Riding on Asia’s Acquisition Wave; Maintain Buy

Riding on Asia’s Acquisition Wave. MLT was focusing on inorganic growth for the most part of 2010. The latest acquisition was the Toki Logistics Centre for S$16.2m. Year-to-date, MLT has completed the acquisitions of 11 properties at NPI yields of 7%-9% in Asia after raising S$305m via equity in Sep 10. This was in stark contrast to 2009, where only one acquisition was completed. It now has 93 properties, comprising 51 properties in Singapore, eight in Hong Kong, six in China, 11 in Malaysia, 14 in Japan, two in South Korea and one in Vietnam. Going forward, MLT has stated that it will continue its pipeline of accretive third-party acquisition opportunities in markets such as Japan & Singapore, which offer attractive NPI yields.

Favorable Industrial Outlook. According to DTZ, there is a total of 398m sf of industrial space in Singapore as at 1Q10, with 26.9m sf of new supply expected over the next three years (majority pre-committed). The 3Q10 price and rental indices of industrial space also continued to improve by 8.3% and 4.8% QoQ, respectively. With improved rail connectivity to the suburban regions, we also expect further upside to the industrial buildings situated near the upcoming MRT lines. MLT has some 51% of its net property income (NPI) derived in Singapore. In line with our OVERWEIGHT rating for the Industrial REITs subsector, we think MLT will likewise benefit from positive rental reversions in FY11-FY12. Asia is also expected to lead the industrial recovery due to trade flows and domestic consumption in China (+Hong Kong) and Vietnam, which constitute 25% of MLT’s NPI.

Valuations. MLT is our top most prolific acquirer among its industrial peers YTD. Given the pick-up in industrial space demand and the strengthening of industrial rents, we think MLT looks set to capitalize on the recovery cycle in Asia. The full effect of its announced acquisitions should improve its top-line and DPU contributions by 2011. MLT is trading at a 4% premium-to-book compared to the broader Industrial-REITs which are trading at 8% premium-to-book. We take the view that this premium is understated, considering MLT’s track record in undertaking accretive acquisitions that boost distributable income. Sponsor, Mapletree Investments, and Itochu also plan to develop logistics built-to-suit projects of approx US$300-500m over the next 3-5 years, which will be offered to MLT on a right-of-first refusal basis, further providing MLT with a pipeline of potential assets for future acquisitions. Maintain BUY and we up our RNAV-derived fair value to S$1.00 (19.5% estimated total return).

Common themes of 3QCY10 results; OVERWEIGHT

Positive Outlook. At 3QCY10 results, we found a few common themes in the guidance given by the industrial REIT managers: positive outlook, strengthening rents, acquisitions and equity fund raising (EFR). The unifying motivation is to capitalise on the recovery cycle that will both strengthen the REITs and also grow distributable income.

Economic conditions remain favourable. Non-oil domestic exports (NODX) grew 23% YoY in Sep 10. Manufacturing output also increased 26.2% YoY. Going forward, the government remains committed to keep manufacturing as a key economic-driver in Singapore with new stimuli to raise the productivity and image of the different industries. These include a new branding campaign called the “We Can Movement” to attract talent to the logistics/SCM industry and the commitment to inject $16.1b over the next five years to support research, innovation and enterprise in the biomedicalsciences, electronics, info-communications, as well as other “white spaces”.

Industrial rents strengthening. The 3Q10 price and rental indices of industrial space continue to improve by 8.3% and 4.8% QoQ, respectively. Rental rates for business parks moderated slightly to S$3.65 psf pm while both light industrial and warehouse rental rates improved by 6.5% and 3.3% to S$1.65 psf pm and S$1.55 psf pm, respectively. With improved rail connectivity to the suburban regions, we also expect further upside to the industrial buildings situated near the upcoming MRT lines (Downtown, Thomson, Eastern Region).

Acquisitions are back on the table. Mapletree Logistics Trust (MLT) has acquired some 11 properties in Asia YTD on the back of a S$305m EFR launched in Sep 10. A-REIT has also completed the acquisition of 31 Joo Koon Circle and DBS Asia Hub for S$131m in Apr 10. Cambridge Industrial Trust is undergoing a S$50.4m EFR presently to fund the acquisition of 25 Tai-Seng Avenue, 511/513 Yishun Industrial Park A and two other potential sites for S$73.2m. In addition, the two newly-listed REITs this year, Cache Logistics Trust and Mapletree Industrial Trust may be silent for now, but we look forward to them contributing actively to the acquisition pot progressively.

Valuations. The industrial sector typically lags the office sector by a few quarters. With the upbeat momentum in the office space, Industrial REITs stand to capitalise on the spillovers to business parks, high-tech and light industrial buildings. In terms of forward yields, Industrial REITs also trade at a premium of 70 basis points to the broader sector. We are bullish on the industrial sector recovery and now have an OVERWEIGHT rating for the Industrial REITs subsector. Top of our pick is Mapletree Logistics Trust (MLT) with a fair value estimate of S$0.97.

MapletreeLog’s Q3 DPU rises 4.1%; income up 8.1%

ACQUISITIONS have boosted Mapletree Logistics Trust’s (MapletreeLog) results for the third quarter ended Sept 30.

The trust yesterday posted a net property income of $47.6 million – up 8.1 per cent from a year ago. Amount distributable rose 9.5 per cent to $31.5 million.

As a result, the available distribution per unit (DPU) increased 4.1 per cent to 1.54 cents from 1.48 cents.

MapletreeLog bought 10 properties in Singapore, Japan, Korea and Vietnam in the past year, growing the book value of its portfolio by 16 per cent to $3.4 billion as at Sept 30 from $2.9 billion last year.

More acquisitions could come.

‘Singapore remains our key priority market; we believe it will continue to give us good investment opportunities with quality customers,’ said Richard Lai, CEO of MapletreeLog’s manager. ‘We are also continuing our expansion in markets such as Japan, South Korea, Malaysia and China.’

MapletreeLog might also go into new markets.

‘We are currently exploring several possibilities across Asia,’ Mr Lai added.

The occupancy rate for MapletreeLog’s portfolio as at Sept 30 was 98 per cent, up a notch from 97 per cent a quarter ago.

The trust’s aggregate leverage ratio as at Sept 30 was 39.9 per cent, rising from 38.8 per cent as at June 30.

MapletreeLog launched an equity fundraising exercise on Sept 21 to support its expansion, raising gross proceeds of $305 million.

Following this, instead of declaring a distribution for the period July 1 to Sept 30, it will declare a distribution for the period July 1 to Oct 14 – which was the day immediately before the date on which the new units were issued and listed. It will announce the cumulative DPU for this period later.

MapletreeLog gained two cents yesterday to close at 90.5 cents.

3Q10 in line; still a compelling play

3Q10 in line. Mapletree Logistics Trust (MLT) reported 3Q10 gross revenue of S$54.5m, up 7.4% YoY and 4.9% QoQ. Net property income of S$47.6m rose 8.1% YoY and 4.0% QoQ. Distributable income of S$31.5m was up 9.5% YoY and 2.2% QoQ. Results were boosted by positive contributions from recent acquisitions and lower vacancy rates. Distributable income was just 2% shy of our S$32.3m estimate.

Occupancy improves. As at 30 Sep, MLT recorded portfolio occupancy of 98%, up from 97% three months ago. This was due to lower vacancies in Hong Kong (+500 basis points) and Malaysia (+300 bps). Recall that in 2Q10, the manager had chosen not to renew leases of certain single-tenanted buildings because of unsatisfactory rent negotiations. Instead it increased its weighting to multi-tenanted buildings with three assets converted from single-user assets to multi-tenanted buildings in 2Q10 (two in Malaysia and one in Singapore).

Still in acquisition mode. MLT recently raised S$305m through a non-renounceable preferential offering to existing unitholders as well as a private placement. Excluding the S$145m of assets acquired on the back of the Nov 09 private placement, MLT has announced approximately S$447m worth of acquisitions this year. The gross proceeds from the equity issue are intended to partially finance these purchases, and are also expected to take MLT's leverage down from about 46% (assuming all acquisitions were debt-funded) to approximately 38%. This is lower than MLT's 45% mediumterm leverage strategy and will allow it to continue to acquire third-party and sponsor-owned assets.

DPU mechanics. Because of the recent private placement, MLT has already declared a "cumulative distribution" estimated at ~1.73 S cents for the period from 01 Jul to 14 Oct (the day immediately prior to the issue of the private placement units). This cumulative distribution will be paid on or around 29 Nov. The next DPU payout will be for the period from 15 Oct to 31 Dec (the "adjusted 4Q10 distribution").

Still compelling. 4Q10 income is likely to be boosted (in our opinion) by contributions from recent acquisitions, offset by an increased equity base post-equity fund raising. MLT has a proven track record in executing a virtuous cycle of accretive acquisitions and competitive fund-raising; we believe more accretive acquisitions are likely in the coming months. After adjusting our valuation inputs to price in a higher possibility of positive rental reversions over FY11 (as per more optimistic guidance from manager), our fair value estimate increases from S$0.90 to S$0.97. Maintain BUY (14% estimated total return).

Equity issue overhang removed; upgrade to BUY

Announces more acquisitions. Mapletree Logistics Trust (MLT) said it intends to acquire AW Centre, a warehouse asset in Singapore, for S$18.3m through a sale and leaseback transaction. MLT also noted that it was in advanced negotiations on four potential acquisitions, one in Japan and three in Singapore, for approximately S$105m in total. The manager said it expected to complete the five transactions in 4Q10. In Aug, MLT had also announced the acquisition of Multi- Q Centre, its second South Korean asset for approximately S$32m.

Launches EFR exercise. Concurrently, MLT has launched an equity-fund raising (EFR) exercise through a non renounceable preferential offering to existing unitholders as well as a private placement. The preferential offering of ~164.3m new units will be made on the basis of two new units for every 25 existing units, at an issue price of S$0.815 (~7.4% discount to pre-announcement price of S$0.88). Meanwhile, the private placement of 207.3m new units was issued at a price of S$0.825 (6.3% discount). Completed yesterday morning, the placement was over 2x subscribed. We had previously noted that an EFR could be triggered by MLT’s aggressive acquisition spree, which had already brought it close to its 45% medium-term leverage target. Both the quantum and timing of the EFR was in line with our expectations.

Proceeds to fund acquisitions. Excluding the S$145m of assets acquired on the back of the Nov 09 private placement, MLT has announced approximately S$447m worth of acquisitions this year (including the four potential acquisitions). Collectively, the EFR exercise will raise gross proceeds of approximately S$305m, which will be used to partially finance these acquisitions. The EFR will take MLT’s leverage down from about 46% (assuming all acquisitions were debt-funded) to approximately 38%. This is lower than MLT’s 45% medium-term leverage strategy and will allow it to continue to acquire third-party and sponsor-owned assets.

Upgrading on valuations / EFR news. MLT fell 3.4% yesterday to S$0.85 on the EFR announcement; we believe the negative reaction is unjustified as the EFR should have come as no surprise to the market and its terms are fairly competitive. We continue to advocate a buy-on-EFR-news strategy for REITs which have proven track record in executing a virtuous cycle of accretive acquisitions and competitive fundraising; MLT certainly falls in this category. After adjusting for the acquisitions and EFR, our fair value estimate edges up from S$0.89 to S$0.90. Upgrade to BUY (13.2% estimated total return).