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Notes on Tanjm Meeting with MIIF managment

He wants us to keep this info private so i shall post this private.

I met for an hour with MIIF management recently. Gregory Osborne and Robert Thorpe were present. Gavin Kerr (the incoming CEO) was also present as an observer. One of the motivations of the meeting may have been a desire to improve investor relations (and indirectly the share price which influences their fees).

I am currently an investor in MIIF. I am relatively indifferent to the state of the short term share price of MIIF as I would regard lower prices as an opportunity to buy. Please do not regard this note as an inducement to buy or sell Im not trying to do anything in this direction. In my view, at the current prices, MIIF has a potential long term total return of about 12% with relative safety.

The following notes are prepared by me based on my own notes and memory. Any errors, misunderstanding of what was said, or miscommunication are definitely due to me. Please do not treat this as an official communication from or about MIIF. I do not guarantee anything please take this note as is and do your own homework if necessary. Take what I say at YOUR OWN RISK.

Any additional comments by me or notes outside of what was discussed in the meeting are enclosed in [].

Please do not reproduce this text anywhere. If you must, please link to it from elsewhere. In particular, I would strongly object to your only reproducing a partial quote.

Macquarie Bank (MBL) and MIIF management
[In this section, please note that MBL and its infrastructure business has operated for 15 and 10 years respectively. So take the history part withthe necessary pinch of salt].

MBL and MIIF have to comply with the various regulators for the protection of investors. [In particular, MBL has multiple regulators (US, Aus, SG) todeal with, who may take an interest in MBL related activities even if the regulator is not directly involved].

Most importantly, MBL has been in business for some time. They certainly want their word to be important to and trusted by investors. In that sense, every time they do something they have to bear the larger business in mind. Many of the underlying funds of MIIF themselves have external shareholders and other regulators.

[I would treat this as an essentially self-regulatory mechanism for MBL and MIIF not to play too fast and loose with investors.]

Historically speaking, performance fees have been taken in script (shares) for all their funds. Certainly, any impact of performance fees on distributable income is an important input they have to consider if they ever want to take performance fees in cash.

They have taken the suggestion to be more clear, and accessible about management/performance fees and their calculations, including deficit calculations etc. I think this will be forthcoming.

Control over new acquisitions. Besides the need for investors to approve all new acquisitions, another control is the fact that there are 3 independent directors on the team who, with the assistance of a 3rd party advisor, get to evaluate any acquisition without any interference from MBL related parties or directors.

Transaction costs. One example brought up was the recent Tanquid transaction in which the transaction cost was >10% of the deal size. It was explained that over 50% of the cost was paid to independent 3rd parties for due diligence purposes (i.e. lawyers, valuers etc). They acknowledge that they could be clearer in differentiating the transaction costs. The independent directors mentioned above are also a point of control in managing transaction costs.

Use of derivatives or synthetic instruments to manage cash flow. Other than normal hedging to cover physical cash flow, they do not do anything to manage their cash flow.

Nature of Assets
Generally, before any acquisition is undertaken, they typically do a 20-30 year model of the business, including all possible expenses. Their valuation of the business to be purchased is based on this model. In other words, their model (at least within the 20-30 year period) takes into account any reasonably expected expenses [and interest rates, growth rates etc]. This has a bearing on the sustainability of the yield they project.[this portion was part of an answer to a question from me regarding interruptions to cash flow from capital expenses or other sources].

[They have released the analyst model spreadsheet to me. In that spreadsheet, they have projections up to as far as 2025 for leisureworld and 2031 forBrussels Airport for example]

Accounting rules generally require them to depreciate book value to zero within a certain period of time (e.g. 20 years) even though these assets may have useful life way beyond the time when their book value is reduced to zero. Many of their assets only need maintenance to carry on useful cash generating activity beyond their remaining book life. One example to use is the Leisureworld business. More on that below.

[I get the impression overall that they do not regard book value as important. Cash flow is more important.]

They generally acquire assets in which they expect the cash flow to gradually increase barring any unexpected happenings. Even for risk to cash flow from debt, they are hedged to within several years against interest rate risks. As for renewal of debt, they do not anticipate other risks (such as decrease of credit standing) due to the nature of the businesses i.e. they do not expect problems renewing debt other than those due to external market conditions over which they have no control.

[in other words, according to them, they generally expect cash flow earnings to be relatively stable and consistent and even to grow a little]

Accrual accounting and cash flows
Generally, I get the impression they think accrual accounting is not very appropriate for appreciating this type of business, though it is a regulatory requirement. i.e. the earnings statement may confuse people. They acknowledge they need to do better to communicate to help investors understand.

[They operate under rules which allow them to distribute available cash in excess of accounting earnings which is similar to the way REITs andBusiness Trusts in SGX are regulated.]

See also the mention on depreciation in the previous section.

One suggestion given was that they publish a simple table or excel spreadsheet, showing the expected cash flows during the year (including from whom, when it is expected, worse and best cases). I think this was taken positively.*

One specific question raised was one that was first brought to my attention by tankie on the wallstraits forum (see this link). When raising funds for new equity, an Offer Information Statement dated 15th Nov 2005 was circulated. In it, the unconsolidated profit (ex. Non-recurring expenses, performance fees, and transaction costs) was published as 39.8 million. But the guidance was about 46 million dollars. It was explained that 39.8 million is based on accruals income which has been declared by their assets. 46 million is based on their expectation of what they would receive. They can only include declared income in the profit forecast. A simple, illustrative example was given:

Business owns 8 assets. 7 assets have declared their income.
Business reports forecasted profits based on the 7 assets. But the expected cash flows would include the 8th asset.

Note that the suggestion given in the * paragraph of this section would help to resolve such issues.

Leisureworld Case Study
This was taken as a case study in order to look at in a little bit more detail. There is another thread in wallstraits forum which talks about leisureworld (see this link) in more detail. You may want to read it to understand this section better.

Book Value – why so small
A large part of their book value was under intangibles – CAN$37 million in net assets if you dont include CAN$112 million in intangibles (bed licences, resident relationships, support contracts). The reported value of the 55% investment for MIIF is SGD165 million (i.e. the entire business is valued at about CAN$207 million).

2 relevant responses.

The intangibles represent long term contracts by the Canadian government to pay the business based on the occupied beds and activities on behalf of residents, of the business. While, in theory, these payments could vary, in practice (given aging population, unwillingness of government to increase beds unnecessarily) they are regarded as practically guaranteed [my words. The actual word used was perpetual. In other words, they do not regardthese contracts as being truly “intangible”]

Many of the physical assets are quite old, and their book value has already been largely written down by accounting treatment. However, in their view, these assets are still quite usable [see remarks earlier about depreciation] and represent value in excess of their reported book value [though inpractice, they cant really easily realize these assets].

Cash Flow why last years 2.5 mths was low
A significant part of the infrastructure of the business has been involved in upgrading works (no specific percentage was given at the meeting). Hence, the financial statements that were issued from mid Oct 2005 to end Dec 2005 may not reflect expected cash flows from the business going forward. [MIIF projects cash flow ex. fees from LW to be >11% of the invested value of SGD165million.]

It was suggested that MIIF organize their web page to include links to all the financial statements and other reports of their assets. This was taken positively.

It was suggested that MIIF include on their web page, the market prices of their listed assets. It was noted by me in passing that MIC and a couple of other assets (all listed in the US) they own actually had trading yields of 6-7% – well below MIIFs current trading yield.


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