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Saturday, 21 November 2009

I bought MacArthurCook Industrial REIT on 18 Nov --- a bet gone wrong?

Some history

  1. 6 November 2009: MacArthurCook Industrial REIT (MI-REIT) announced a severely value destructive recapitalisation plan on the 6 November 2009.
  2. 11 November 2009: Cambridge Industrial Trust (CIT) annouced the usage of $10.5m out of $28m from recent private placement to acquire 9.76% interest in MI-REIT.
  3. 16 November 2009: CIT alerted MI-REIT unitholders to the value destructive nature of the recapitalisation plan and urge them to vote against the resolution at the EGM on 23 November. They intend to vote out the managers of MI-REIT and install themselves as the manager of the REIT.
  4. 17 - 20 November: Separate rallying announcements, newspaper ads by CIT and MI-REIT to seek support against and for the recapitalisation plan respectively
  5. 20 November: MAS announced that it will not approve managers of CIT to manage MI-REIT due to potential conflict of interest.

The recapitalisation plan
  1. Issuing 78.5m new units to AMP Capital Investors (AMPCIL) at 28 cents
  2. Issuing 142.9m new units to Cornerstone Investors at 28 cents
  3. Issuing 975.6m rights at 15.9 cents (2 rights for 1 MI-REIT unit) to all unitholders, including AMPCIL and Cornerstone Investors.
With 266.4m outstanding units as at 30 September 2009, new units constituted a hefty 83% of existing units! No wonder the dilution and value destruction are so severe!

Value destruction

From the proposed recapitalisation plan announced on 6 November, the financial effects pre and post recapitalisation are stated as follows:


NAV per unit: 92 cents
DPU (half year): 3.45 cents
Yield (annualised): 16.8% (based on MI-REIT unit traded at 41 cents)


NAV per unit: 31 cents
DPU (half year): 1.04 cents
Yield (annualised): 9.3% (based on MI-REIT unit traded at 41 cents)

Issuing new units to AMPCIL and Cornerstone Investors at 28 cents a share at a discount of 30% to traded price of 41 cents before the recapitalisation plan was announced and 70% discount to NAV was upmost unfair to existing shareholders!

Better to let it fail?

Before the announcement of the recapitalisation plan, MI-REIT was trading at about 40 cents, or 56.5% discount to NAV. After the recapitalisation, if the market continue to value it at the same discount to NAV, it would mean a share price of about 13.5 cents!

Allowing MI-REIT to fail would mean a fire sale of its properties. Though the process will take some time and most, if not all, would go at a huge discount to last the valuation on Sep 2009, existing unitholders can use the NAV per unit to guage how much they will get back. Assuming a 50% discount to NAV, each unit can still fetch 46 cents! This is already much higher than the 31 cents NAV per share after recapitalisation and even higher than the 41 cents before its announcement!

A bet gone wrong?

It was only after CIT highlighted the severe value destructive nature of the recapitalisation plan that I find out more about it. Satisfied that the ridiculous plan is indeed a totally unfair deal for existing shareholders, I am willing to bet that they will not support such a deal. Since it was a bet, I decided to risk less and bought less than what I normally would for other investment. Thus I bought some on 18 November.

I was hoping that the plan will be rejected, CIT take over MI-REIT, and come up with a fairer recapitalisation plan, e.g. rights, new loan facility etc; restructure it, sell off unperforming assets and ulimately merge the two REITs.

However, that hope was dashed when MAS announce it would not approve CIT's managers to manage MI-REIT on concerns for conflict of interest. Thus my only hope left was to see the recapitalisation plan get voted down and have MI-REIT liquated to unlock its value for existing shareholders.


Investment is all about risk and I am willing to take calculated risk. I did my sums and theoretically, the ridiculous recapitalisation plan should be voted down. However, as there are sometimes no logic in market behaviour, I can't be too sure until the votes are counted.