My thoughts on MacarthurCook Industrial REIT's fund raising exercise.....

At last, the EGM for MacarthurCook Industrial REIT (MI-REIT), one of my investments has been convened. I attended the EGM today and this happened to be my first time at an EGM after one year plus of investing journey. It was indeed an eye-opener for me at the EGM where I saw the exchanges between the unitholders and management of MI-REIT. I highly encourage serious investors to attend all AGMs and EGMs of their invested companies to update themselves on the developments of their invested companies,  voice out their constructive opinions on important issues to the management of their invested companies, and also to vote for any important resolutions to be passed during such meetings. Thus, such meetings serve as very important avenues for shareholders to meet the management, and exert shareholder pressure serving as a check to make sure management is still executing strategies that are beneficial to both the business and their shareholders.

There are altogether five resolutions to be passed at the EGM basically as follows.

(1) To approve the AMP Capital Investment
(2) To approve the Cornerstone Investments
(3) To approve the AIMS Investment (as part of the Cornerstone Investments)
(4) To approve the Rights Issue
(5) To approve the Acquisition of the AMP Capital Properties

Based on one of my earlier post, MI-REIT has term loans of S$226 million and JPY 1500 million (S$23.7 million) which needs to be settled by end December. It also has a contractual obligation to purchase an industrial property in Singapore (1A International Business Park) by end December which it requires around S$90 million.

MI-REIT has come out with a fund raising proposal which comes in a package to deal with the refinancing of the loans and purchase of the business park property. In this package, it has invited some institutional investors namely AMP Capital Holdings, a group of investors including AIMS Financial Group together called the Cornerstone Investors, and proposed a rights issue to raise funds to refinance it's debts. All the invited institutional investors will be offered the purchase price of $0.28 per unit for new units in MI-REIT. Rights units under the rights issue will be priced at $0.159 per unit. As part of the proposal, it has also proposed the purchase of 4 industrial properties from AMP Capital Holdings as part of the agreement for AMP Capital Holdings to invest in MI-REIT.

I present below some of the major issues that were raised by unitholders and also responses of MI-REIT to the issues raised. After that, I will present my own thoughts over this whole fund raising episode. Before I continue further, I caution readers that I do not guarantee the completeness or accuracy of my interpretation of the issues raised and responses to the issues by MI-REIT.

Major issues were raised by existing unitholders during the EGM as follows:-

(1) Why did MI-REIT waited so long (almost a year) to come up with a last minute desperate fund raising proposal (when the debts are due soon in December) that leaves existing unitholders with no choice but to accept this proposal or face winding up of MI-REIT?

(2) Is there no other better proposal except this current packaged fund raising proposal?

(3) Why are the invited instituitional investors (AMP Capital, AIMS Financial and other investors under the group of Cornerstone investors) offered new units ($0.28 per unit) at such a significant discount to the NAV of MI-REIT ($0.94 per unit)? Are the invited investors being opportunistic in nature?

(4) Why did MI-REIT not consider the sale of some of it's properties to raise funds to clear it's debts?

(5) Why must MI-REIT purchase the 4 properties from AMP Capital? Is it fair for MI-REIT that AMP Capital should insist the sale of it's 4 properties to MI-REIT as part of the agreement to act as a potential investor in MI-REIT?

(6) Why not consider winding up MI-REIT since it's NAV is high and unitholders may get back a good fair amount of compensation after liquidating MI-REIT's properties and paying down all it's liabilities?

(7) Is such a huge dilution due to the funds raising proposal (theoretical ex-rights price of around $0.22 per unit and ex-rights NAV of $0.32 per unit) justified for the interests of the unitholders?

Management of MI-REIT responded to the above major issues raised as follows:-

(1) MI-REIT has already been actively seeking out funding possibilities since the start of the year. However, all potential lenders or institutional investors require an interest return of 25 to 30% which is too much for MI-REIT to accept as favourable. Basically, under such negative circumstances faced by MI-REIT, it has no bargaining power over it's potential lenders/ investors. As such, the management thinks the current proposal is the best and is not a last minute thing, after much sourcing for funding and consideration.

(2) Mangement thinks there is no other better solution after much sourcing for funding and consideration, except to accept the whole proposed fund raising package for the interests of the unitholders.

(3) Mangement expresses that it is necessary to come with an agreement with the potential investors to offer new units at such attractive price of $0.28 per unit to ensure the fund raising exercise will be successful as the investors will also sub-underwrite the rights units being offered. All in, this ensures the REIT will obtain it's funding to refinance it's debts.

Management thinks the potential investors AIMS Financial Group and AMP Capital Holdings will serve as strong sponsors to MI-REIT once they have a substiantial stake in MI-REIT after acquiring new units in MI-REIT. Both these investors are some of the leading investment companies in Australia and they have exposure and experience in real estate and fund management in China, Japan and Australia. They will be catalysts in helping MI-REIT source for and acquire good industrial properties in such regions out of Singapore which is in-line with MI-REIT's original growth strategy of investing in industrial properties in Asian regions. Thus, management thinks these investors are not opportunistic and on the contrary will benefit MI-REIT to have them as it's future sponsors.

(4) MI-REIT has considered but will not sell any of it's properties as it's total debts and obligations are too large (around $320 million) to be meaningfully met by the sale of some of it's properties (total of it's estimated property value only round $500 million).

(5) MI-REIT thinks that it is necessary to accept the purchase of the 4 properties from AMP Capital as part of the agreement so as to secure AMP Capital as one of it's potential investor and future sponsor which will provide future benefits to MI-REIT and it's unitholders. Somemore, the total purchase price of the 4 properties is fairly priced (according to two independent property valuators) and the properties are also yield accretive.

(6) Management thinks winding up MI-REIT is not a viable option and is disadvantageous for it's unitholders. In the event of winding up, the properties will be in the hands of a receiver (e.g. a bank) and the receiver will try to sell the properties as quickly as possible at firesale prices which means the amount to be returned will be much lower than the total current value of all it's properties. Furthermore, the total debts and liabilites need to be cleared and after clearing all debts and liabilities, it may mean little amount or even no compensation to be returned to it's unitholders. Thus, winding up is never an option at all as it may result in total loss of it's unitholders' investments in MI-REIT.

(7) Such significant dilution due to the fund raising exercise according to management is not good for it's unitholders. However, management expresses that it is necessary to do the fund raising to ensure the continuity of MI-REIT. This will settle all refinancing until year 2012 and will put MI-REIT at better grounds financially for possible expansion (by acquiring properties) into other Asian regions given the support from the new sponsors which have experience and expertise in estate and fund management in other Asian regions.

My thoughts on the whole fund raising episode by MI-REIT

My opinions are mostly aligned to MI-REIT's managment responses to the major issues raised during the EGM. A fund raising exercise like this, though resulting in significant dilution, is necessary to the continuity of MI-REIT.

NAV per share is NOT a guarantee to one's investments

I am not in favour of the winding up of MI-REIT as this may mean total loss of unitholder investments in MI-REIT. Many investors have the misconception that Net Asset Value per share (NAV per share) is like a magical number that guarantees their investment value in a company. In investments, there is nothing guaranteed. In the event of liquidating the assets of a company due to winding up the company, the assets usually sell at ridiculousy low prices over a short-time period so as to raise cash fast to pay the debts due and other forms of liabilities owed by the company. So, NAV per share is just a very rough estimate not to be taken too seriously. Seriously speaking, NAV per share DOES NOT guarantee the investor will get back this NAV per share amount upon liquidating all assets and paying all liabilities. Thus, I learn this big lesson over the MI-REIT's episode. Nothing is guaranteed in equity investment (unless there is any insurance company willing to insure an investor's investments??). Always be very careful when investing. As such, I had partly divested out my investments in MI-REIT to recover back my invested capital in MI-REIT before attending the EGM.  I did this not because I have no faith in the fund raising exercise by MI-REIT. I wanted to protect my capital as anything can happen should unitholders not vote in favour of the resolutions during the EGM. As Warren Buffet's most important investment rule goes, "Never lose money". Preservation of capital is the most important investment rule that all sound investors hang on to carefully.

Most investors are short-term oriented or should I say short-sighted?

With this fund raising episode, I can see that most investors are very much concerned about the dilution effect due to the fund raising exercise. I can understand and emphatise with many investors on the dilution of their investments and reduction of distribution yield. However, should an investor be only concerned about the returns of an investment and ignore anything else including the fundamentals of the invested company. I quite agree with MI-REIT management's viewpoint of getting in AIMS Financial Group and AMP Capital as strategic sponsors to benefit the REIT going forward. Of course, nothing is guaranteed as to the future growth of MI-REIT with these new potential sponsors. However, at least the immediate benefit is that MI-REIT is able to raise funds from these new potential sponsors to clear it's debts and ensure continuity of it's business. I am for the long term growth of a company and if having these sponsors can potentially help MI-REIT in it's future growth, the question is why not? I think as investors, we need to have a long term outlook and not just be caught up with short-term gains. Returns on investments though are important, one also need to consider that returns come from underlying business of an invested company. No good business equals to no good returns. If MI-REIT can strengthen it's balance sheet and have strategic growth plans going forward, why not give it a chance and not quibble over a temporary drop in distribution yield or NAV? I think that even investors sometimes can act like small children quarelling over who gets more and who gets less over a short-term period. Be long term business oriented and not short-sighted money oriented.

Protection of capital by value investing

Again, holding MI-REIT's units at low average price (around $0.30 per unit) substantially lower than it's NAV of $0.94 per unit allowed me the chance to partially divest out of it to recover my capital thus preserving my capital. If I had purchased my units at higher prices, I may have to bear a loss upon divesting out at current market value (which an investor has no choice but to do so should a company is on the road to bankruptcy). Thus, value investing by purchasing equities at undervalued prices again allowed me the chance to protect my capital by divestment upon possible mishaps to a company (I had earlier divested out of another company Jaya Holdings also by virtue of value investing).

Final conclusion

I certainly hope that MI-REIT can survive this ordeal and emerge stronger clearing it's refinancing and also with the new sponsors in it's management. Much leaves to the future of MI-REIT even if it pulls through this ordeal. It still have to prove itself by expanding over the Asian regions if the new sponsors come on board with their regional experiences and networking. If it pulls through, I hope it can learn a good lesson from this episode and be prudent with capital management and risk going forward. Expansion is always good for any company or REIT. However, it will not be good if expansion puts the company/ REIT in a precarious financial situation. I still subscribe to the notion that a business that can enjoy good growth and returns by using mostly retained earnings to reinvest and not employing much debts is the best around. Even better if it's rate of growth and returns is higher than it's competition under such conservative capital management and ideal economics that does not require funding of growth by large amount of debts.