MLT – OCBC

Occupancy dips as manager re-positions assets

2Q10 below expectations. Mapletree Logistics Trust (MLT) reported 2Q10 gross revenue of S$52m, flat YoY and up a marginal 1.1% QoQ. Net property income of S$45.8m inched up 0.3% YoY and 0.1% QoQ. Unitholders will receive a payout of 1.5 S cents, up 1.4% YoY and flat QoQ. DPU was 5% below our 1.58 S cents estimate as positive contributions from recent acquisitions were offset by higher vacancy rates. As at 30 Jun, MLT recorded portfolio occupancy of 97%, down from 98% three months ago. This was due to higher vacancies in Singapore (occupancy -100 basis points), Hong Kong (-300 bps) and Malaysia (-500 bps). We understand this is as the manager has chosen not to renew leases of certain singletenanted buildings because of unsatisfactory rent negotiations. Instead it is increasing its weighting to multi-tenanted buildings with three assets converted from single-user assets to multitenanted buildings during the quarter (two in Malaysia and one in Singapore).

2H10 could be stronger. To date, the manager has successfully renewed and replaced 42% of the leases due for renewal in 2010; approximately 10% of the portfolio gross revenue is due for renewal in 2H10. It noted some mild positive reversions (+0.3% to +0.5%). MLT said that “while the economic environment has shown signs of improvement, market sentiments remain cautious in the geographies in which [it] operates.” 2H10 income could be boosted (in our opinion) by full-year contributions from the three assets acquired in 2Q10 and also from contributions from Natural Cool Lifestyle Hub (expected purchase completion around Sep 2010). Additionally, with strong leasing enquiries, the manager believes occupancies should improve over 2H10.

Valuation. Our FY10 DPU estimate falls 3% to 6.2 S cents as we adjust our estimates for actual 1H10 results. With leverage of approximately 39.8% debt-to-assets (our estimateincluding the Natural Cool acquisition, 38.8% actual as at 30 Jun) versus a medium-term target of 45%, MLT has debt headroom for roughly another S$165m worth of acquisitions. MLT is likely to speed up its acquisition pace beyond that quantum, with S$300m worth of assets in its sponsor pipeline already at or nearing completion. As such, we believe equity fund-raising is likely in the coming months, potentially through another private placement. With an estimated 4.2% total return, we downgrade MLT to HOLD with a marginally higher S$0.86 fair value [prev: S$0.84]. Potential catalysts for an upgrade include announcements on substantial acquisitions or development projects.