MapleTree – OCBC

Likely to turn to inorganic growth

Waiting for stabilization. We expect Mapletree Logistics Trust (MLT) to report 3Q results in three weeks’ time and are keen to get an update on occupancy levels (prev: 98.3%). We will also focus on the tone of guidance versus 2Q, where the manager cautioned that “the environment remains challenging and occupancy and rental rates may be under pressure”. Business conditions have improved since then and this may ease downward pressure on rents and capital values, in our view. Still, there is a big difference between stabilization and recovery.

Turning to inorganic growth. We believe tenant retention, as opposed to positive rent reversion, continues to be a key priority for the existing portfolio. As such, MLT may turn to acquisitions to support and grow DPU. MLT is geared at 37.8% debt-to-assets. At 2Q results, the manager said it would not raise equity solely to reduce gearing. But it did indicate interest in third-party acquisitions, provided these buys are coupled with an equity issue to at least maintain (or reduce) current gearing levels. MLT’s rerating (up 114% YTD) and relatively looser credit conditions are conducive to this stance. The sticking point is property yields, which would have to be fairly high for the transaction to be DPU accretive. Third-party buys are more likely to clear this hurdle than the S$300m development pipeline from MLT’s sponsor in our view.

Prefer top-tier industrial names. We find a large divergence in value among the industrial REIT space. Price to book range is wide: MacarthurCook Industrial REIT [NOT RATED] trades at the low of 0.36x 2Q CY09 NAV but A-REIT [NR] trades at 1.21x book. The sub-sector is highly geared, with an average leverage of 39.7%. A-REIT has raised equity twice, and Cambridge Industrial Trust [NR] has raised funds once. This space offers some of the highest yield opportunities but gearing levels and an uncertain outlook continue to concern us. Consequently, we prefer to focus on the top-tier industrial names for now.

Attractive total return. We find MLT’s valuations (0.84x book, 7.4% estimated FY09 yield) fairly attractive. We also like the quality and diversification of its portfolio. We have not made any changes to our earnings estimates but have lowered our discount and cap rate assumptions to less rigorous levels. We revise our fair value estimate for MLT to S$0.78 from S$0.52 previously. While upside of 5% to current price is limited, total return of 12% is attractive (in our view). Upgrade to BUY.