Capital Recycle Play kick-started

Strategic divestment of older assets… Mapletree Logistics Trust (MLT) recently announced that a local IT solutions company and CK Holdings have exercised their purchase options on 8 Apr for two MLT properties – 9 and 39 Tampines Street 92 at a purchase consideration of S$12.8m and S$14.7m, respectively. A total net disposal gain of S$2.1m is expected from the divestment. MLT cited that the two properties have building specifications that are now outdated and no longer ideal for modern logistics operations. Given its limited growth potential, it believes that divesting these assets would be the best option to maximise returns. MLT expects the disposal gain to result in a one-time increase in FY11 DPU by 0.07-0.09 S cents.

… to fund better-yielding Acquisitions. The net proceeds (after deducting the net disposal gain distributable to unitholders) will be deployed to fund MLT’s recent S$24.5m acquisition of Jian Huang Building (JHB), which is a five-storey warehouse-cum-office building located at 15A Tuas Avenue 18. Under the sale-and-leaseback arrangement, JHB will be leased to Jian Huang Engineering for a period of seven years with an annual built-in rental escalation of 2% and a sevenyear extension option. The two-year old property provides an initial NPI yield of 8.2% and has a remaining land lease of about 27 years. In addition, MLT also made its first acquisition for FY2011 on 25 Mar with the purchase of Hiroshima Centre, Japan for S$114.2m (debt-funded). The total GFA is about 43,600 sqm, making it a major logistics facility in the Hiroshima prefecture of Chugoku region. The acquisition provides only an initial yield of 7%, but MLT believes there is further scope for organic growth, since it has not yet reached its maximum permissible plot ratio of 45,000 sqm. Despite our concern of greater exposure in Japan, MLT reiterated that the acquisition is in line with its “Follow-the-Client” strategy and its aim to grow the portfolio through repeat customers. Hiroshima Centre is currently leased to Nippon Access Group which is an existing MLT customer, taking up approximately 87,700 sqm of space. With this acquisition, Nippon Access will take up approximately 131,300 sqm of space and contribute towards 4.3% of MLT’s gross revenue.

Still compelling but Japan woes remains. MLT has a proven track record of executing a virtuous cycle of accretive acquisitions and competitive fund-raising. We take delight that it is also starting to recycle proceeds into better-yielding assets. However, we remain wary of Japan’s woes and increased the country risk premium to 75 bp for its Japan assets in our valuation. Maintain BUY with a reduced RNAVderived fair value of S$1.01 (prev: S$1.03).

Another Japanese Venture

• Acquiring Hiroshima Centre @ 7% yield

• Japan is an established logistics hub with strong customers

• Maintain BUY with 28% total return to S$1.07 TP

Venturing into Japan again. MLT announced that they have acquired Hiroshima Centre in Chugoku, western Japan for JPY 7.3bn (S$114.2m). The property consists of a 2-storey warehouse for cold/frozen storage and a 2-storey dry warehouse with an ancillary office with a combined GFA of 43,600 sqm. The asset will be leased back to Nippon Access, one of MLT’s current tenants, on a 16-year lease, with a periodic rent review every 5 years. This acquisition further strengthens MLT’s earnings visibility & stability with a long average weighted lease expiry of c. 6 years. In addition, there is opportunity to increase the property’s GFA by another 45,000 sqm, which the manager is keen on, subject to interest.

Initial yield of 7% is accretive. Initial yield is estimated to be c.7% (in line with its recent Japanese transactions which were done in the region of 7.0%-8.6%) and above its current implied yields of 6.5%. MLT is expected to fund the acquisition from debt sources. Post acquisition gearing will inch up slightly to 39.7%, which is close to the 40-45% target ratio. As such, we believe that further acquisitions might be funded partially by new equity, which we have assumed in our forecasts.

Living up to expectations – maintain BUY and S$1.07 TP. Japan continues to remain an attractive investment thesis in the longer term and will continue to play a strategic role in MLT’s strategy as it is an established logistics centre with customers having strong credit profiles. Post acquisition, MLT’s exposure to Japan will increase to 26.4% (from 23.8% previously). This acquisition will meet a third of our S$300m acquisition forecasts, which we believe it is attainable. Additionally, we have assumed an equity raising (40/60 debt – equity ratio) in our numbers. We like MLT for its growth ability, leveraging on its existing client and partners network. MLT now offers a FY11 – 12 DPU yield of 7.4 -7.7%, which is attractive. Maintain BUY.

MapletreeLog buys 7.3b yen property in Hiroshima

MAPLETREE Logistics Trust (MapletreeLog) is forking out 7.3 billion yen (S$114.2 million) for a property in Hiroshima, Japan.

The industrial real estate investment trust continues to see Japan as an important market, despite natural disasters which hit the country this month.

MapletreeLog is buying the freehold Hiroshima Centre, which consists of a two-storey warehouse for cold or frozen storage and a two-storey dry warehouse with an ancillary office. The buildings have a combined gross floor area of about 43,600 square metres.

The property – some 900 kilometres from the north-east coast of Japan where Sendai and Fukushima are – was not affected by the earthquake and tsunami. Nevertheless, MapletreeLog conducted a building audit to make sure that the building structure was intact.

Nippon Access Group, a food distributor in Japan, is renting the property. There are 16 years left on its lease, which allows for a rental review every five years.

Nippon Access is MapletreeLog’s existing client and is leasing space at another two of its properties in Japan. ‘We foresee many opportunities to work with Nippon Access in the future, both in Japan and elsewhere in Asia,’ said Richard Lai, CEO of Mapletree Logistics Trust Management.

According to MapletreeLog, the acquisition of Hiroshima Centre has an initial net property yield of about 7 per cent, and there is potential for organic growth by adding around 45,000 sq m of gross floor area to the property. ‘We will explore this when there is sufficient level of interest,’ Mr Lai said.

Assuming the purchase and other acquisition costs are fully funded by debt, MapletreeLog’s gearing level is expected to increase to around 39.7 per cent.

MapletreeLog had 14 properties in Japan before the acquisition. Out of these, one in Sendai was affected by the disasters. Nevertheless, the Reit still sees potential in the country.

‘We are relieved that Japan has already started taking concrete steps towards recovery. Taking a long-term view, we continue to regard Japan as a key market for MapletreeLog,’ Mr Lai said.

MapletreeLog units closed trading unchanged at 88.5 cents yesterday.

One property affected; impact not material

Maintain Outperform. MLT’s 14 Japanese assets which contribute 16% to its net property income are largely intact after the 8.9-magnitude earthquake in Japan on Friday. Only one property, Sendai Centre, located in Sendai City, is more severely damaged but its contribution to net property income is less than 1%. MLT’s 96 assets are spread over seven countries, which dilutes its concentration risks in Japan and we do not expect the quake to have a material impact on its operations. No changes to our DPU estimates or DDM-based target price of S$1.05 (discount rate 8.6%). We continue to expect acquisition catalysts and believe the 2.7% price pullback last Friday presents a buying opportunity. MLT trades at 1.06x P/BV and a forward yield of 7%.

The news

8.9-magnitude earthquake in north-eastern Japan. The 8.9-magnitude earthquake struck north-eastern Japan on Friday, triggering a tsunami, an explosion in the Fukushima Daiichi nuclear plant that may lead to nuclear radiation in the area, and fires and power outages in Japan’s north-eastern prefectures. The prefectures worst hit are Aomori, Iwate, Miyagi, Fukushima, Ibaraki and Chiba.

Sendai Centre accounts for 0.6% of NPI. We estimate that Sendai Centre (acquired in 2010 for S$22m) contributes S$1.5m of net property income or about 0.6% of our net property income estimation of S$248m for FY11. Preliminary reports suggest that the building is intact although the full extent of damage can only be known when access into the property is allowed. The manager estimates reinstatement costs of S$9m, although it does not expect the cost of repairs to come up to this amount.

Other buildings in Japan safe. The other 13 Japanese properties are intact with either no damage or minimal damages. The impact on rentals should be mitigated bylong leases on its Japanese assets which are also fully master-leased. Overall, we expect Japanese assets to contribute 20% (up from 16% in 2010) to MLT’s FY11 net property income. In terms of asset value, Japanese assets made up 28% of MLT’s portfolio value of S$3.4bn as at Dec 10.

Valuation and recommendation

Maintain Outperform and target price of S$1.05. MLT’s 96 assets spread over seven countries dilute its concentration risks in Japan and we do not expect the earthquake to have a material impact on its operations. Nonetheless, there could be additional capex going forward for damage repair. We keep our DPU estimates and DDM-based target price of S$1.05 (discount rate 8.6%) pending more developments and clarity from management. Meanwhile, we believe the price pullback last Friday presents a buying opportunity. We continue to expect acquisition catalysts and believe the 2.7% price pullback last Friday presents a buying opportunity. MLT trades at 1.06x P/BV and a forward yield of 7%.