MLT – OCBC

3Q10 in line; still a compelling play

3Q10 in line. Mapletree Logistics Trust (MLT) reported 3Q10 gross revenue of S$54.5m, up 7.4% YoY and 4.9% QoQ. Net property income of S$47.6m rose 8.1% YoY and 4.0% QoQ. Distributable income of S$31.5m was up 9.5% YoY and 2.2% QoQ. Results were boosted by positive contributions from recent acquisitions and lower vacancy rates. Distributable income was just 2% shy of our S$32.3m estimate.

Occupancy improves. As at 30 Sep, MLT recorded portfolio occupancy of 98%, up from 97% three months ago. This was due to lower vacancies in Hong Kong (+500 basis points) and Malaysia (+300 bps). Recall that in 2Q10, the manager had chosen not to renew leases of certain single-tenanted buildings because of unsatisfactory rent negotiations. Instead it increased its weighting to multi-tenanted buildings with three assets converted from single-user assets to multi-tenanted buildings in 2Q10 (two in Malaysia and one in Singapore).

Still in acquisition mode. MLT recently raised S$305m through a non-renounceable preferential offering to existing unitholders as well as a private placement. Excluding the S$145m of assets acquired on the back of the Nov 09 private placement, MLT has announced approximately S$447m worth of acquisitions this year. The gross proceeds from the equity issue are intended to partially finance these purchases, and are also expected to take MLT's leverage down from about 46% (assuming all acquisitions were debt-funded) to approximately 38%. This is lower than MLT's 45% mediumterm leverage strategy and will allow it to continue to acquire third-party and sponsor-owned assets.

DPU mechanics. Because of the recent private placement, MLT has already declared a "cumulative distribution" estimated at ~1.73 S cents for the period from 01 Jul to 14 Oct (the day immediately prior to the issue of the private placement units). This cumulative distribution will be paid on or around 29 Nov. The next DPU payout will be for the period from 15 Oct to 31 Dec (the "adjusted 4Q10 distribution").

Still compelling. 4Q10 income is likely to be boosted (in our opinion) by contributions from recent acquisitions, offset by an increased equity base post-equity fund raising. MLT has a proven track record in executing a virtuous cycle of accretive acquisitions and competitive fund-raising; we believe more accretive acquisitions are likely in the coming months. After adjusting our valuation inputs to price in a higher possibility of positive rental reversions over FY11 (as per more optimistic guidance from manager), our fair value estimate increases from S$0.90 to S$0.97. Maintain BUY (14% estimated total return).