A small but significant step forward

• Placement of new units for acquisitions
• Impact on DPU is small but signifies management intent on growing unitholder value
• Maintain BUY, TP S$0.84

Placement of 115m new units to grow portfolio. Mapletree Logistics Trust (MLT) announced a placement of 115m units to raise cS$79m (priced @ S$0.69, 5.6% discount to VWAP). Proceeds are expected to partially finance its target acquisition of 3 properties worth cS$145m in Singapore and Japan. The target assets come with secured leases, averaging 5- 8 years and in-built growth of 2% for the Singapore assets. This, in our view, should further improve MLT’s income visibility and stability going forward.

+1% accretion to forward DPU estimates. Based on an EBITDA yield of 8.4% for the new assets, our estimated FY10-11F DPU estimates are nudged upwards by c1% to 6.0 – 6.2 Scts after accounting for dilution from the new placement units. We adjust our estimates slightly downwards in 2009 to account for the slight dilution from new units in 4Q09.

Post this placement and completion of the 3 acquisitions, gearing is expected to remain at c38%.

Maintain BUY, TP S$0.84. This current acquisition plan while small in size, is a signal of the manager’s intent and focus at growing shareholder value while not over-leveraging the trust’s balance sheet. We are attracted by MLT’s prospective FY10F-11F yield of 8.2%-8.4%, underpinned by its DPU of 6-6.2 Scts which could continue to grow when the manager further executes on its growth plans. Current closing price offers a total return of 22% to our target price.

Protecting loan-to-value through placement, acquisitions

Raises equity via private placement. Mapletree Logistics Trust (MLT) has successfully completed a private placement of 115m new units or 5.9% of the existing unit base. The issue price is 69 S cents, at a 6.1% discount to Friday’s closing price of 73.5 S cents. Note that existing unitholders will receive an advance distribution of 0.74 to 0.76 S cents for the period from 01 Oct to the day prior to the issue of the new units on 18 Nov. Both existing and new units will be entitled to receive income for the latter half of 4Q09.

Plans to acquire three properties. The manager intends to use the gross proceeds of S$79.4m to finance the acquisitions of two industrial properties in Singapore. The vendors / lessees of both single-user facilities are repeat tenants and the purchases are expected to be completed by end-Dec 2009. MLT will then use the increased debt headroom to acquire a single-user warehouse facility in Japan’s Greater Tokyo region for about S$68m or JPY4.42b by 1Q10. All three buys have long leases of five to eight years.

Attractive yields. After all transactions are completed, the manager expects MLT’s gearing to be roughly 38.5%, which is similar to the current gearing level of 38.1% as of October. NPI yields on the two new Singapore properties are above 9%, higher than the current NPI yield of the current Singapore portfolio of roughly 6.5%1 and the distribution yield of 8.1% on annualized 9M09 DPU. Additionally, the manager expects the NPI yield on the Japan property to exceed 7% which is significantly higher than the current NPI yield on MLT’s Japan book of about 4.5%.

Protecting LTV of portfolio. MLT has been talking about some sort of equity/acquisition combination for some time now so this move is not surprising. While the absolute gearing level is unchanged, we believe the primary purpose of these transactions is to support the loan-to-market value ratio for the portfolio. We expect a (still) tough industrial market to impact revaluations this quarter. The big yield gap highlighted here as well as MI-REIT’s [NOT RATED] recent revaluation exercise (property values fell 11.1% over the past six months) supports this view. Using equity to acquire assets instead of repaying loans potentially allows MLT to catch any upside as the sector recovers. Our S$0.78 fair value had priced in a cash call and remains unchanged. Maintain BUY on 14.5% total return.

Advanced distribution for existing units. Note the manager is guiding for an advanced distribution of roughly 0.74 to 0.76 S cents for existing unitholders only. This is for the period from 01 Oct to the day prior to the issue of the new placement units (expected issue date: 18 Nov). The income for the latter half of 4Q09 will be distributed to both existing and placement units as per usual.

More on the acquisitions. All three acquisitions are single-user facilities. The Singapore purchases will be leased back to their respective vendors on a triple net basis (tenant covers outgoings such as land rent, property tax and property maintenance expenses). The Japan acquisition will be leased to the sitting tenant. All three assets have long leases of five to eight years. The two Singapore properties have options to extend the lease, and the leases also have built-in step-up escalations of 2% per annum in rental from the second year onwards.

Starting up acquisitions

Buying assets in Singapore and Japan

Maintain Underperform with DDM target price of S$0.77 (from S$0.75). MLT has announced acquisitions worth S$145m in Singapore and Japan, to be funded partially with debt, and partially with equity proceeds from a private placement. After factoring in the changes, our DPU forecast for FY09-11 changes -3% to +3%. We maintain Underperform as warehouse properties tend to have more limited scope for higher
rental reversions compared with the other asset types. We are also concerned that there could be more non-accretive acquisitions bundled together with moderately accretive ones in the near future.

Acquisitions a mixed bag. MLT is acquiring two assets in Singapore and one in Japan for a total of S$145m. All three deals will come with long leases of 5-8 years. The Singapore assets come with built-in rental increases of 2% p.a. We view the Singapore assets positively for their net property income (NPI) yields of more than 9%, which are above MLT’s annualised YTD portfolio yield of 6.3%. NPI yields for the
Japanese property have not been announced. However, at a collective EBITDA yield of 8.4% for the three assets, we infer that NPI yields for the Japanese property are likely to be 6.3%, non-accretive to the portfolio.

Weighted average lease expiry (WALE) increases to five years from 4.9 years. After the acquisition, MLT’s WALE based on gross revenue will increase to five years from 4.9 years, increasing its portfolio stability.

Singapore assets funded by equity; Japanese properties by debt

Private placement to raise S$79.4m, diluting share base by 6%. MLT has  successfully placed 115m new units in a private placement this morning. This will dilute its share base by 6%. The price of the new units is S$0.69. This represents a 5.6% discount to the VWAP of S$0.731 per unit for trades in MLT’s units on 6 Nov 09. Citigroup is the sole bookrunner. The new units will raise gross proceeds of S$79.4m.

S$80m equity injection implies S$200m of acquisitions. Assuming MLT resorts to 60:40 debt to equity for its acquisitions, it can potentially make acquisitions to the tune of S$200m, based on S$80m of gross proceeds. Some of the debt headroom made available after the private placement will be used to fund the Japanese property. We anticipate another S$55m of acquisitions for FY10, assuming that MLT will make a
total of S$200m of transactions.

Asset leverage still below 40%. After the completion of the three acquisitions, MLT estimates its asset leverage at 38.5%, incrementally higher than its 38.1% leverage as at 30 Sep 09. We believe management will not be so ready to gear up beyond 45% in the near future after its painful refinancing in 2008.

Valuation and recommendation

Changes in assumptions. We factor in: 1) the three acquisitions at a total of S$145m at net property yields of 8.4%, with revenue contributions coming in only in FY10; 2) an additional S$55m of acquisitions in FY10 with 75% revenue contributions at 8.4% NPI yields; and 3) 1% growth in the portfolio from zero earlier, incorporating effects from built-in rental escalation as well as possibly higher rental reversions.

Impact of changes. After our changes, our DPU forecast for FY09 falls 3% from dilution. However, our DPU forecasts rise by 1% for FY10 and 3% for FY11 as the new assets start contributing. Our DDM-derived target price (discount rate 8.6%) rises to S$0.77 from S$0.75. At the rights offer price of S$0.69, dividend yield in FY10 should be 8.6%, above the FY10 diluted yield of 8%. This is still rather attractive.

Maintain Underperform. We are unexcited about the deals as the combined effect of equity issuance with the acquisitions would only be marginally accretive. Warehouse properties tend to have more limited scope for higher rental reversions compared with the other asset types, all things being equal. This explains management’s eagerness to revert to its “growth by acquisition” strategy.

However, as market NPI yields are not much higher than MLT’s current dividend yield of 8%, we are concerned that there could be more non-accretive acquisitions bundled with moderately accretive ones in the near future, due to the difficulty of finding sufficient sizeable acquisitions (as the quantum for a single warehouse property is relatively small) and growing competition for industrial properties from more institutional buyers returning to the market.