Strong rental reversions

MCT kicked off FY13 with strong rental reversions for both VivoCity and its office portfolio. This bodes well for 2H when the effects will flow through DPU as more leases are expected to lapse then. With healthy operating metrics, MCT’s organic growth outlook remains strong.

1Q13 DPU was slightly above street and our forecasts, at 25% of our FY13 forecast on stronger reversions. We expect a backend-loaded FY13 as committed rental reversions kick in towards 2H. We up DPU and DDM target price (8.1% disc. rate) for stronger reversions. Maintain Outperform.

Backend-loaded year

We expect positive rental reversions to flow through in 2H when more leases expire. 1Q13 NPI was up 14% yoy from 1Q12 (restated to one quarter), reflecting positive rental reversions and slight margin upticks. Management has finalised close to 50% of lease renewals even though the majority expires towards 2H.

Vivo still the key driver

Positives came from stronger rental reversions of 37.4% at VivoCity, albeit not entirely comparable with FY12’s 24.9% as 1QFY13’s rental reversions are pegged to fixed rents rather than gross rent in FY12. The strong reversions reflect partly 2009’s low base. We understand that reversion trends would have been fairly similar to last year’s if we were to compare expected gross rents pegged to new tenants’ projected sales. Retention fell to 75% vs. 92% last quarter, mainly due to tenant management. Tenant demand remains strong, with some open to renewals and negotiations ahead of expiries. Shopper traffic growth of 6.5% is higher than other retail REITs while tenant sales growth of 2% (affected by fit-outs) is healthy.

Some progress at ARC; strong office reversions

Committed and physical occupancy at ARC crept up to 63% and 59% from 50% and 57% in 4QFY12, respectively. PSA Building saw higher committed occupancy of 97.9% while positive rental reversions jumped to 39.5% due to lower expiring rent of ~S$5 psf vs. signing rents of S$6-7 psf and improved connectivity of property. Effects should flow through in later quarters when more leases lapse.

Ride the southern wave

• Boost from VivoCity’s healthy rental reversion, opening of ARC and PSAB’s higher occupancy

• Gearing moved down in line with peers with no refinancing needs

• Maintain BUY at an unchanged TP of S$1.12

Anticipating another good wave. Performance for VivoCity, the largest asset in Mapletree Commercial Trust’s (MCT) portfolio continues to exceed expectations. We noted that the spike in visitors to Universal Studios in the last few quarters and the opening of final 12 new MRT Circle staions since October 11 have had a positive impact on VivoCity’s footfall and tenant sales. Given its exposure of up to 18% gross turnover (GTO) revenue component (based on FY12 gross revenue), we believe VivoCity is the only mall that has the biggest leverage to another year of strong visitors to Resorts World Sentosa as the hotels and the West Zone open progressively.

Moving up the tracks. Office portfolio occupancy has reached a high of 98.2% with the incremental 15ksf of office space at PSA Building (PSAB) leased out to Mapletree Investment- another quality tenant. We visited Alexander Retail Centre (ARC) recently and were pleased to see that the newly minted mall, with popular F&B operators, are drawing good lunch time crowds. Committed occupancy rate has crossed 60% and should filter down to FY13F earnings as tenants opened progressively.

The wild card. With Mapletree Business City (MBC) still operationally ramping up, we believe an acquisition is unlikely to be on the cards in the immediate term. Nevertheless, we conducted a scenario analysis to assess the impact of the potential acquisition on DPU. In our analysis, we assume an acquisition price of MBC is S$1.25-1.58b or NPI yield of 5-6%, we estimate that FY14F DPU could see a –3% to +5% impact.

Maintain BUY. 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. Yields of 6.1-6.5% are attractive given its strong sponsor links. Our DCF-backed TP of S$1.12 offers total return of close to 17.5%.

Southern belle works its rents again

• Full year DPU beat our forecast by c.5%

• Positive rental reversions from VivoCity, and PSAB to be seen next quarter

• Maintain BUY at slightly higher TP of S$1.11

Highlights

Slightly ahead of expectations. 4Q12 gross revenues and NPI was c.10.9% and 16.1% y-o-y higher respectively, largely due to Vivocity’s strong positive rental reversions, as well as the progressive opening of Alexandra Retail Centre (ARC). On a q-o-q basis, NPI also rose by a healthy 6% despite a seasonally-weak quarter on the back of lower property and maintenance expenses. Consequently, 4Q DPU came in at 1.554cts. Full year DPU beat our forecast by c.5%.

Our View

VivoCity exceeded expectations. Monthly rents are now at S$10.62, which is above the earlier forecast of $10.40 psf. Rental uplift for the year was 24.9% and retention rate at a high of 92.1%. Negotiations for its FY12/13 leases (33.4% of its revenue) have begun and management has indicated that there is healthy interest amongst tenants. Most of these leases will expire in 2H and are largely specialty shops. As these leases were likely signed in 2009, at the trough of the retail market, so assuming a typical three-year lease term, we expect the trust to see healthy positive rental reversions, supported by high shopper traffic (+15.5% y-o-y) and tenant sales (+8.7% y-o-y). Meanwhile, occupancy costs remain healthy at 15.8%

More to come. ARC has been opening up, progressively from 15 December, 2011 and has reached a committed occupancy rate of 57.1%. PSAB has also completed its asset enhancement work, and the incremental 15k of office space has already been leased out. We should see a higher contribution from this asset going forward. Meanwhile rents for the offices continued to trend up nicely by 8.6%yoy on the back of higher occupancy (98.2%).

Balance sheet remains healthy. Gearing dipped marginally to 37.6% with no major refinancing in FY12. Average cost of borrowings remains low at 1.96%

Recommendation

Maintain BUY. We continue to like MCT for its proactive leasing strategy and its ability to drive rental renewals. We have nudged TP up by 1.8% to S$1.11 to account for its better-than-expected performance at VivoCity. FY13/14 yields are at 6.8/7.2 % and our revised TP of S$1.11 offers a total upside of close to 30%.

MCT's Q4 DPU of 1.55 cts beats forecast

Mapletree Commercial Trust (MCT) posted a distribution per unit (DPU) of 1.55 cents for the fourth quarter ended March, beating its forecast of 1.31 cents by 18.4 per cent.

This translates to an annualised yield of 7.0 per cent, based on MCT's closing price of 89.5 cents on April 25.

MCT said the books closure date will be on May 7, and unitholders can expect to receive their distribution on May 30.

The trust was listed on 27 April 27 last year.