MapletreeLog Q2 DPU up 1.4%

Amount distributable to unitholders was $30.9 million, up 8%

MAPLETREE Logistics Trust (MapletreeLog) yesterday posted improved results for the second quarter on the back of lower property and other expenses as well as borrowing costs.

Amount distributable to unitholders in Q2 was $30.9 million, up 8 per cent from a year ago. Distribution per unit (DPU) rose 1.4 per cent to 1.5 cents. This was despite gross revenue staying relatively flat at $52 million.

The top line was affected by a repositioning exercise at some of MapletreeLog’s properties. The trust converted three from single-user to multi-tenanted buildings for better rental revenues, but that caused the portfolio occupancy rate to dip slightly to 97 per cent as at June 30. The trust expects occupancies to ‘return to normal’ in the coming quarters.

Also, recent acquisitions have yet to boost results. MapletreeLog bought five properties since December last year but of these, three were completed only in Q2. The trust expects the full benefit from these assets to make an impact from Q3.

Lower costs in Q2 helped support the trust’s earnings. Property expenses dipped 2 per cent from a year ago to $6.2 million, and borrowing costs fell 13 per cent to $7.2 million. Net foreign exchange losses also narrowed 97 per cent to $162,000.

MapletreeLog is upbeat about its prospects. ‘In all the markets that we operate in, we have seen increased levels of activities and enquiries,’ said the trust manager’s CEO Richard Lai.

‘For the renewals that took place during the quarter, we have begun to witness some positive rental reversions especially in Singapore and we believe, as the existing stock of warehouses are taken up, that rental reversions should be stronger in the quarters to come.’

MapletreeLog said it will continue to build its pipeline of acquisitions. In Q2, it financed its purchases fully through debt. This caused its leverage ratio to increase slightly to 38.8 per cent as at June 30, up 0.2 percentage points from three months ago.

For the first half, MapletreeLog’s distributable income was $61.7 million, up 8 per cent year-on-year. DPU was 3 cents, rising 1.7 per cent. The trust will pay out 1.5 cents to unitholders for the period April 1 to June 30 on Aug 27.

MapletreeLog units closed unchanged on Friday at 88 cents.

A more challenging environment for acquisitions

3 (Hold) rating maintained

• We maintain our 3 (Hold) rating. MLT’s acquisition-growth strategy resumed in late-2009 when it picked up three assets, financed partly with a S$79m placement. After the acquisition announcement of another three assets for S$83.5m on 31 May 2010, which would take its leverage ratio above 40%, according to MLT’s estimates, we believe MLT’s equity-fundraising risk has risen.

• Moreover, unlike the heady capital-market conditions from mid-2005 to the end of 2007, MLT’s DPU yield is not low, and combined with a more cautious debt market, the DPU-accretion from recent acquisitions has not been compelling, in our view. We note that this situation is not unique to MLT and appears commonplace among the S-REITs following the financial crisis.

RNG valuation-derived target price of S$0.87

• Our six-month target price, based on parity with our RNG valuation (a finite-life Gordon Growth model) is S$0.87, on a par with its NAV as at 31 March 2010. Our valuation assumes a weighted (blended) cap rate of 6.9% for its investment-property portfolio and a blended cost of debt of 3.3%.

Major risk factor: another market disruption

• MLT’s acquisition-growth model depends on well-functioning capital markets and could stall again with a stock-market correction or other dislocation. MLT’s underlying organic growth of low single-digit percentages year-on-year (for DPU, based on our forecasts) appears pedestrian, in our view.

MapletreeLog completes purchase of 2 properties

MAPLETREE Logistics Trust (MLT) has completed the acquisition of two properties – one in Vietnam for US$6.4 million and the other in Japan for 1.49 billion yen (S$22.8 million).

The purchase price and other acquisition costs were fully funded by debt, given the relatively small size of the acquisitions, MLT said.

The Vietnam property, called Mapletree Logistics Centre, is the trust’s first property in Vietnam.

MLT bought the warehouse, in the Vietnam Singapore Industrial Park in Binh Doung Province, from its sponsor Mapletree Investments.

Vietnam is a ‘market of immense opportunities’, MLT said when it announced the purchase last month.

‘The (trust’s) manager sees Vietnam as an important key emerging market in Asia, with its competitive cost structure and burgeoning middle-class population, which presents attractive growth prospects,’ MLT said in a May 31 statement.

‘With growing demand for logistics space in Vietnam, the manager believes Vietnam will provide opportunities to our valued partners and tenants.’ it added.

The second property, a warehouse in Japan called Sendai Centre, was also bought from Mapletree Investments. It is in Sendai City in Japan’s Miyagi Prefecture.

The net property income yield of Sendai Centre is 6.8 per cent, which is higher than the implied property yield of MLT’s existing Japan portfolio of 5 per cent, MLT said on May 31.

MLT’s counter closed unchanged at 83 cents yesterday.

In acquisition mode

Three properties for S$83.5m

Maintain Neutral. MLT will be acquiring three assets in Singapore, Japan and Vietnam for a total of S$83.5m. Their blended net property yield of 7.9% is above MLT’s existing portfolio yield of 6.2%. DPU accretion is estimated at 0.12ct, or 2% of our FY10 DPU forecast of 6.14cts. We maintain our estimates as we had already assumed S$357m of acquisitions for this year. Our target price of S$0.86 (discount rate 8.6%) based on DDM valuation is intact. Maintain Neutral as we remain cautious on upcoming acquisitions depending on country-specific risks and the possible need for equity which could dilute acquisition yields.

Assets from Vietnam, Japan and Singapore. The three assets are Mapletree Logistics Centre in the Vietnam Singapore Industrial Park, Binh Duong Province, Vietnam; Sendai Centre in Miyagi Prefecture, Japan; and Natural Cool Lifestyle Hub, 29 Tai Seng Avenue, Singapore. Mapletree Logistics Centre and Sendai Centre are to be acquired from MLT’s sponsor. All the assets are fully tenanted with long leases with the exception of Mapletree Logistics Centre in Vietnam whose leases will expire in 1-3 years’ time.

First foray into Vietnam. Mapletree Logistics Centre will be MLT’s first acquisition in Vietnam. Vietnam is an emerging market in Asia which offers a competitive cost structure and a growing middle-class population. Real GDP growth averaged 7.3% from 2005 to 2009, while forecasts for 2010-11 are 6.5%. Vietnam is also attractive to the logistics, manufacturing, retail, information technology and basic materials industries, among others. The Vietnamese government intends to improve infrastructure by investing as much as 10% of GDP on the transport, energy and telecommunication sectors. This is likely to boost demand for logistics services, and warehouse space. We believe the decision to enter this market is also related to the sponsor’s presence there. The sponsor is developing two more projects in Vietnam. The company hopes to acquire these over the next few years.

Comments

Accretive acquisitions. The three acquisitions are rather attractive in terms of yields. The Vietnam acquisition offers the highest net property income (NPI) yield of 10.3%, which is attractive against MLT’s current portfolio NPI yield of 6.2%. However, there could be some near-term risks in renewals with leases expiring over the next 1-3 years. The Japanese property has a high NPI yield of 6.8% vs. MLT’s Japanese portfolio yield of 5%, and an existing 10-year lease that will expire in 2019. The Singapore asset also has an attractive yield of 8.05% vs. the Singapore portfolio yield of 7.1% with a 10-year leaseback arrangement with the vendor, Natural Cool Holdings.

Full debt funding for now; gearing to reach 40%. Due to the small quantum of the acquisitions, MLT will be funding its purchases fully with debt for now. It has sufficient credit lines although it is not clear what the cost of debt will be. The manager estimates that asset leverage will reach 40.2% (from 38.6%) after the acquisition.

Impact on DPU positive though not material. We estimate an incremental DPU of 0.12ct, assuming the properties are held for a full year, and cost of debt of 2.5% (the current portfolio’s cost of debt). This is about 2% of our FY10 DPU forecast of 6.14cts. Although the acquisitions are accretive, the impact on DPU will not be material.

Valuation and recommendation

Maintain Neutral. We maintain our estimates as we had already assumed S$357m of acquisitions for FY10. Blended yields of 7.9% meet our net-yield expectations. We maintain our Neutral rating as risks in a developing market like Vietnam are high particularly with leases expiring in the short term, and MLT could possibly require equity at a later stage, which could dilute its acquisition yields.

Another round of acquisitions

Another round of acquisitions. Mapletree Logistics Trust (MLT) intends to acquire three properties in Vietnam, Japan and Singapore for a total consideration of S$83.5m. This is MLT’s first Vietnam purchase, where it sees the opportunity for “strong growth as [Vietnam] increasingly becomes a major manufacturing hub and consumption market”. The purchases come on the heels of the S$145m in assets acquired over 4Q09-1Q10 utilizing funds from the November private placement. MLT’s portfolio now consists of 87 properties in seven countries.

Sponsor pipeline in play. Natural Cool Lifestyle Hub, the distribution centre in Singapore, is being acquired by way of a put and call option agreement with a wholly-owned subsidiary of SGX-listed Natural Cool Holdings Ltd [NOT RATED]. The two warehouses in Vietnam (Mapletree Logistics Centre) and Japan (Sendai Centre) are being acquired by way of a conditional sale and purchase agreement with MLT’s sponsor Mapletree Investments Pte Ltd. MLT has thus begun to dip into the S$300m logistics development projects in the sponsor pipeline that are completed or nearing completion; other assets in this pool are located in Vietnam, China and Malaysia.

Fully debt funded for now. The three properties are being acquired at net property income yields of 6.8% (Japan), 8.05% (Singapore), and 10.3% (Vietnam) or a weighted NPI yield of 7.9% (existing portfolio: 6.2%). The manager intends to finance all three acquisitions fully by debt in the interim, which would bring the REIT’s leverage up to 40.2% debt-to-assets compared to 38.6% as of 31 Mar; this is within MLT’s medium-term target of 45%. MLT estimates that, on a pro forma annualized basis, the purchases add 0.157 S cent to DPU (2.62%). The accretion drops to 0.039 S cent or (0.64%) by the manager’s estimate if the assets were 40% debt funded instead.

Valuation. The purchases are expected to be completed by Sep; we have updated our earnings estimates accordingly. The acquisitions were as per prior guidance and are likely, in our view, to be the first of several transactions over the next two years. Those acquisitions are likely to be financed using a combination of debt and equity. We continue to price in a further S$200m equity issue in our valuation of the REIT, but reflect the lower unit price in our issue price assumption. We also increase our discount rate assumption by 100 bps to incorporate increased macro-economic and regional risks. This reduces our fair value estimate from S$0.93 previously to S$0.84, or an estimated total return of 11.6%. Maintain BUY.