Looking for synergies and benefits

• Creating synergies from latest acquisition from JTC

• “Strategic Premium” paid for exclusive assets

• BUY maintained, DCF-based TP S$1.21

Creating synergies from latest acquisition from JTC. Mapletree Industrial Trust (“MINT”) has been awarded tranche 2 of the latest JTC tender exercise of 11 properties (8 flatted factories and 3 amenity centers) of over 2.1m sqft, increasing its total portfolio size by 18% to S$2.6bn. A key advantage is the ability for MINT to create operational efficiencies given its leadership & experience in managing the flatted factory space. MINT is expected to extract the embedded earnings growth from this target portfolio through (i) improving current occupancy level, which is at c95%; (ii) higher rents as the current passing rent is more than 30% below JTC’s latest posted rents as at 1st July’11; and (iii) asset enhancement works on certain assets to improve efficiency and/or GFA. This implies further earnings upside in the coming years when these expiring leases are renewed.

“Strategic Premium” paid for exclusive assets. While we like the attributes of this target portfolio, we believe that the purchase consideration of S$400.3m, translating to an initial yield of 5.0%, appears to have factored in a fair amount of forward growth in our view. We have raised our earnings to account for the contribution from this portfolio, assuming rental reversions of 15% in FY12-13 and 5% thereafter for the new portfolio, funded by a 40-60% debt-equity scenario, keeping gearing at 36.5%.

Longer term benefits, BUY, TP maintained at S$1.21. We believe that synergies from an enlarged portfolio will flow through in the longer term. In addition, we have not factored in any potential enhancement works that would be yield accretive.

Positive accretion but at high cost

Wins Tranche 2 of JTC second divestment

MINT has been awarded Tranche 2 of JTC’s second-phase divestment portfolio of S$400.3m, a shade below the appointed valuers’ S$402.7m valuation but 46% above the second bid by AREIT. With an implied entry yield of 5%, we believe the bid was aggressive. Management, however, highlighted the stronger reversionary growth potential for this acquired tranche vs. its existing portfolio, with rentals estimated at more than 30% below JTC’s newly-posted rents. Part of the acquired portfolio is also located near its existing assets within the Kallang Basin, providing opportunities for operational and leasing efficiencies. Management is reviewing financing options. No change to our DPU estimates pending details on financing. We continue to like MINT for its organic growth potential and maintain our earnings estimates as well as DDMbased target price of S$1.27 (discount rate 8.4%). Catalysts could include higher-thanexpected rental reversions.

The news

MINT has been awarded Tranche 2 of JTC’s second-phase portfolio divestment of S$400.3m, a shade below the appointed valuers’ valuation of S$402.7m. This implies a valuation of S$145 psf GFA and S$189 psf NLA. With a total GFA of 256,251sq m and NLA of 196,898 sq m, the portfolio comprises eight flatted factories and three amenity centres across five property clusters within established industrial estates in the central and eastern regions of Singapore. Contrary to our expectations, renewal rates will still be subject to a rental escalation cap of 5% per annum on JTC’s latest posted rents (1 Jul 11) for three years from the completion date (estimated Aug 11), mirroring MINT’s existing portfolio of flatted factories. Management is still reviewing its financing options.

Comments

Entry yield of 5%. Management estimates overall rentals for the acquired portfolio at more than 30% below JTC’s latest posted rents of about S$1.53 psf for the clusters near the acquired tranche. Coming in 46% above the second highest bid by AREIT (AREIT was likely less keen on this portfolio) and implying an entry yield of only 5% (vs. its current portfolio’s 7%), we believe the bid was aggressive, notwithstanding the growth potential.

Strong potential. Management, however, sees stronger rental reversion for this acquired tranche vs. its existing portfolio, due to an under-rented portfolio and the ability to benefit from JTC’s newly posted rents in Jul 11. Kallang Basins 1, 2 and 3 clusters would also complement its nearby assets in Kallang Basins 4, 5 and 6, which should afford some operational and leasing efficiencies and cost savings. Management also notes a more centralised location for these newly acquired assets and opportunities for asset enhancement which could further propel rental growth.

Funding likely through debt and equity. Management is reviewing its financing options and will be releasing more details after its 1Q12 results on 26 Jul. With limited debt headroom of S$373m to a 45% gearing, we expect the acquisition to be funded by a mix of debt and equity. Assuming 50:50 debt-equity, we expect moderate DPU accretion of about 1% for FY13 when full-year contributions kick in. We set out below the DPU accretion expected in FY13 on different assumed debt-equity funding and placement prices.

Valuation and recommendation

Maintain Outperform. We keep our DPU estimates pending details on the funding mix. Assuming 50:50 debt-equity, we expect moderate DPU accretion of 1% for FY13 when full-year contributions kick in. We continue to like MINT for its organic growth potential and expect catalysts from higher-than-expected rental reversions.

Mapletree Industrial Trust, Soilbuild win JTC properties

They bagged over 300,000 sq m of industrial space for $688.6m

MAPLETREE Industrial Trust (MIT) and Soilbuild Group have secured over 300,000 square metres worth of industrial space from JTC Corporation at a combined price of $688.6 million, JTC said yesterday.

MIT took up the more expensive tranche – which consisted of 11 blocks of flatted factories and amenity centres – which was sold by JTC at $400.3 million.

The other tranche – comprising 10 blocks of flatted factories and amenity centres – was sold to Soilbuild for $288.3 million.

The factories are located mainly in places such as Kolam Ayer, Kallang Basin, Tai Seng, Bedok and Kampong Ubi.

This is the second divestment of industrial properties by JTC.

The first was finalised in 2008 when JTC sold 39 high-rise ready-built factories worth a total of $1.7 billion to Temasek Holdings’ unit Mapletree Investments.

According to an earlier BT report, at least five parties had submitted bids in the first phase of the two-stage tender process that closed in early March.

The contenders could bid for either or both tranches of assets and had to state their indicative bid prices for the respective tranche of assets, as well as listing their track record, financial strength and proposed business plans for the properties, among other things.

The three parties were then shortlisted and invited to perform due diligence on the assets in the tranche or tranches they were eyeing.

The same report cited analysts saying that the bid price is likely to be the main factor that JTC will use in deciding whom to award the two tranches of properties to under the second stage of the tender process.

This is because it would have factored in the qualitative factors in shortlisting the bidders under stage one.

Shares of MIT gained one cent to close at $1.18 yesterday. Soilbuild was privatised last year.

Three parties in final race for JTC assets

Ascendas unit, MIT and Soilbuild said to have been shortlisted

THREE parties – a unit of Ascendas group, Mapletree Industrial Trust (MIT) and Soilbuild Group – are said to have been shortlisted to take part in the second and final round of bidding for two tranches of JTC Corporation’s flatted factories and amenity centres which were earlier tipped to be worth a total $600-650 million.

Market watchers suggest the Ascendas entity could be the listed Ascendas Real Estate Investment Trust (A-Reit), which along with MIT and Soilbuild, is said to have been shortlisted to bid for one tranche of assets, while the Ascendas entity and MIT will bid for the second tranche of properties.

Final submissions for both tranches of properties are expected to close next week, BT understands.

DTZ, which is managing the sale, could not be reached for comment.

Five or more parties are believed to have submitted bids in the first phase of the two-stage tender process which closed in early March. The contenders were allowed to bid for either or both tranches of assets and had to state their indicative bid prices for the respective tranche of assets in addition to listing their track record, financial strength and proposed business plans for the properties, among other things.

The three parties were then said to have been shortlisted, and invited to perform due diligence on the assets in the tranche or tranches they were eyeing.

For the second stage of the tender process, analysts reckon that the bid price is likely to be the main factor JTC Corp will use in deciding whom to award the two tranches of properties to, since it would have factored in the qualitative factors in shortlisting the bidders under stage one.

Sources suggest that the bidders taking part in Round 2 cannot bid lower than a stipulated percentage of their indicative bids under Round 1.

‘So basically they have some leeway to adjust their prices downwards if necessary since their initial indicative bid prices were formulated without the benefit of doing due diligence on the assets,’ said an analyst.

JTC is selling 21 blocks of flatted factories and amenity centres adding up to over 300,000 sq metres and located mainly in places like Kolam Ayer, Kallang Basin, Tai Seng, Bedok and Kampong Ubi, according to earlier reports.

This marks the second phase of JTC’s asset divestment exercise. The first phase culminated in the $1.71 billion sale to Temasek unit Mapletree Investments of 39 blocks of flatted factories, 12 amenity centres, six stack-up buildings, one ramp-up building, three multi-tenanted business park buildings and one warehouse building.

Mapletree later roped in Arcapita Bank and the portfolio was floated last year under MIT.

JTC has previously said the second phase sale of its portfolio will allow it to focus on seeding new ideas and developing innovative projects that can create a differentiating advantage for Singapore.

Market watchers reckon JTC would be gunning to wrap up the sale before the year runs out.