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Can this man Save MI-REIT?
11.23.2009
Source From: The Edge Singapore
Edited By: Goola Warden
Date: November 23, 2009


George Wang, chairman and CEO of AIMS Financial Group, had little more than A$3,000 to his name when he arrived in Australia from China in 1988 at the age of 26. A native of Hainan Island, he was fortunate to have avoided the worst of the Cultural Revolution, and had graduated from Shanghai University, where he studied environmental engineering. After a stint in environmental and city planning for the Guangdong government, Wang wanted to go into business but felt that China’s restrictions on travel, among other things, would be a serious impediment. So, despite the practical difficulties and risks, he decided to leave his homeland.

“When I arrived in Australia, Sydney was like a farm – not like it is now,” says Wang, who is 47 years old. “I spent six months studying English and my first job was as an insurance agent for AMP Capital Holdings.” By 1991, Wang had figured out how he would make his fortune in his new home. “A lot of immigrants in those days didn’t know how to get a loan from the bank. They couldn’t speak much English. I helped a lot of people to buy homes and I saw a future in that.” Wang’s AIMS Financial Group is in the business of mortgage lending and securitisations. It also owns Asia Pacific Exchange Ltd, an up-and-coming stock exchange in Australia.

Last year, Wang manage to steer his company safely through the global financial crisis that crushed many of his competitors in Australia. “In 2005-06, I felt the market was too hot,” Wang tells The Edge Singapore. “There were a lot of lenders. People were lending to anybody. I felt the market was changing as people’s lending standards were getting lower. I started to sell the assets. By March 2007, I sold out A$400 million [507.3million] of assets.” After the markets crashed, Wang began using the buckets of cash he had been accumulated to make acquisitions and set his AIMS Financial Group on a growth path in China. In August, his company acquired MacarthurCook (MCK), a troubled property funds management business that controls Singapore-listed MacarthurCook Industrial REIT (MI-REIT).

“I thought MCK was a very good platform for my move into China,” Wang says. “I thought it had a very good platform for property funds in Australia, and a platform for REITs in Singapore.” But he quickly found that he had underestimated MCK’s problems. “When I came in, I said, ‘Oh my God!’” The most pressing issue Wang discovered was a looming unfunded obligation at MI-REIT to purchase an industrial property in Singapore called 1A International Business Park for $91 million. On top of that, MI-REIT needs to refinance some $225 million of debt by year-end.

Wang scrambled to line up a slate of financiers willing to pump in cash and assets into the REIT. On top of that, he is proposing a deeply discounted rights issue. But he is now facing a revolt from investors in MI-REIT, who object to the massive dilution they will suffer under the plan. Leading the dissidents is Cambridge Industrial Trust (CIT), a competitor REIT that swooped in and grabbed a 9.78% stake in MI-REIT earlier this month. Besides drumming up opposition to Wang’s proposal to rescue MI-REIT, which its shareholders are due to vote on this Monday, CIT wants to wrest MI-REIT from the MCK group and place it under the control of its own manager Cambridge Industrial Trust Management (CITM) at a separate shareholder’s meeting scheduled for Dec 4.

Will Wang succeed in his plan to recapitalize MI-REIT? Or, will CIT win the day and wrest control of MI-REIT from Wang? What does it all mean for investors?

Web of relationships

To fully understand the unfolding contest for MI-REIT, it is worth recounting a bit of history. CIT is an owner of industrial properties, much like MI-REIT. The REIT and its manager CITM were originally set up by a handful of Singaporean businessmen, with the backing of a couple of companies, including locally listed logistics player CWT and Japan’s Mitsui & Co. By 2008, however, CIT and CITM had fallen under the control of Oxley Capital, a newly created funds management group run by Australians. Last year, Oxley and National Australia Bank (NAB) formed a partnership to hold the main stake in CITM. NAB has a 54% stake in CITM, while Oxley holds 26%. The remaining 20% is still held by Mitsui.

Heading Oxley is chairman Michael Dwyer, who was once a key executive at Allco Financial Group, an Australian property and funds management group that went into receivership in the wake of the global financial crisis. Within Allco Financial Group, Dwyer had been CEO and managing director of Allco Commercial REIT Management, which managed Singapore-listed Allco Commercial REIT. Three of the directors of Allco Commercial REIT’s manager – Chua Yong Hai, Tan Guong Ching and Dwyer – are now directors of CITM.

In August 2008, as the deepening financial crisis shock Allco Financial Group, Frasers Centrepoint paid $180 million for a 17% stake in Allco Commercial REIT and its manager. The REIT has since been renamed Frasers Commercial Trust. How3ever, Dwyer had stepped down by the time Allco Commercial REIT and its manager were sold to Frasers Centrepoint. It was his successor Nick McGrath who oversaw the transaction on the Allco Financial Group’s side. McGrath was appointed CEO of the manager of MI-REIT in January this year.

Just one month before that, in another twist of fate, Chris Calvert, who had been CEO of Mi-REIT when it launched its IPO in 2007, was appointed CEO of CITM. In fact, Calvert was running Mi-REIT when it agreed to purchase 1A International Business Park, commitment that is now at the centre of its financial troubles. “The unfortunate thing is the [previous] management team hadn’t put the funding in place for the asset,” McGrath gripes, “I’ve come in this year to clean it all up.”

There is more CITM has apparently mooted a merger between CIT and MI-REIT more than once this year. According to documents seen by The Edge Singapore, CITM had considered a share swap between the two REITs in July. However, the plan, which also called for a one-for-one rights issue to raise $147 million at CIT, didn’t materialize. CITM apparently didn’t abandon hope of snaring Mi-REIT, though. According to email correspondence between Wang and Calvert that came to light last week, a merger between CIT and MI-REIT had been discussed as recently as Nov 3.

CITM subsequently stated that it has no intention of making any offer for MI-REIT. Nevertheless, it still saw the potential to “implement an initiative to take advantage of an enlarged pool of assets to benefit all investors” if it were to succeed in becoming the manager of MI-REIT in addition to CIT. But this wasn’t going down well with investors or regulators. Among the questions that were being raised was whether CITM would face a serious conflict of interest managing two industrial property REITs. Some investors were also unhappy with CIT’s funds being used to pursue MI-REIT for what appeared to be the benefit of CITM.

CIT raised $28 million through a placement of 71.4 million shares at 39.2 cents each in July to fund asset enhancement programmes and the REIT’s working capital needs. More than 90% of that placement was taken up by three investors: Mackenzie Cundill Recovery Fund, APG Asset Management and NAB. CIT’s purchase of its stake in MI-REIT had cost it $10.3 million.

Meanwhile, the email correspondence between Wang and Calvert that came to light last week was also casting a shadow of intrigue over CIT’s stake in MI-REIT, which it acquired – curiously – from a unit of MCK at about midday on Nov 6. In a Nov 9 email, Wang asserted that CIT had purchased the shares in MI-REIT from the MCK until several hours before the deadline he had been given to respond to proposal to merge MI-REIT and CIT. That raises concerns CIT’s agents may have dealt in MI-REIT shares while in possession of inside information relating to the merger, Wang said in his email.

Calvert responded by alluding to the fact that it was also at about midday on Nov 6 that MI-REIT revealed its own equity fundraising plans, which triggered a sell-off in its shares. “We think it appropriate that, when you notify the regulatory authorities, you also confirm to the SGX that you are not aware of any party trading (before or since your MI-REIT announcement) with the benefit of any insider information,” he countered in an email to Wang on Nov 10.

Calvert also said in this email that that the deadline for response from Wang to the proposed merger between MI-REIT and CIT was the close of business on Nov 5, not Nov 6. He added that CIT did not initiate the transaction of the stake in MI-REIT. Instead, the transaction was the result of a tender process conducted by the MCK unit, which had begun on the afternoon of Nov 4, Calvert said.

According to McGrath, CEO of MI-REIT’s manager, the MCK unit sold the 9.78% stake in the REIT because it did not have the funds to subscribe for its upcoming rights issue. And, while Wang would have been willing to buy those units personally to strengthen his position at the shareholders’ meeting on Monday, the fund manager who sold them was acting independently, McGrath tells The Edge Singapore. “It’s a credit to George [Wang] that he had appropriate Chinese walls, but it was clearly against his interest.”

After much speculation, regulators finally acted late last week. In a statement on Nov 20, CITM said the Monetary Authority of Singapore would not approve its appointment as manager of MI-REIT in view of potential conflicts CITM would face. CITM plans to explore options that do not involve in being appointed manger of MI-REIT, it said in the statement. However, CIT will still note against MI-REIT’s recapitalization proposal on Monday, it added.

Massive dilution

Several other investors are also preparing to vote against MI-REIT’s proposals to recapitalize itself. Among them is Mohamed Salleh of Second Change Properties, who reportedly owns some five million shares in MI-REIT. Why are they against it?

Under the recapitalisation plan that will be put to its investors on Monday, MI-REIT plans to place out a total of 221.5 million units at a deeply discounted price o 28 cents each to a group of cornerstone investors. The largest of these will be AMP Capital Holdings, which will pay $22 million for 78.57 million shares. Also among the cornerstone investors is the vendor of 1A International Business Park, Tolaram Corp, which will take up 14.7 million of the placement shares.

All in, MI-REIT will raise some $62 million from the placement. After that, MI-REIT will launch a two-for-one rights issue of 975.6 million units priced at 15.9 cents each, to which the cornerstone investors will also be entitled, to raise a further $155.1 million. Next, MI-REIT will use $68.6 million of its funds to purchase four industrial properties from AMP Holdings, which will expand its portfolio by about 13%. That will reduce MI-REIT’s debt-to-asset ratio from 44% as at Sept 30 to (a pro-forma) 29%, and provide it with access to much needed bank credit.

However, investors in MI-REIT are unhappy about the steep discount the cornerstone investors are getting for their investment. As at end September, MI-REIT had a net asset value(NAV) 0f 94 cents per share,3.3 times more than the 28 cents it will get for eash new share it issues to the cornerstone investor. “Our final assessment is the [MI-REIT’s] recapitalization proposal will simply destroy unit value for exsiting MI-REIT unitholders including CIT,” Calvert said in a statement on Nov 16. “We are better off having MI-REIT wound up and its assets realized.”

Indeed, shares in MI-REIT were trading at 36.5 cents last week, up from as low as 20.5cents in March. By opposing the recapitalization proposals, investors are hoping to force Wang go back to the drawing board and cut a better deal for them under a new plan. And, even if MI-REIT is wound up by its creditors, and its assets liquidated at a discount to their book value of 94 ce3nts per share, they may still come out with a gain versus their original investment.

Wang and McGrath have been at pains to explain the risks, though. Firstly, MI-REIT’s commitment to purchase the 1A International Business Park property will take a bite out of its NAV. McGrath says he explore various options like paying a termination fee to get out of the deal to no avail. And, the REIT was unable to obtain additional debt to cover the haircut it would suffer if it sold the building to a third party. “The only buyers that were out there were private equity fund which wanted 25% to 30% unleveled returns,” McGrath says. The property was valued at $73 million as at Nov 6, versus the $91 million MI-REIT is committed to paying.

Without a fresh infusion of equity, MI-REIT would find itself unable to obtain the credit it needs to honour its obligation buy 1A International Business Park, or refinance almost $226 million of debt that comes due by year-end. However, in order to persuade banks to underwrite its share issues, MI-REIT needed to entice a slate of cornerstone investors that would be willing to take up their share of any rights issues. That meant selling shares at a steep discount, McGrath explains. “We have certain obligations at the end of the year, and I have to do a capital-raising to meet those obligations.” Failure to obtain the fresh equity would put MI-REIT at risk of being wound up, he insists.

Would investors in MI-REIT still come out ahead in the event of a winding-up? While shares in MI-REIT are trading at a steep discount to NAV, the REIT does have a substantial amount of debt. So, a relatively small haircut on its assets could have significant impact on its NAV. As at Sept 30, Mi-REIT had total assets of $505 million, with its 21 warehousing and manufacturing properties accounting for $409.5 million on that value. The REIT also had total debt of almost $226 million. A fire sale that shaves, say, 25% off the book value of its assets would leave investors with not much more value than currently reflected by the market value of its 266.4 million shares. And, that’s before taking into account its commitment to buy 1A international Business Park.

So, what should investors do? According to some analysts, the best course of action is to simply avoid investing in MI-REIT for now. Depending on the outcome of the vote on Monday, investors either face the prospect of having to plough more money into the REIT to avoid being diluted by the rights issue, or a steep sell-off as the pressure of its financial obligations builds up.

Jonathan Koh, an analyst at UOB KayHian, says investors looking for exposure to industrial properties would be better off buying shares in Ascendas REIT than MI-REIT or CIT. “Its asset quality is strong, it is perceived to have a strong sponsor, and it works harder by adding value to its development projects,” he says. Koh adds that in the wake of the financial crisis, “banks do look at the quality of the sponsor, because if anything happens the sponsor can step in. If a sponsor is weak, there is less to hold on to”.

Other analysts see MI-REIT as a high risk-high return prospect, provided investors are willing to take a long-term view. Lee Kok Joo, an analyst at Phillip Securities, says the rights issue MI-REIT wants to do could be an opportunity for long-term investors to build up their stake. “We would advise long-term investors to take up the rights units as we estimate MI-REIT offers a potential FY2011F [distribution per unit ] of 1.89 cents, which translates to a dividend yield of 11% based on the rights price of 15.9 cents,” he says. “For investors who are not keen, we maintain our ‘sell’ recommendation.”

Can Wang deliver?

The big question, of course, is what Wang plans to do with MI-REIT if he manages to solve all its problems and fend off CITM. “We are going to be very conservative,” he says. And, he is looking for a fresh pipeline of industrial properties to help the REIT grow. Those assets could well be in China, where Wang has been building up his business interests.

“I always position [AIMS Financial Group] as a bridge between China and Australia,’ he says. “We bring money out of China to invest in Australia, and [we bring] the Western world to China. China needs the Western way of structuring, governance – the system.” For instance in August 2008, just before the start of the Olympic Games, AIMS Financial Group said it would set up a biotechnology fund in partnership with Beijing University. In June this year, AIMS Financial Group said it would work with the Tianjin municipal government to develop its financial services sector, in areas such as REIT management and consumer lending.

“We’re helping the Tianjin government introduce produces,” Wang explains, adding that the deal is opening doors to other opportunities for AIMS Financial Group. “The Tianjin government has given us land – industrial land.” Separately, Wang says AIMS has also struck a deal to develop some 20 sq km, located 2.5 hours from Guangzhou, in a joint venture with the Guangdong government.

“There is a lot of stock for supply to MI-REIT,” Wang says, “China has the most industrial factories and warehouses in the world.” Indeed, Wang is confident enough of wining over investors and turning MI-REIT around that he is already trying to come up with a new name for it to reflect its new backers. One idea: AIMS AMP Industrial REIT, or AA-REIT for short. “How does that sound?” he asks. 
 

   Can this man save MI-REIT