Moody's assigns first-time Baa3 rating to MacarthurCook Industrial REIT
Singapore, June 07, 2007 -- Moody's Investors Service has assigned a Baa3 corporate family rating
to MacarthurCook Industrial REIT ("MI-REIT").
The rating reflects Moody's opinion on MI-REIT's ability
to honor its financial obligations as if it had a single class of debt
and a single consolidated legal entity structure. The rating outlook
is stable. This is the first time Moody's has assigned a
rating to MI-REIT.
"The rating reflects MI-REIT's steady income stream,
supported by its portfolio of good quality industrial properties in Singapore
and its relatively long lease maturity profile," says Nancy
Koh, a Moody's VP/Senior Analyst.
In terms of quality, the assets are well maintained and close to
Changi Airport, port facilities, relevant amenities,
public transport and major arterial road networks. They have seasoned
operating histories and exhibit stable and high occupancy rates.
The portfolio's average lease tenor is 6.7 years and includes
built-in fixed rental escalations. Moreover, tenants
are generally of good quality and the relatively high level of security
deposits committed further supports income stability.
"The rating also reflects the expectation that MI-REIT will
prudently execute its acquisitive strategy as it expands its portfolio
to achieve economies of scale and enhance its access to the capital markets,"
says Koh. MI-REIT intends to focus its expansion on Singapore
for the next few years, an approach which will help reduce asset
concentration and reliance on key tenants. Moody's expects
it to keep leverage within 40-45% on a sustained basis,
even as it expands its portfolio.
"Nevertheless, these strengths are tempered by MI-REIT's
small size, low level of asset diversification and some degree of
tenant concentration, though these weaknesses will diminish as its
portfolio expands," says Koh. Its top three properties
account for almost 60% of rental income while the top 5 tenants
contribute to 70% due to a head lease agreement. However,
the level of tenant concentration risk is somewhat alleviated after consideration
of a multi-tenanted arrangement.
The rating also reflects MI-REIT's short operating history
as a REIT and thus its limited record in demonstrating value enhancement.
The core members of its management team are from MacarthurCook Limited
(MCK), a Melbourne-based specialist real estate investment
management group established only in 2003.
Management's approach is to build strategic alliances with local
vendors such as United Engineers Ltd (UEL), and engage third-party
agents such as Colliers to manage its property portfolio, facilitating
the rapid formation of relationships within and knowledge of domestic
and regional markets. UEL, from which it has acquired one
asset and potentially two more later, has a 7.5% interest
in the trust's management company, MacarthurCook Investment
Managers (Asia) Limited. UEL has also granted MI-REIT the
right of first refusal over potential sales of two assets for 5 years.
As with most Singapore REITs, MI-REIT has limited financial
flexibility due to its mandatory high dividend payout policy, lack
of committed back-up facilities, and high level of encumbered
assets. However, refinancing risk is not expected to be significant
in the near term, given that its S$128.8 million bank
facility will mature in April 2009. The rating also incorporates
Moody's expectation that MI-REIT will have uninterrupted access
to the capital markets to unwind any temporary increase in leverage above
its 45% target.
If any of MI-REIT's senior unsecured debt obligations were
to be rated in future, they would be notched down from the Baa3
corporate family rating to reflect legal subordination risk. Its
existing debts are secured, based on the balance forecast for FYE3/2008,
wherein secured debt as a percentage of gross assets is expected to measure
By comparison, A-REIT's (A3/Stable) higher rating reflects
its substantially larger asset base and diversity, as well as longer
operating track record, as demonstrated by higher operating margins
and stronger credit metrics. Similarly, MapletreeLog's
(Baa1/Stable) rating reflects its larger asset base, longer operating
track record, geographically more diversified portfolio and high
level of unencumbered assets.
Despite its focus on different asset types, MI-REIT shares
similarities with Allco(Baa3/Stable), predominately an office REIT,
in terms of management background, size, asset and tenant
concentration and the presence of long lease terms supported by master
lease agreements. Similarly, both are expected to undertake
an acquisitive expansion strategy, the success of which hinges on
management's capabilities in managing the associated integration
and execution risks with strong financial discipline.
The stable rating outlook for MI-REIT reflects Moody's expectation
of continued steady cash flow generation from its portfolio, supported
by committed rental revenues, favorable industrial market conditions,
low level of development risk exposure, and ongoing financial discipline
in the pursuit of its growth strategy.
For upward rating pressure to emerge, MI-REIT will need to
demonstrate a track record of sustained and sound operating performances,
successful execution of its acquisition strategy and established access
to the capital markets. There should also be significant improvements
in its liquidity and financial flexibility through reductions in its encumbered
assets ratio and reliance on secured borrowings, as well as implementation
of a reasonable level of committed back-up facilities. At
the same time, it would be expected to maintain EBITDA/Interest
above 4x, Total Debt/EBITDA below 8x, and Total Debt/Total
Assets below 35% on a sustained basis.
Conversely, the rating may experience downward pressure if EBITDA/Interest
coverage falls below 2x, total debt/EBITDA exceeds 12x, and
total debt/total tangible assets surpass 45% on a sustained basis.
This could be a result of (1) aggressive debt-funded acquisitions;
(2) failure to execute its acquisitive growth strategy and achieve expected
returns; and/or (3) the occurrence of materially negative events
that cause a significant downturn in rentals. In addition,
a decrease in the likelihood of it refinancing its major bank loan prior
to maturity in April 2009 could also cause negative pressure.
MI-REIT is a Singapore-based real estate unit trust that
was formed primarily to own and invest in a diversified portfolio of industrial
properties. MacarthurCook Investment Managers (Asia) Ltd is the
trust manager and, as such, is responsible for the investment
and financing strategies, asset acquisitions, divestment policies,
and overall management of real estate assets.
Vice President - Senior Analyst
Corporate Finance Group
Moody's Singapore Pte Ltd.
JOURNALISTS: (852) 2916-1150
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Senior Vice President
Corporate Finance Group
Moody's Asia Pacific Ltd.
JOURNALISTS: (852) 2916-1150
SUBSCRIBERS: (852) 2916-1121