MLT – OCBC

Acquisition frenzy continues

Announces more acquisitions. Mapletree Logistics Trust (MLT) announced its intention to acquire three distribution centers in the Kanto region (Greater Tokyo) of Japan. MLT has signed a binding Memorandum of Understanding with the vendor – a logistics facilities development and management company. The three assets are on long-term leases of between eight and 10 years. The purchases are expected to be completed by end 3Q10.

Financed fully through debt. The total acquisition cost is estimated at JPY13b or S$201m. The properties will be acquired at an average initial NPI yield of 7.3%, compared to an average implied property yield of 5.0% on MLT’s existing Japan portfolio. The purchases will be fully funded by debt, increasing MLT’s leverage to approximately 43.6% debt-toassets. On a pro forma basis, the manager expects an accretion of 0.33 S cents (+5.5%) over the annualized 1H10 DPU of 6.0 S cents. Note MLT estimates that accretion drops to +0.01 S cents (+0.2%) if the acquisitions were 60% equity financed at an issue price of S$0.84, a 5% discount to the current price.

Equity issue likely, in our view. Since Dec 09, the manager has announced or completed S$430m of acquisitions, all financed by debt. We note that MLT is fast approaching its 45% medium-term leverage target. At the same time, MLT looks far from sated with its acquisition spree (in our opinion), with both sponsor and third party assets up for grabs. As such, we believe equity fund-raising (EFR) is likely in the next six to 12 months, and sooner rather than later. At the recent 2Q10 analyst briefing, the manager indicated that any potential EFR is likely to take the form of a private placement, citing the faster / more flexible time frame and lower discount versus rights issues. MLT can issue up to 20% of its existing unit base through a private placement. The manager also emphasized that the purpose of any EFR would be to allow MLT to continue to grow rather than to de-leverage.

DPU estimates adjusted upwards. We have adjusted our earnings estimates to account for the impact from these acquisitions with contributions estimated from 01 Oct 2010 onwards. This raises our FY10-11F DPU estimates by 1.7% and 5.5% respectively to 6.3 S cents and 7.0 S cents. Our fair value estimate is also up from S$0.86 previously to S$0.89. With uncertainty about the timing and quantum of any EFR, and an estimated total return of 7.7%, we maintain our HOLD rating on MLT.