MapleTree – OCBC

Virtuous decisions

Protected… In our opinion, Mapletree Logistics Trust’s manager has commendably protected and created value for existing investors through the crisis. Despite refinancing needs and relatively higher leverage, MLT did not raise funds at steep discounts to de-lever the REIT in FY09. Instead in Nov, MLT raised S$79.4m through a private placement at an issue price that was at a 6.1% discount to the last closing price. The proceeds and the consequent increased debt headroom were used to acquire three industrial properties in Singapore and Japan from third parties.

…and created value. NPI (Net Property Income) yields on the two new Singapore properties were above 9%, higher than the current NPI yield of the current Singapore portfolio of roughly 6.5% and the distribution yield of 8.1% on annualized 9M09 DPU (at the time of acquisition). Additionally, the manager guided for a NPI yield of over 7% on the Japan property, significantly higher than the current NPI yield on MLT’s Japan book of about 4.5%. Note that gearing is expected to stay relatively unchanged at roughly 38.5% after all transactions are completed.

Expect negative revaluations. MLT, which was geared at 38.1% as at Sep 2009, is due for asset revaluations in 4Q09. We have a negative view on the industrial sector , and expect the tough industrial market to impact valuations. This view is supported by the implied yields achieved on the recent acquisitions and by the 11.1% asset value decline booked by MIREIT [NOT RATED] over the six months from Mar to Sep 2009. The recent acquisitions will help support net asset value somewhat, in our view.

Manager commitment is attractive. We have used pre-crisis valuations as a sanity check on current pricing. MLT’s FY10F yield of 7.8% outperforms 2006 levels but is fairly similar to the consensus 7.58% averaged in 2007. The current price-to-book value of 0.83x compares favorably to the 1.02x and 1.19x book averaged in 2006 and 2007 respectively. Note that with a 10% decline in asset values, the current price is valued at roughly 2006 levels. Valuations are attractive relative to peer Ascendas REIT [HOLD, FV: S$1.76], which trades at 1.2x book and 6.7% FY10F yield. With MLT prioritizing tenant retention over positive rent reversion, the outlook for organic DPU growth is limited. But if the manager can continue on a virtuous cycle of accretive acquisitions, a persuasive investment case emerges. Maintain BUY with S$0.78 fair value (14.6% total return). Key risk to our thesis is heightened regional economic risk, which could dampen investor sentiment towards diversified REITs.