Macquarie Reit stays focused

MACQUARIE MEAG Prime Reit (MMP Reit) is a real estate investment trust (Reit) that invests primarily in prime real estate used mainly for retail and/or office purposes in Singapore and abroad.

The trust’s current portfolio comprises two properties located in Orchard Road, the heart of Singapore’s premier shopping and tourist precinct.

MMP Reit owns 74.2 per cent of Wisma Atria, valued at $675 million. This comprises 129,000 sq ft of retail space and 99,000 sq ft of office space, by net lettable area. It also owns 27.2 per cent of Ngee Ann City, valued at $652 million and comprising 256,000 sq ft of retail space and 140,000 sq ft of office space, by net lettable area.

The substantial shareholders of MMP Reit are Macquarie Bank with an indirect stake of 21.2 per cent and American International Assurance with an indirect stake of 6.8 per cent.

The manager of MMP Reit is Macquarie Pacific Star Prime Reit Management (MPSPRM), which is 50 per cent indirectly owned by Macquarie Bank, 25 per cent indirectly owned by Munich Ergo Asset Management GmbH and 25 per cent owned by Investmore Enterprises.

MMP Reit was listed in Singapore in September last year in one of the most highly sought after initial public offerings (IPOs) in years.

But MMP Reit is languishing at 7.1 per cent below its IPO price. Investors appear impatient with MMP Reit for not making any acquisitions and not pricing in any growth via acquisitions.

MPSPRM is working hard on the acquisition front. Chief executive officer Franklin Heng says: ‘We are excited about the opportunities available overseas and are reviewing a number of acquisition opportunities in our target markets.’

He identifies three tiers of target markets - the first being China, Japan, Malaysia and Singapore; the second being Australia, Hong Kong, India, Indonesia, South Korea, Taiwan and Thailand; and the third being the Philippines and Vietnam.

Mr Heng says: ‘At the outset of the IPO, we have established MMP Reit to be a pan-Asian Reit as there will be limited opportunities if we focus on the Singapore market alone.’

Mr Heng hints that MMP Reit is likely to acquire abroad, given more attractive opportunities available overseas and the high price expectations for properties in Singapore, particularly prime Orchard Road retail properties.

However, acquiring overseas can be tricky as ‘cross border transactions are by nature more complex and will therefore require more effort and time to source and structure’, explains Mr Heng.

Generating organic growth

While MMP Reit is working on potential acquisitions, it has also been generating organic growth at its existing properties from active management. For example, the hugely successful Food Republic was introduced on level four of Wisma Atria late last year. Shopper traffic at Wisma Atria rose by 21 per cent in the first half of this year from a year ago.

Mr Heng is upbeat about the prospects for MMP Reit’s Orchard Road properties. New retail mall developments may be coming up in other parts of Singapore but Mr Heng says: ‘We do not believe that the retail malls outside Orchard Road will be a threat as Orchard Road has strong and unique appeal to retailers, tourists and locals.’

Mr Heng says: ‘Most international brand owners want to have their flagship stores along Orchard Road, such as Louis Vuitton, Chanel, Zara, Cartier, Alfred Dunhill, Montblanc,’ adding, ‘the issue currently is the lack of prime retail space along Orchard Road’. He notes: ‘Recently we had to work very hard with FJ Benjamin to ensure that Wisma Atria is able to make available a 9,000 sq ft space for a GAP flagship store there.’

On developments coming up on Orchard Road, Mr Heng views these as ‘more of an opportunity than a threat’. He thinks a key retail development like that at the Orchard Turn site will polarise traffic to the stretch of Orchard Road where MMP Reit’s properties are located and free up more space within the area to create a more exciting shopping destination with greater variety of brands and flagship stores for shoppers and tourists.

MMP Reit provides investors with exposure to highly sought after Orchard Road properties. Distribution yield at 6.3 per cent is higher than average in the Singapore Reit market and offers investors a spread of around 290 basis points to the Singapore 10-year government bond.

The trust’s gearing of 29 per cent is relatively low compared with other Singapore Reits and allows the trust the flexibility to gear up to fund an acquisition. Moreover, MMP Reit’s existing debt is fully hedged, which means it is not subject to interest rate volatility.

MMP Reit has proven it can grow organically. It has outperformed its IPO forecast for the last three quarters. The catalyst to MMP Reit’s unit price performance could come from the announcement of an accretive acquisition.

But with MMP Reit trading at a higher yield than its competitors, it is more challenging for MMP Reit to make a yield accretive acquisition. Mr Heng says: ‘We are not daunted by our current trading yield as we are focused on delivering sustained growth through yield accretive acquisitions and are able to better use MMP Reit’s debt capacity given its current low gearing at 29 per cent.’

He adds: ‘We believe that it is more important to demonstrate a clear focus and coherent investment strategy and while it is crucial to make acquisitions whose yields are accretive to our current dividend yield, we are also focused on ensuring that these yields are superior to our long term cost of capital.’

On balance, investors may find the combination of limited downside risk due to resilient prime retail rents and upside from an upswing in the office market and potential yield accretive acquisitions offered by MMP Reit attractive.

Disclaimer: All analyses, recommendations and other information herein are published for general information. Readers should not rely solely on the information published and should seek independent financial advice prior to making any investment decision. The publisher accepts no liability for any loss whatsoever arising from any use of the information published herein.

Source : Business Times - 17 Aug 2006