VivoCity remains the Star

Positive rent reversions from previously negotiated leases at VivoCity kicked in in 3Q, which together with stronger GTO rentals, drove a 10% qoq jump in VivoCity revenue in 3Q. We remain positive on VivoCity, MCT’s largest asset, underpinned by its healthy operating stats.

3QFY13/9M13 met our expectations but was above street, forming 26/75% of our FY13 forecast. We tweak FY13 DPU but retain FY14-15 DPUs. We maintain Outperform with an unchanged DDM-based target price (discount rate: 6.9%). We see catalysts from stronger-than-expected rental reversions.

Strong showing at VivoCity

3QFY13 NPI was up 17% yoy as margin improvements added to a 12% rise in revenue. NPI growth was driven mainly by VivoCity, as positive rental reversions booked in previous quarters, coupled with stronger GTO rentals in 3QFY13 drove a 10% qoq jump in VivoCity. MCT had booked a 33% uplift in fixed rents at VivoCity. We estimate that passing rents at VivoCity edged closer to S$12psf in 3Q. Operating stats remain healthy, with yoy growth in shopper traffic (+3.8%) and tenant sales (+3.1%) still a tad above peers despite fit-outs by some tenants, auguring positively for future rental reversions.

Progress at ARC; Mapletree Anson acquisition approved

Alexandra Retail Centre (ARC) made further leasing progress in 3Q, as committed occupancy rose to 80.4% from 75.9% last quarter. The proposed acquisition of Mapletree Anson was approved by unitholders at the EGM on 23 Jan. Asset leverage should creep up from 35% as at end-3Q (on a revalued book during acquisition) to 41% after the deal.

Maintain Outperform

MCT is currently trading at forward yields of 5.3% and 1.2x P/BV, which appear undemanding relative to other retail REITs given room for further rental growth at a bustling VivoCity. We maintain Outperform as we see catalysts from stronger-than-expected rental reversions at VivoCity and the newly-acquired Mapletree Anson.

Acquisition stars aligning

• In line, 6M DPU makes up 49% of our FY13 numbers
  
• Strong operational and financial metrics, supportive of new acquisitions
  
• Maintain BUY, TP raised to S$1.35 as we roll forward our numbers and factor in S$1bn of acquisitions
  

Another sterling quarter. MCT reported 2Q gross revenue and NPI growth of c.15% y-o-y each to S$51.8m and S$36.5m respectively. The better performance was driven by higher rental income from improved occupancies and better rental rates across all properties. As a result, DPU came in at 1.546Scts and 1HDPU makes up 49% of our full year forecast.

Organic growth drivers are still in place. Looking ahead, forward growth will be driven by positive rental reversions at VivoCity and improving pre-commitments at ARC (75.9% vs 60% a quarter ago). Meanwhile, average rent for VivoCity continued to trend up nicely to >S$11psf/mth. While occupancy cost has risen to 17%, it is still lower compared to city malls (c.20%). Hence, we believe the trust can continue to drive rents, albeit at a more modest pace, on the back of increasing shopper traffic and higher tenant sales.

Acquisitions likely to be the next catalyst. Gearing level is at 37.7% with only S$122m worth of refinancing due in April 2013. With the trust trading at 1.3x P/Bk NAV and an implied yield of 5%, we believe it has become a more effective platform for new acquisitions that can be funded through a mix of debt and equity. We now assume S$1bn of acquisitions @ 5.25% yield in FY13F (equity: debt ratio of 60:40), raising our FY14F estimate by 2%.

Maintain Buy. We continue to like MCT for its defensive nature backed by quality assets and healthy financial metrics. We believe a re-rating catalyst could come from new acquisitions such as Mapletree Business City and Mapletree Anson. As we roll forward our number and factor in S$1bn worth of acquisitions, we raise our target price to S$1.35.

Strong 2H13 in the bag

Having negotiated >90% of its leases expiring at VivoCity in FY13 and booked strong committed rental reversions, a solid 2H13 appears to be in the bag. Stronger-than-peer operating stats continue to bode well while accretive acquisitions could just add icing to the cake.

2Q/1H13 DPUs were broadly in-line, forming 25/49% of our FY12 estimate. Expecting a back-end loaded FY13 as committed rental reversions kick in, we nudge DPUs higher. Coupled with a lower discount rate of 6.9% (prev. 8.1%), we raise our DDM target price. Maintain Outperform.

Strong 2H13 in the bag

We expect greater DPU uplifts in 2H13 when committed rental reversions flow through in 2H. 2Q13 NPI and DPU were up 15% and 16% yoy, respectively, thanks to positive rental reversions at VivoCity and ongoing take-ups at ARC and PSAB office. VivoCity remains in a state of pink. Management has negotiated >90% of leases expiring in FY13, booking a strong 33.4% uplift in fixed rents and having just 2% of leases remaining for 2HFY13. Operating stats were healthy, with yoy growth in shopper traffic (+8.4%) and tenant sales (+5.6%) a tad stronger than that in 1Q13 and peers. Occupancy cost pre-rental reversions kicking in were healthy at 17% on rents of about S$11+psf. PSAB office and ARC also made progress, with both booking stronger occupancy and commitments. PSAB office particularly saw strong rental reversions (albeit on a low base), on signing rents of about S$7+psf.

Capital management

Management refinanced S$160m of borrowing due in FY14 with a fixed rate note due 2020. This lengthened weighted average debt maturity to 2.9 years from 2.1 years back in 1Q, without significant cost increase.

Acquisitions?

With overall cost of capital dropping as equity yields compress and borrowing cost remaining low, ease of an accretive acquisition has risen. We understand that pre-commitments from Mapletree Business City has risen above 90%, though physical occupancy remains <90% as some tenants have yet to move in.

Reversionary engine still running

• 1Q13/14 results in line with estimates at 25% of our forecast

• Vivocity’s reversions and retention rates remain robust

• Maintain BUY at S$1.12 TP

Highlights

1Q13/14 DPU of 1.537 Scts in line with estimates. Mapletree Commercial Trust’s (MCT) gross revenues and net property income were at 6.9% and 9.5% respectively, ahead of the prospectus forecast but are in line with our forecast. The growth was largely driven by positive rental reversions at VivoCity, a 12% step up rental at Merrill Lynch Habourfront and the additional contribution from Alexandra Retail Centre (ARC). As a result, distributable income had come in 20.7% higher than forecasted, at S$28.7m, which translates to a DPU of 1.537 Scts, forming c.25% of our fullyear forecasts. On a sequential basis, performance had remained relatively stable, with a slight decline in net property income margins due to rising utilities cost.

Our View

Business as usual. Vivocity’s performance had remained robust, achieving higher occupancies of 99.9% on a committed basis in 1Q13. About 50% of the leases that are expiring in FY13 have been renewed at 37.4% higher than previous rents, supported by high retention rates of 74.6%. Monthly rents now touched S$11 psf vs the S$10.62 achieved last year. While shopper traffic and tenant sales at Vivocity had risen by a smaller 6.5% and 2% clip y-o-y, this was in part due to the tenant fitout period for some tenants. We believe that should improve sequentially with the opening of new shops. Meanwhile, the PSA Building’s committed occupancy held steady at 97.9%, with an incremental 15ksf of office space having been leased out to Mapletree Investment. At the same time, two leases were renewed at 39.5% higher than preceding rents as they revert to market rents. Alexander Retail Centre (ARC)’s committed occupancy rate has reached 62.5%.

Recommendation

Maintain BUY at S$1.12 TP. We continue to like MCT’s defensive nature backed by quality assets. There is no refinancing due this year and gearing has moved to 37.7%, in line with the bigger cap reits. While we do not see imminent acquisitions from the ROFR pipeline, including Mapletree Business City, we believe any re-rating catalyst would likely hinge on that and its accretion. Our DCF-backed TP of S$1.12 offers total return of close to 13%.