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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:

Before

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

After

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.

Conclusion

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.

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27 Comments:

Anonymous Anonymous said...

Hi. i don't know how you derive the 50% NAV under firesale.

total asset = 560 - 570 mil (490 mil assets + 70+ mil for 1A IBP)

total liability = 320 mil (230 debt + 90 mil obligation to buy 1A IBP)

total share = 266 mil

if firesale @50% of property value would mean 560 * 50% - 320 = -40 mil

how could be there any value left?

I don't think you can just 50% the NAV, because you can't 50% the debt, no matter how you sell the property, the debt will remain the same or higher.

21 November 2009 at 21:48  
Blogger Market Uncle said...

hi,
oops, great boo boo here. Wrong calcution. yes, 50% discount at fire sale means nothing left!

21 November 2009 at 21:56  
Anonymous Anonymous said...

what I think the best option will be to sell the shares in the open market on Monday morning, if there is any profit. the bet is simply too risky.

if the recap resolutions are voted down, default on the loan is inevitable. the interest incurred during the wind up will be high. and the wind up process will time-consuming.

even if can fetch 80% of book value for all assets, which will be 560 * 80% = 450 mil, after deducting all debt and property sale cost there won't be much left. maybe around 30cents/share? worse than open market price.

21 November 2009 at 22:06  
Blogger Market Uncle said...

yes, indeed i agree. Due to the mistake in my calcuation, i had thought a failed MI-REIT is better. But I am curious to know what is CITM thinking then? I don't asssume they made the same mistake as me?

21 November 2009 at 22:15  
Anonymous Anonymous said...

as a competitor to MI-Reit, CITM might gain from other perspective other than just gain from unit price of MI-Reit. if the recap resolutions are voted down, CIT may try to buy MI-Reit's distressed but quality assets at a discount. that's only my speculation. as an individual investor, such benefit does not exist.

21 November 2009 at 22:22  
Anonymous Anonymous said...

in the very beginning, I thought CIT wanted a merger between CIT & MI-Reit,which will really benefit both CIT investors & MI-Reit investors. and there won't be much value dilution for MI-Reit and MI-Reit will enjoy further upside with CIT. for CIT, it can acquire MI-Reit's assets at 50% discount. so win-win for both CIT & MI-Reit unitholders. right after CIT's announcement of merger is no longer an option, I felt it is not right. and I sold my holdings. too risky. CITM can't manage CIT & MI-Reit seperately due to conflict of interest. they are exactly in the same business, who will acquire the asset when opportunity comes? and If CITM can't be the manager, CITM is difficult to get a refinancing package for MI-Reit. simply CITM is abandoning MI-Reit already.

21 November 2009 at 22:29  
Blogger Market Uncle said...

Hi,
Yes, I'd agree to that. CIT could very well gain whether its an outright merger or scoping up cheap assets under distressed sale if the recap plan fell flat. Anyway, another increment to my mistake list :(

but really thanks for the enlightenment!

22 November 2009 at 08:56  
Blogger Musicwhiz said...

Hi Market Uncle,

Even after reading The Edge and the various newspaper articles and ALL of CIT and MI-REIT's press releases, I must say I am still very confused over what's going on.

And when I am confused, I usually avoid. Though it may seem like an opportunity if you understand the intricacies of the deal, for me I'd rather take a back seat and see how things pan out before deciding on my best course of action.

Good luck!

Musicwhiz

22 November 2009 at 15:22  
Blogger Market Uncle said...

hi musicwhiz,
I have been following the developements quite closely and thought I understood them until anonymous pointed out my errors. Its indeed (potentially) costly mistake as I overestimated the returns and underestimated the risk. Anyway, another lesson learnt!

22 November 2009 at 15:53  
Anonymous Anonymous said...

Hi all,

I tot NAV is assets - liabilities already i.e. market uncle's original caluculation is right?

Why did 'Anonymous' calculated using total assets - total liabilities x 0.5?

23 November 2009 at 00:23  
Blogger Aspire said...

Good question Anonymous. I was wondering the exact same thing. Could you help enlighten us pls? Thx a bunch.

23 November 2009 at 09:44  
Anonymous Anonymous said...

it is an assumption of firesale will get 50% discount on its assets.

23 November 2009 at 10:58  
Anonymous Anonymous said...

Hi all,

I tot NAV is assets - liabilities already i.e. market uncle's original caluculation is right?

Why did 'Anonymous' calculated using total assets - total liabilities x 0.5?

November 23, 2009 12:23 AM

I meant, uncle originally cal already factored in 50% discount to NAV i.e. using NAV of 92c x 0.5 = 0.46

Thus, can we take this 50% discount NAV? I suppose we can't use this NAV bcos of the share dilution?

23 November 2009 at 12:00  
Anonymous Anonymous said...

you can't. because it is wrong to calcluate the 50%NAV. there is no such thing called 50% NAV, only 50% of the assets value. how can you 50% the debt? will bank allow you only pay 50% debt? and uncle is assuming MI-Reit will fail and the assets must be sold to repay debt...

23 November 2009 at 12:21  
Blogger Market Uncle said...

Yes, I'm wrong to simply take 50% NAV.

NAV/share = [(A)Assets - (L)Liabilities)]/(S)Outstanding shares

Eventhough A is 2X L and giving the large NAV/share, halving A => 0 NAV!

Anyway, I sold MI-REIT in the open this morning with about 10% loss. A neat lesson learnt. But I'm thankful that at least I blogged, so my mistakes are pointed out :)

Wonder how things will turn out tomorrow, with the recap plan passed at the EGM today.

23 November 2009 at 20:28  
Anonymous cif5000 said...

The REIT manager continues to be the manager even after they screwed up big time. It's a recession-proof job.

23 November 2009 at 22:48  
Anonymous Anonymous said...

Any updates/opinons on Maccook trading at 0.20 now?

4 December 2009 at 16:05  
Blogger Joseph said...

The rights closed @3.5c on Fri + exercise price 15.9c = 19.4c vs mother share 20c. That means mother share may fall <20c this week. Likewise the rights may fall to 2c since there are so many rights. Cheaper to buy rights if it falls to 2c - since all the bad news have filtered through n no refinancing problem in near term.

6 December 2009 at 20:01  
Blogger Market Uncle said...

At current price, the forecasted yield is just around 10%, I don't see how attractive this can be?

6 December 2009 at 20:06  
Blogger Aspire said...

Sorry, bit confused. Forecasted yield's 10%?

I thought for the last year they had a dividend of 8.9c. With the current price of 20c wouldn't translate to like about 45%?

6 December 2009 at 20:29  
Blogger Market Uncle said...

check out their annoucement on 6 nov:
http://info.sgx.com/webcoranncatth.nsf/VwAttachments/Att_EB93DAC254FB55BA48257665005F667D/$file/MI_REIT_EFR_ANNOUNCEMENT_6_November_2009.pdf?openelement

the post rights and new share issue DPU is 1.04 for half a year => 10.4% yield based on 20 cents of MI-REIT.

6 December 2009 at 20:39  
Anonymous Anonymous said...

Hi Uncle,

Like musicwhiz, I prefer to keep out of such deals that I don't fully understand.

But I think you're making a good investment in Suntec REIT. The office rental trend will surely go up when the economy recovers, and ARA's management is decent.

By the way, I wonder if you'd be interested in an idea I have on the investment community in Singapore. I can be reached at js7970 (at) gmail.

8 December 2009 at 13:14  
Blogger Aspire said...

Ah yes. Thanks for the highlight M.Uncle. My mistake. I was wondering then, at what price would you start buying in again?

Hmmm, just to ask, what kinda yield would you consider attractive when considering REITs anyway? When last checked CIT's about 12% and that seems to be the most amongst the REITs. Thx again.

10 December 2009 at 09:19  
Blogger Market Uncle said...

personally, i aimed for 15% annual returns.

for cambridge trust, the yield far exceed 15% at the price i re-entered.

for suntec reit, the yield i entered is about 10% but though rents would go down further it go up, I am hopeful yield could improve with rising rents subsequently.

as for mi-reit, I don't see how i can milk anything near 15% after the recap.

11 December 2009 at 08:57  
Anonymous Anonymous said...

Hi,

Been reading comments on whether to buy based on the yields - which is looking at potential returns. But what about looking at downside protection? The gearing has improved tremendously, translating to downside protection?

12 December 2009 at 16:10  
Blogger Market Uncle said...

Hi,
I don't quite get you here.

1) What is your objective in looking at downside protection?
2) Are you comparing such protection vs other REIT (some blue chip REIT got such strong parent sponsor that will not suffer credit rating drop even with higher gearing) or other businesses (some are so stable that have prices cast in stone in the midst of stock market crisis)

12 December 2009 at 17:04  
Anonymous Anonymous said...

Hi,

Not comparing against other reits or any other companies. I thought we should look at potential downside before even looking at the potential upside? Its true that some stocks have higher upsides or yields, but they may also carry more downside risks. Between a stock that offers a higher potential upside but also more downside risk (esp the beta counters), and one that may offer lower upside but also lower downside, I will choose the latter.

17 December 2009 at 22:20  

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