Category: MIT
Industrial REITs – DMG
Change in game rule by JTC
Since the beginning of the year, JTC has indicated that property funds, such as REITs, have to pay land premium upfront for all industrial buildings acquisitions from sellers on JTC-leased sites, instead of paying in terms of a monthly land rental. Through this change in rule, REITs will have to set aside a sum of capital for the payment of upfront land premium; thus essentially raising the acquisition costs of industrial buildings. Having said that, we expect some of the REITs to counter this measure via i) lower acquisition price on the property to make up for the upfront land premium and/or ii) requesting the seller of the property to pay a higher leaseback rental to compensate for the land premium having been paid (i.e., a double net versus a triple net rental). Although the long term impact of this change in policy remains to be seen, we believe there will be pressure in the industrial property prices and rentals in the short term.
Minimal change expected to tenants expenditure. Before the change in policy, tenants of industrial properties have been paying the land rental through triple-net tenant agreements. We expect tenants that lease space in newly acquired industrial buildings will have to pay a higher rental rate to make up for the upfront land premium. However, on a net basis, there is little difference in the total amount of rental expenses incurred by tenants, as the amount previously paid for land rental in a triple-net tenant agreements forms part of the new double-net tenant agreements.
REITs may find it trickier to buy new properties. With the change in this policy, industrial REITs will be facing a hurdle in terms of future acquisitions as the capital involved in buying new properties rise. As REITs try to crawl back or offset a portion of these upfront charges (whether through lump sum pro rata basis or discount in acquisition price), there is a likelihood that building owners may choose to sell their buildings to industrialists since it is possible that they can sell the property at a higher price (given that industrialists can continue to pay a monthly land rental under the new policy). In our view, we believe this option to be limited to i) smaller buildings, as industrialists are unlikely to buy over a larger property than they require; ii) when owners of the buildings do not seek to sell and lease back the property for their own use.
Impact of change in policy may not be all bad. After the change in policy, REIT managers will have to factor in the additional capital expenditure into the IRR for any acquisitions. In our view, as long as the IRR can meet each REIT’s requirement, REITs will continue to acquire buildings; particularly on the back of low interest rate and relative ease in financing. In addition, although paying the land premium upfront may translate to a higher initial acquisition cost, this may prove to be cheaper in the long run as land rent paid on a monthly basis are subjected to a 5.5% annual escalation cap. Lastly, it is important to note that this change in policy do not affect BTS projects that some REITs plan to undertake this year.
MIT – DBSV
Sailing along just fine
- 3Q13 results in line with expectations
- Positive rental reversions but growth moderating
- Maintain HOLD and S$1.43 TP
Highlights
3Q13 DPU of 2.29 Scts in line. Mapletree Industrial Trust (“MINT”) reported gross revenue and net property income of S$69.2m and S$49.1m, higher by 6% and 8% y-o-y respectively. The stronger performance was largely organic-led with positive rental reversions portfolio wide, while occupancy levels remained fairly stable at close to 95.2%. As a result, distributable income came in 7% higher at S$37.7m, translating to a DPU of 2.32 Scts. On a sequential basis, 3Q13 was an improvement with moderate rises of 1.5% and 1.4% in topline and net property income, respectively.
Positive reversions seen; strong retention rate. Portfolio retention rate was high at 85%, despite average rental hikes for new leases and renewals of 8%-24%, which implies the stickiness of the tenants in their portfolio. As a result, portfolio average rental inched up higher to S$1.61 psf/mth (vs S$1.59 in 2Q13).
Our View
Cautious outlook and pressure points in 2013. Looking ahead in the next financial year, MINT will be renewing close to 30% of its revenues, of which a majority are from its flatted factory space. Given pressure from new competing supply of new industrial space, coupled with a tougher operating environment for SMEs due to cost hikes on the labour front, we expect reversionary gap to compress in the coming quarters and retention rate to fall. In addition, management is expecting to see net property income margin of 70.9% to be under pressure – owing to expected cost increases from maintenance, utilities and security contracts expected to be renewed in the coming year.
Asset enhancement initiatives and development projects completing end of 2013 to lead growth initiatives. MINT is currently embarking on 3 asset enhancement projects (Woodlands Central, Toa Payoh North 1 and The Signature) and 1 development project (Built-to-suit for Kullicke & Soffa) which are on track for completion by the end of FY13. These properties should contribute positively to the trust performance in the medium term. For this quarter, MINT has instituted a dividend reinvestment scheme (DRP) of which proceeds can be channeled towards capex and maintenance needs.
Recommendation
HOLD Call maintained, TP S1.43. While FY13-14F yields of 6.5%-6.7% are attractive vs peers, we believe positives of its resilient portfolio are priced into the stock. Maintain HOLD and DCF based TP of S$1.43.
MIT – CIMB
Decent 3Q performance
MINT bucked trends of slower economic growth and delivered steady rental reversions and occupancy gains in 3Q. However, we think positives are priced in, particularly with a pure-local mandate and lack of pipeline assets likely to hinder meaningful acquisition growth.
3Q/9MFY13 DPUs were slightly above our and street expectations on stronger margins, forming 26/77% of our FY13 forecast. We tweak DPUs higher on stronger margin assumptions, but keep our DDM-based target price (discount rate: 7.5%) of S$1.50 unchanged. We maintain our Neutral rating.
Steady quarter
3QFY13 DPU was up 7% yoy on contributions from acquisitions, positive rental reversions and margin improvement. DPU rose 1% qoq. Positives came from the marginally stronger portfolio occupancy of 95.2% (2Q: 95.0%), while rental reversions remained fairly strong – flatted factories at +24%; business parks at +8%; stack-up/ramp-up at +18%. Also management announced a new AEI (estimated capex of S$4m-5m) at its business park property, The Signature to enhance common areas and competitiveness of the asset.
Capital management
Asset leverage remains a healthy 37.1%, with all FY13 loans refinanced. As part of proactive capital management efforts, management will also introduce the distribution re-investment plan (DRP) for 3QFY13. We are positive on the financial flexibility offered by the programme (proceeds could be channelled toward funding needs of small AEIs such as the one at The Signature), but remain cautious of impact from potential dilution.
Maintain Neutral
The key draw of MINT’s portfolio, we believe, lies in its bond-like income stream, its pure local exposure and positive rental reversions. But we see positives priced in at 1.4x P/BV, particularly with a pure-local mandate and lack of pipeline assets likely to hinder meaningful acquisition growth, till MINT looks at expanding overseas with the expiry of its pure-local mandate in Oct 2013.
MIT – DBSV
Portfolio rentals inching up
- 2Q13 results held steady q-o-q
- Operational results stable while reversions remained positive at c19-23% y-o-y
- Maintain HOLD with revised TP of S$1.43
Highlights
2Q13 DPU of 2.29 Scts in line. Mapletree Industrial Trust (MINT) reported gross revenue and net property income of S$68.2m and S$48.4m, higher by 16% and 18% y-o-y respectively. The stronger performance was largely attributed to the contribution from the acquisition portfolio, supported by continued positive rental reversions, high occupancy levels for its various key property segments. As a result, distributable income came in 18% higher at S$37.5m, translating to a DPU of 2.29 Scts, forming c51% of our full year forecasts. On a sequential basis, performance was steady for topline (+2% q-o-q) and net property income (+0.1% q-o-q).
Improved capital structure. MINT issued S$45m worth of MTN notes at a fixed rate of 3.65% with a tenure of 10 years. However, all-in interest costs declined to 2.3% (vs 2.5%) as the REIT replaced its expiring interest rate swaps with cheaper ones.
Resilient portfolio; positive reversions should continue. MINT’s diversified portfolio of industrial properties remained resilient, achieving improved average occupancies 94.9% in 2Q13 and continues to see healthy retention rates of 71.1%. Portfolio average rental inched up higher to S$1.59 psf/mth (vs S$1.56 in 1Q13) with new leases and renewals rising by 19-23% on average. Retention saw a rebound to 85% ( vs 71% in 1Q13) on the back of pro-active preleasing efforts.
Our View
Manager expects operational outlook to remain stable. Looking ahead, with only 9% of topline that is up for renewal over the rest of FY13, earnings should remain fairly resilient. The manager is attempting to improve portfolio WALE (currently at 2.4 years) and income certainty for the REIT through offering tenants longer-term leases with staggered rental escalations, and responses have been positive. Rental reversions are expected to trend down as MINT’s portfolio average passing rent inches up each quarter. Our estimates are nudged up slightly as we account for the positive reversions in its flatted factories / ramp-up factories.
Recommendation
Maintain HOLD, TP raised to S1.43. While FY13-14F yields of 6.5-6.6% are attractive vs peers, we believe the positives regarding its resilient portfolio are reflected in the share price. Our TP is raised as we roll forward our valuations to FY14 but maintain our HOLD call on MINT given limited upside to our target price.
MIT – CIMB
No major surprises
We believe MINT’s current P/BV of 1.4x has priced in its growth potential, particularly as passing rents of its under-rented portfolio catches up with the market and on likely increasing resistance from tenants amid external demand headwinds and cost pressures.
2Q/1HFY13 DPUs broadly met our and consensus expectations, at 26/53% of our FY13 estimates. We nudge DPUs marginally higher on margin adjustments and raise our DDM-based target price after lowering our discount rate to 7.3% from 8.1% previously. Maintain Neutral.
No major surprises
The portfolio remained resilient. 2QFY13 DPU was up 12% yoy on contributions from acquisitions, positive rental reversions and margin improvement. Qoq, DPU was flat (+1%). Positives came from the marginally stronger portfolio occupancy of 95.0% (1Q: 94.9%). Rental reversions remained fairly strong: flatted factories at +23%; business parks at +8%; stack-up/ ramp-up at 20.7%; and warehouse at +19%. Some concerns could come from the fairly slow take-ups at its BTS/AEIs as pre-commitments remain fairly unchanged from 1Q, though more take-ups could flow through nearer to completion. Warehouse occupancy had also dipped to 73% from 90% in 1Q.
Stronger capital management
Asset leverage is at 37.2% as at end-2Q, or 39-40% considering developments and AEIs. In 2Q, MINT issued a S$45m 10-year fixed rate note which successfully lengthened average debt tenure to 3.2 yrs from 2.7 yrs. Yet, cost of borrowing fell from 2.5% to 2.3%, due partly to the replacement of expiring interest rate swaps with lower cost ones.
Maintain Neutral
Notwithstanding the resilient portfolio, we believe the current P/BV of 1.4x (among the highest in the sector) has likely priced in growth potential, particularly as passing rents of its under-rented portfolio catches up with the market, and on likely increasing resistance from tenants amid external demand headwinds and cost pressures.