Category: MLT
MLT – DBSV
Expanding Asian footprint
• More acquisitions, maiden foray into Vietnam
• Earnings accretive, increases income visibility
• Maintain Buy with TP of $0.93
Tapping its sponsor for assets. MLT announced that they have acquired 3 logistics properties located in Vietnam, Japan and Singapore for a total consideration of S$83.5m. These acquisitions (roughly c3% of total portfolio value), while relatively small in size, are significant in our view as (i) the assets in Vietnam and Japan are MLT’s first injection of incubated assets from its sponsor, Mapletree Investments; and (ii) it is MLT’s first foray into the fast growing Vietnam logistics market. The Singapore property was purchased from 3rd party vendor – Natural Cool Investments Pte Ltd.
7.9% yield, accretive to earnings. The properties are fully occupied and backed by long lease tenures of up to 10 years, providing MLT with income visibility and stability. Post acquisition weighted average lease to expiry has lengthened to 4.9yrs. Average NPI yield of 7.9% is higher than MLT’s current implied trading yield of 7.1%. The purchase will be funded by debt and will raise gearing to 40.2%, which is within its targeted long term gearing ratio of 40-45%. Accretion to DPU is estimated to be c0.157cts or 2.62% on an annualised basis.
More growth opportunities in the medium term. The acquisitions do not come as a surprise and we have already factored in S$150m worth of new additions into our forward estimates. Looking ahead, in addition to 3rd party assets, MLT’s sponsor is in the process of building cS$700m worth of logistics assets, of which S$300m is nearing completion or undergoing stabilizing and leasing activities. MLT has the right of first refusal to purchase these assets. Furthermore, the trust is also looking to develop a Built-to-suit (BTS) capability by taking on development projects, which in our view, will offer higher yields. We maintain our FY10-11F DPU estimates of 6.1 and 6.4 Scts respectively, translating to 7.4-7.8% yield. We retain our BUY Call with a TP S$0.93, offering 21% total return.
Industrial REITs – OCBC
On stronger footing
Stronger balance sheets. The industrial REIT sub-sector is in much a stronger position, in our view, compared to a year ago. REITs including A-REIT, Mapletree Logistics Trust, AIMS AMP Capital Industrial REIT [AAREIT, NOT RATED] and Cambridge Industrial Trust [NR] have all raised fresh equity within the past year or so. The sub-sector is on average geared at 33.5% debt-to-assets versus the broader S-REIT average of 30.6%. While the level of debt has decreased generally, there are still pockets of industrial REITs with higher leverage. Leverage levels range from 25% (Cache Logistics Trust, NR) to 42.6% (Cambridge).
Expecting some stability. The managers for the most part presented a cautiously optimistic outlook going forward – both in terms of a bottoming out of asset values and of rents. This is in line with the expected GDP growth of 7-9% in Singapore this year. Colliers expects the recovery in the exports and manufacturing sector to “support an expansion in demand from manufacturers”. This, along with the return of institutional funds, could drive “rents, land and capital values of singleuser factories and warehouses [up] to 10 percent in the next 12 months”. The demand-supply picture varies by asset type, but we do expect a stable-to-positive year for rents and asset values this year, barring significant shifts in the economic environment Big growth plans. Acquisitions are back on the table with transactions worth S$1.25b done in the last seven months; we could potentially see MLT, A-REIT and Cache grow their portfolios further. Balance sheet strength and ability to access capital competitively remains the key sticking point. The subsector has also indicated a new focus on development projects, which has been A-REIT’s domain until now. Asset enhancements and divestments appear to be popular strategies as well.
Valuation. In terms of forward yield, industrial REITs trade at a premium of 100 basis points to the broader sector. Interesting, industrial REITs are actually trading at a lower 5% discount-to-book versus 13% for S-REITs on average. There is significant divergence in valuations within the sub-sector: while A-REIT is trading at a 22% premium to book value, on the other extreme, AAREIT trades at a 32% discount to book. We think this is partially because of continued investor caution towards smaller industrial REITs. Nevertheless, if second-tier industrial REITs can present two to three quarters of sustained earnings performance and deliver on their strategic plans, we could see the valuation gap narrow. We have a NEUTRAL rating on the broader S-REIT sector.
SREITs – OCBC
1Q10 results review; downgrade sector to NEUTRAL
1Q CY2010 results review. Four out of the eight S-REITs under our coverage reported earnings in line with our estimates. CapitaCommercial Trust (CCT) and Frasers Centrepoint Trust (FCT) beat our DPU estimates by 7.8% and 6.7% respectively. CCT benefited from positive rent reversions and lower property tax that drove a 11% YoY increase in net property income. FCT, meanwhile, beat our estimates (and the manager’s own guidance) on the back of a strong performance from Northpoint post asset enhancement works. Conversely, A-REIT and LMIR Trust missed our earnings expectations for 1Q CY10; with A-REIT missing our DPU estimates because of one-off upfront fees for loans. As a gauge, in 4Q CY09 five REITs reported results in line, three above our expectations and none below.
Guidance was ‘cautiously optimistic’, and growthoriented. Several managers indicated an intention to optimize yield and grow the portfolio both organically (asset enhancement initiatives, including CapitaMall Trust (CMT) and Ascott Residence Trust (ART)) and inorganically (acquisitions, including Mapletree Logistics Trust (MLT)). With this focus on growth, we believe S-REIT’s balance sheet capacity and ability to raise capital will remain key valuation differentiators. It may also be the first time the relatively young S-REIT sector will see REITs refresh their portfolios through divestments and re-developments in a big way (Cambridge Industrial Trust [NOT RATED] has been leading the pack as it de-leverages its balance sheet). Another price differentiator, in our opinion, will be the manager’s skill in optimizing yield through asset works: CMT and FCT, for instance, have a proven track record in this area in our view.
Volatility in the near term. Year-to-date performance of the S-REIT index is slightly negative (-0.7%) at 613.58 points. The recent volatility in the market has led to ~100 basis point movements in yields – we think this volatility will continue as macro-economic concerns, this time in Europe, take a front seat again. In our view, investors may consequently ascribe a higher risk premium (that is, higher yields and lower price-to-book ratios) to the S-REIT sector in the near-term. Nonetheless, we see selective opportunities to pick up strong REITs at attractive valuations (on a longer time horizon), after careful scrutiny of return versus risk. In an uncertain environment, we prefer REITs with a strong earnings outlook and strong balance sheets. We tilt slightly defensive in our top picks and favor FCT, MLT and ART with estimated total returns of 19%, 19.8%, and 21.7% respectively. Downgrade broader sector to NEUTRAL on a more cautious view.
MLT – Daiwa
NPI and borrowing costs below expectations
What has changed?
• Mapletree Logistics Trust (MLT) announced its 1Q10 results on 22 April 2010. Net-property income (NPI) of S$45.77m was 4.0% below our forecast, while distribution per unit (DPU) of 1.50¢ was 3.5% below our forecast.
Impact
• NPI was the major negative variance. Overall occupancy (at 98%) and the arrears ratio (at 1% of annualised gross revenue) were stable. Rental reversions for 1Q10 (3% of the total portfolio and 22% of renewals for 2010) were flat. We believe part of the shortfall was due possibly to a timing issue, as MLT acquired two properties, CEVA (Changi South) in Singapore and Shonan Centre in Japan, in the latter half of the quarter.
• The biggest positive variance was borrowing costs, 14.8% below forecast. MLT’s weighted average annualised interest rate declined to 2.5% as at 31 March 2010, compared with 2.6% as at 31 December 2009. To date, the manager has refinanced S$60m of the S$204m debt due in FY10.
• We have revised up our DPU forecasts by 2.3% for FY10, 0.9% for FY11, and 0.9% for FY12 after adjusting down our NPI assumptions by about 0.3% and borrowing costs by about 11%. Our forecasts do not include any acquisition assumptions.
Valuation
• We have raised our six-month target price, based on parity to our RNG valuation (a finite-life Gordon Growth model), to S$0.87 (from S$0.84) after lowering our core-operating income and cost-of-debt assumptions. Our valuation assumes a blended, effective cap rate of 6.9% (consisting of a discount rate of 8.4% and an internal growth rate of 1.5%) and a blended cost of debt of 3.3%. MLT’s NAV as at 31 March 2010 was S$0.867.
Catalysts and action
• We maintain our 3 (Hold) rating for MLT as the units look fully valued to us, and we think accretive acquisitions might be hard to come by in 2010.
MLT – CIMB
Nearing acquisition catalysts
• Results in line; upgrade to Neutral from Underperform. 1Q10 DPU of 1.5cts met Street and our expectations, forming 27% of our estimate. Distributable profit grew 8% yoy on tight cost control and lower borrowing costs. We raise our acquisition assumptions in view of management’s historical strong pursuit of growth via acquisitions, as well as higher new net property income margin and lower interest expense assumptions. Our DPU estimates increase by 9-12% for FY10-12. Our DDM-based target price (discount rate 8.6%) rises accordingly to S$0.86 (from S$0.74). MLT offers forward dividend yields of 7%. We upgrade it to Neutral in view of an improving outlook for industrialists. Re-rating stock catalysts could include announcements of acquisitions and development work in the near term, we believe.
• Second quarter of improving net property income (NPI). We were impressed with MLT’s tight cost control of property-related expenses which drifted down 4% qoq and 21% yoy. As a result, NPI of S$45.8m represented the second sequential quarter of improvement (+2% qoq). Portfolio occupancy was stable at 98%. On a quarter comparison basis, both distributable profit and DPU had declined due to a one-off contribution from the extension of leases at 201 Keppel Road in 4Q09.
• Expect acquisitions and BTS in near term. Management is closely looking at the acquisition of assets developed by its sponsor, Mapletree Investments. These acquisitions could take place in China, Vietnam or Malaysia. MLT’s portfolio cap rates are 8-9% in these countries and we expect properties to be acquired at such levels. Separately, MLT is exploring build-to-suit (BTS) properties with end-users. We believe announcements for acquisitions and BTS projects could come by 1H10 as the recent compression in its dividend yields makes yield-accretive acquisitions likely in the near term. Nonetheless, we are cautious on the attractiveness of upcoming acquisitions, depending on: 1) country-specific risks; and 2) the need for equity which would dilute acquisition yields.
• Changes in assumptions. Given management’s historical strong ambitions in growth via acquisitions and improving industrial indicators, we have increased our acquisition assumption to S$357m in 2010 (from S$157m), 60:40 funded by debt:equity. Separately, we increase our NPI margin assumptions to 89% (from 87.5%) and lower our cost-of-debt assumption to 2.5% (from 3%).