Likely resilient, even in downturn

Sanguine view on MLT’s outlook. We recently met Mapletree Logistics Trust (MLT) management for an update and came away with a positive view on its outlook. Despite the current uncertain economic backdrop, MLT shared that it has already secured a majority of the leases that are up for renewal in 3Q11. We believe some of these renewals may be made at higher rates than its passing rents, as the previous leases might have been secured at depressed levels during the financial crisis. Latest datapoints from Jones Lang LaSalle (JLL) showed that Singapore factory/ industrial rental growths have moderated (0-3% QoQ) in 3Q11, but were still 35-67% above their last troughs in end 2009. Hence, we anticipate MLT to report another round of positive rental reversion for the renewals, when it releases its 3Q11 results on 20 Oct.

Stable diversified portfolio. Management also highlighted that its portfolio is well-diversified, both in terms of geography and tenant types. We note that its end-users are also relatively well-spread across various industries, while its leases are typically covered by security deposits (average of 7.7-month coverage as at 30 Jun). Moreover, its annual portfolio occupancy rate has remained consistently high, even in market downturns (It has never fallen below 98.0% since its listing. In 2Q11, the rate was at 98.9%, an improvement from 98.3% seen in 1Q11). This clearly shows the resilience of its portfolio, in our view.

Continued focus on yield optimization. For 2Q11, the group announced a commendable 26.6% and 24.6% YoY growth in gross revenue and NPI respectively, due to contributions from its acquisitions made over 2010-11. In the same quarter, it also divested its properties at 9 and 39 Tampines Street 92. This reflects the MLT’s ability to recycle capital to optimize its yield. Going forward, we expect the group to continue to focus on this yield and growth strategy. While we believe it may be more selective in investments in this uncertain economic condition or even be facing difficulty in finding sizeable yield accretive third party acquisition, we note that MLT has a strong pipeline from its sponsor (~S$300m completed or near completion).

Maintain BUY. We continue to like MLT for its resilient portfolio, proven track record and strong sponsor support. Aggregate leverage may be a concern (40.6%), but MLT said it has sufficient resources and is already in advanced talks with banks to refinance its debts maturing in 2012. Maintain BUY with revised fair value of S$1.06 (S$1.01 previously), after incorporating its 2Q11 results.

Acquisitions remain in focus

At a Glance

• 2Q11 DPU of 1.6 Scts (+7%y-o-y) was in line • Operationally stable; further acquisitions to underpin earnings upside

• Maintain BUY and S$1.07 TP based on DCF

Comment on Results

In Line 2Q11 results. Gross revenue and NPI for the quarter rose 26% y-o-y (+6% q-o-q) and 25% y-o-y (4% q-o-q) to S$65.8m and S$57.1m respectively, lifting distributable income to about S$38.8m (+26% yoy, +3% qoq). The robust performance was largely due to an enlarged portfolio size as well as strong organic growth of 5%, backed by positive rental renewals and high occupancies. As a result, DPU rose by about 7% to 1.6 Scts. Separately, the group has also announced a 0.09ct bonus payout from the divestment gain of 2 properties to the unit holders over the next 3 quarters.

The group has successfully renewed 52,000 sqm of space at higher average rentals. Average portfolio occupancy remains robust at 98.9%. While the group has another 169,000 sqm of space to be renewed for the remaining year, management guided that about 50% is currently under negotiation and is on track to lease out the remainder. The manager also intends to continue to reconfigure some of their portfolio single-tenanted space to multi-tenanted building to further optimize property yields.

Further acquisitions a possibility. While Singapore remains its core business area, the group is also actively looking to grow its overseas portfolio in markets like China and Korea. The group recently signed MOUs to develop 2 distribution centres in Zhengzhou with total GFA of 144,000 sqm recently, which should contribute positively in the medium term.

Recommendation

BUY, TP S$1.07 maintained. Backed by strong economic fundamentals and a robust balance sheet, MLT remains on a growth track. Forward yields of 7.1-7.3% remain attractive, given its large cap and strong sponsor status.

Acquisition-fuelled growth

• In line; maintain OUTPERFORM. At 25% of our full-year forecast, MLT’s 2Q11 DPU of 1.60 Scts (+6.6% yoy) met our and consensus estimates. 1H11 DPU of 3.15 Scts works out to 48% of our full-year estimate. There were no major surprises. The positives were occupancy improvements and upward rental reversions, which offset higher operating costs stemming from repairs in Japan and property conversion in Singapore. Management is actively looking for acquisition opportunities and has identified a local property with redevelopment potential. We incorporate the change in year-end in FY3/12 but keep our S$500m acquisition assumption, DPU estimates and DDM-based target price of S$1.05 (8.6% discount rate) pending the analyst briefing. MLT continues to offer an attractive yield of 7%. We maintain our OUTPERFORM call, with the catalysts being accretive acquisitions and AEIs.

• Net property income (NPI) up 25% yoy and 4% qoq. 2Q11 topline rose 27% yoy, thanks to contributions from newly-acquired assets, partially offset by the FX impact from a stronger S$ though the DPU impact was mitigated by FX hedges. The portfolio also benefited from positive rental reversions and a 0.6% pt improvement in occupancy, driven mainly by Singapore assets. NPI however grew by a more muted 25% yoy due to higher property expenses arising from repairs in Japan and the conversion of a local property in 2Q11. Distributable profit increase 26% yoy but DPU was up by a lower 7% due to an enlarged unit base after its equity fundraising in Oct 10. Management also divested two local properties in the quarter and plans to distribute net gains of S$2.1m (0.09 Scts/unit) over the next three quarters.

• Property acquisition and redevelopments. Management continues its search for acquisition opportunities, with a focus on South Korea, Singapore, Japan, China and Malaysia. It also seeks to extract greater yields from its portfolio through conversion and redevelopments. It is in the midst of seeking authorities’ approval for the redevelopment of a local property with underutilised plot ratios.

• 41% asset leverage. Asset leverage was at 41% as at end-2Q11, still below management’s medium-term target of 40-50%. Management successfully rolled forward S$102m debt (7% of total debt) maturing in 2011 and is in advance negotiations to refinance/extend debt maturing in 2012 (31% of total debt).

MapletreeLog Q2 net up 25%

MAPLETREE Logistics Trust has achieved net property income of $57 million for the second quarter ended June 30, up 24.6 per cent from a year ago. Distribution per unit (DPU) came in at 1.6 cents, against 1.5 cents a year earlier.

Gross revenue for the latest quarter rose 26.6 per cent to $65.8 million on the back of contributions from completed acquisitions in Singapore, Japan and South Korea. This was further boosted by positive rental reversion and higher occupancy of 98.9 per cent, said Mapletree Logistics Trust Management Ltd (MLTM), manager of the trust.

Said MLTM CEO Richard Lai: ‘Despite the continued uncertain economic environment experienced in Q2 2011, MapletreeLog’s portfolio has demonstrated its resilience and robustness, delivering a strong set of results. Organic growth was also achieved through proactive asset management initiative which saw the conversion of a property in Singapore from single-user asset to multi-tenanted building in Q1 2011. Overall, the portfolio experienced organic growth of 5.1 per cent in Q2 2011 against Q2 2010.’

Following the recent crises in Japan, MapletreeLog said it has commenced its repair efforts for the affected properties. Except for Sendai Centre, the other properties suffered limited damage, and minor repairs have been carried out. Total repair cost to be expensed as a result of the damage is estimated to be about $1 million, of which $0.5 million was recognised in Q2. The balance will be accounted for in Q3.

Sendai Centre has been declared structurally sound and repair works are underway to restore the chilled facility to full operational effectiveness.

As at June 30, MapletreeLog’s portfolio comprised 99 properties with a book value of approximately $3.6 billion.

MapletreeLog said it continues to pursue its growth strategy with inroads having been made into South Korea. Besides South Korea, it said it continues to see acquisition opportunities in Singapore, Japan, China and Malaysia. It will also broaden its investment horizon to new markets.

Completes KPPC Pyeongtaek Centre buy

KPPC Pyeongtaek Centre. Mapletree Logistics Trust (MLT) announced on 17 Jun that it has completed the acquisition of KPPC Pyeongtaek Centre in South Korea. Recall that MLT has previously reported on 25 May that it has signed a conditional sale and purchase agreement with Korea Port Processing Co. Ltd (KPPC) for this property at a purchase price of approximately S$85.9m (KRW 75.6b). The property comprises two blocks of dry goods warehouses with a total GFA of about 100,900 sqm. There is also potential for organic growth as it has yet to maximise its permissible plot ratio, which will yield an additional GFA of close to 20,000 sqm. The vendor, KPPC, will lease the entire property for a period of 5 years with an annual rental escalation of 3.0%.

Important milestone in South Korea. MLT has stated that this acquisition marks an important milestone to entrench the trust into the South Korea market. Given the sizeable acquisition, the contribution of South Korea to the total portfolio’s gross revenue is expected to increase from 2.7% to 5.6%. Consequently, KPPC will be the first Korean customer in MLT’s list of top ten tenants; thus further diversifying its tenant base. Assuming that the purchase price and other acquisition costs of the property are fully funded by debt, we estimate that MLT’s gearing should increase to about 41.3% in FY11 from 37.7% in FY10 (after taking into account all acquisitions and divestments announced to date).

Yield-accretive acquisition. According to MLT, the new property provides an initial NPI yield-on-cost of 8.6%. We have factored in contributions from KPPC Pyeongtaek Centre starting on 18 Jun with a modest starting rent of S$7.02 psm/month or KRW 6178 psm/month (GFA basis). Based on our estimates, this compares favourably with the NPI yield of 5.58% in FY10.

More acquisitions to come. Apart from Korea, MLT has also said that it is actively looking at acquiring a warehouse (60,000 sqm and 98% leased) in Malaysia from its sponsor. MLT should be able to complete this acquisition by this year. Going forward, its main acquisition focus continues to be in Singapore, Malaysia and South Korea. MLT has a proven track record of executing a virtuous cycle of accretive acquisitions and competitive fund-raising. It is also a favourable move to recycle proceeds into better-yielding assets. Reiterate BUY with an unchanged RNAV-derived fair value of S$1.01.