reit’s portfolio and higher refinancing costs, ‘we estimate MI-Reit will add about 0.4 cent per unit to CIT’s distribution per unit for forecast FY 2010′.

‘Our numbers suggest the MI-Reit investment adds 0.5 cent per unit to CIT’s value, which is more than offset by a 1.3 cent per unit increase in net debt and 0.7 cent per unit dilution from potential equity raising,’ it said.