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49 MACQUARIE MEAG PRIME REIT
ANNUAL REPORT 2007
CAPITAL
MANAGEMENT
Prudent Capital Management to Optimise
Stable Returns to Investors
The Manager will review the use of appropriate levels
of debt and equity capital to fund acquisitions and new
investments, and aims to maximise the cheaper source
of capital to deliver higher returns to unitholders. Given
MMP REIT’s relatively low gearing level of 29.0% and
the availability of competitively priced debt capital, the
Manager intends to optimise the level of borrowings
before considering raising equity. The use of borrowings
does however result in returns being influenced by
market interest rates. The Manager intends to hedge the
majority of any interest rate and foreign currency risks
by entering into derivative financial instruments to help
protect the unitholders’ returns from interest rate and
foreign currency volatility.
MMP REIT’s financial risk management policy is
described in greater detail below.
Interest Rate Risk Management
MMP REIT’s policy is to hedge the majority of its
interest rate exposure in the medium term by using
fixed rate debt and interest rate derivatives. The
policy aims to protect MMP REIT’s earnings from
the volatility in interest rates, providing stability to
unitholders’ returns.
MMP REIT has fixed approximately 89% of its
debt for the next 2.75 years using a combination
of derivative financial instruments and fixed rate debt.
The weighted average interest rate including hedges
was 2.69% for the financial year ended 31 December
2007. The interest service coverage ratio was a
healthy 4.5 times for the year, indicating that
MMP REIT can comfortably pay interest on its
outstanding debt.
As at 31 December 2007, MMP REIT’s borrowings
comprised a term loan (CMBS equivalent) of
S$380 million, a S$160 million bridging loan,
S$75 million in revolving credit facilities, a
JPY 3.1 billion (S$40 million) Japanese bond and
RMB 40 million (S$8 million) payable to the
vendor of the Renhe Spring Zongbei Property in China.
The S$380 million term loan (CMBS equivalent),
representing 58% of total borrowings, has a fixed rate
of interest of 3.18% per annum up to its maturity in
September 2010.
The S$160 million bridging loan was used to finance
the acquisition of the Japanese Properties and is
repayable at the end of May 2008. The interest rate on
the loan has been fixed at an average rate of 2.32% per
annum until September 2012, using interest rate swaps
and cross currency swaps.
The S$75 million due under the RCF represents 11%
of total borrowings and comprises a S$60 million
facility fully drawn to finance the acquisition of the
Renhe Spring Zongbei Property and S$15 million
drawn from a S$35 million facility used for working
capital. These borrowings have not been hedged for
interest rate exposures.
The JPY 3.1 billion (S$40 million) five-year Japanese
bond was used to part finance the acquisition of the
Japanese properties and has been hedged via an interest
rate cap (capped at 2.1% per annum) until May 2012.
The RMB 40 million (S$8 million) represents
deferred consideration payable to Rendong Company
and was assumed as part of the acquisition of Renhe
Spring Zongbei Property in China. The amount is
interest-free, and is repayable over seven years in equal,
annual instalments.
Foreign Exchange Risk Management
MMP REIT is exposed to foreign exchange risk arising
from its investments in Japan and China. The income
generated from these investments and net assets are
denominated in foreign currencies, mainly Japanese Yen
(“JPY”) and Chinese Renminbi (“RMB”).