Category: MLT
MapleTree – OCBC
Virtuous decisions
Protected… In our opinion, Mapletree Logistics Trust’s manager has commendably protected and created value for existing investors through the crisis. Despite refinancing needs and relatively higher leverage, MLT did not raise funds at steep discounts to de-lever the REIT in FY09. Instead in Nov, MLT raised S$79.4m through a private placement at an issue price that was at a 6.1% discount to the last closing price. The proceeds and the consequent increased debt headroom were used to acquire three industrial properties in Singapore and Japan from third parties.
…and created value. NPI (Net Property Income) yields on the two new Singapore properties were above 9%, higher than the current NPI yield of the current Singapore portfolio of roughly 6.5% and the distribution yield of 8.1% on annualized 9M09 DPU (at the time of acquisition). Additionally, the manager guided for a NPI yield of over 7% on the Japan property, significantly higher than the current NPI yield on MLT’s Japan book of about 4.5%. Note that gearing is expected to stay relatively unchanged at roughly 38.5% after all transactions are completed.
Expect negative revaluations. MLT, which was geared at 38.1% as at Sep 2009, is due for asset revaluations in 4Q09. We have a negative view on the industrial sector , and expect the tough industrial market to impact valuations. This view is supported by the implied yields achieved on the recent acquisitions and by the 11.1% asset value decline booked by MIREIT [NOT RATED] over the six months from Mar to Sep 2009. The recent acquisitions will help support net asset value somewhat, in our view.
Manager commitment is attractive. We have used pre-crisis valuations as a sanity check on current pricing. MLT’s FY10F yield of 7.8% outperforms 2006 levels but is fairly similar to the consensus 7.58% averaged in 2007. The current price-to-book value of 0.83x compares favorably to the 1.02x and 1.19x book averaged in 2006 and 2007 respectively. Note that with a 10% decline in asset values, the current price is valued at roughly 2006 levels. Valuations are attractive relative to peer Ascendas REIT [HOLD, FV: S$1.76], which trades at 1.2x book and 6.7% FY10F yield. With MLT prioritizing tenant retention over positive rent reversion, the outlook for organic DPU growth is limited. But if the manager can continue on a virtuous cycle of accretive acquisitions, a persuasive investment case emerges. Maintain BUY with S$0.78 fair value (14.6% total return). Key risk to our thesis is heightened regional economic risk, which could dampen investor sentiment towards diversified REITs.
REITs – OCBC
The virtuous and the not-so-virtuous
Policy and leverage appetite shapes 2010. We believe the Singaporelisted REIT sector’s 2010 performance will be influenced by opposing systemic forces. A favorable policy climate is likely to sustain a high liquidity environment. While some S-REITs may book negative revaluations in 4Q09, the ‘Bernanke Put’ could potentially create a floor for asset values in 2010. On the flipside, the rules for leverage have changed and increased conservatism is the new normal. Over-leveraged players (by today’s standards) may need to reduce gearing through equity fund-raising or asset sales. This de-leveraging can potentially occur not only on the REIT level, but also on the sponsor, manager, and institutional investor level.
The virtuous and the not-so-virtuous. 2010 will not be an ‘easy’ market, in our view, as we expect greater variance in performance among the individual REITs. We believe the sector can be broadly divided into two camps differentiated by leverage, sponsor strength, and sub-sector specific differences in forward earnings performance. Investment opportunities are available in both camps but of different varieties: the stronger REITs may enjoy yield compression and price-to-book normalization, and can potentially tap into a virtuous cycle of accretive acquisitions. On the other hand, the weaker REITs could be trapped in a vicious cycle of declining asset value, refinancing difficulties, and a consequent need to de-leverage. For those REITs with outstanding challenges, we advise interested investors to wait until after a resolution is proposed and the extent of any dilution is clear.
Limited upside, risks to the downside. We use 2006 valuations as a sanity check on the current recovery. The sector trades on average at 0.78x book, still below the 0.89x average in 2006. The potential 13.4% increase from current levels is offset, however, by book value risk from 4Q09 revaluations. A 6.9% potential upside from a distribution yield perspective is also offset by a mixed earnings outlook. With an unexciting risk-reward ratio for 2010, we maintain our NEUTRAL rating on S-REITs. Within our coverage universe, we have BUY ratings on Mapletree Logistics Trust [MLT, FV: S$0.78], Ascott Residence Trust [ART, FV: S$1.25], and Suntec REIT [FV: S$1.40]. Our top picks for the sector are ART and MLT, for ART’s positive earning outlook and MLT’s earnings stability, and for the possibility of yield-accretive acquisitions at both REITs. Key risks to our thesis include an increase in interest rates (which we believe would impact the blue chips the most), a double-dip recession and the threat of a new asset bubble.
MapleTree – DB
Announces S$146m of acquisitions and equity issue
Announces accretive acquisitions in Singapore/Japan and placement
MLT’s first acquisitions in more than a year are forecast to raise FY10-11 DPU by 1-1.5%, and marks a return of accretive acquisitions. We continue to like MLT’s stable and well-diversified portfolio, anchored by long leases and quality tenants. Capital structure remains relatively stable with gearing unchanged post-placement. We have revised up our DPUs and TP to reflect the accretion from the acquisitions; Buy maintained.
Placement to raise up to S$82m; proceeds to fund Singapore acquisitions
MLT has launched a private placement for 115m new units (5.9% of existing units) between S$0.69-0.71 (6.6% to 3.9% disc to VWAP) per unit to raise gross proceeds of up to S$82m. Proceeds will be used to fully finance the acquisitions of 2 warehouses in Singapore (S$78m). The resulting debt headroom will be used to fund the acquisition of a third asset in Japan (S$68m). NPI yields for the S’pore and Japan assets are above 9% and 7% respectively (vs current NPI yields of 6.5% and 4.5% respectively), contributing to 1.5% pro-forma DPU accretion.
Revising up FY10-11E DPU by 1-1.5%
We revise down FY09E DPU marginally by 0.7% to 5.83cts to reflect dilution from the new units (expected to be issued on 18 Nov) and have increased FY09-10E DPUs by 1-1.5%. The Singapore acquisitions are expected to be completed by end Dec 09 while the acquisition of the Japan property should be completed by 1Q10. MLT will declare an advanced distribution for existing units from 1 Oct-17 Nov of around 0.74-0.76cts.
Maintain Buy with revised TP of S$0.83 (from S$0.82)
We maintain our Buy rating with valuations attractive at 0.84x P/B and 7.9% FY10E yield. MLT is well-positioned with its well-diversified portfolio and high proportion of long leases. Recovering credit and capital mkts could continue to restore its acquisition-led business model and regional growth strategy; parent Mapletree continues to hold the pipeline of devt assets in Vietnam, China and Malaysia in which MLT has a ROFR. We value MLT using a DDM (see p.5). Risks: reversal of recovery trends for the economy impacting leasing demand, credit risk from tenants on long sale & leasebacks, higher than expected rise in borrowing costs
MapleTree – Daiwa
An enticing deal (assuming smooth execution)
What has changed?
• Mapletree Logistics Trust (MLT) announced on 6 November the launch of a private placement of 115m units to raise S$79-82m to partly finance three acquisitions worth S$145m.
Impact
• The acquisitions identified are two Singapore warehouse facilities for S$43m (for the 7 Penjuru Close property) and S$34m (for a multi-storey warehouse in eastern Singapore) with net-property income (NPI) yields of above 9%, and a single-user warehouse facility in the greater Tokyo region of Japan for S$68m with an NPI yield of over 7% (compared with MLT’s current Japanese asset portfolio NPI yield of 4.5%). The manager expects completion by the end of 2009 for the two Singapore properties and by 1Q10 for the Japan property.
• We have assumed that the placement will be completed in mid-November at S$0.69 per unit (the low end of the S$0.69-S$0.71 range) and MLT will raise net proceeds of S$78m. We have lowered our distribution-per-unit (DPU) forecast by 0.7% for FY09 (due to placement dilution and no NPI benefit from the acquisitions until the start of FY10), and have raised our DPU forecasts by 1.5% for FY10 and 0.6% for FY11.
• The sponsor, Mapletree Investments, will not participate in the placement. We expect its stake to decline from 46.9% to 44.3%, which would improve slightly MLT’s free float and trading liquidity.
Valuation
• We have raised our six-month target price, based on our RNG valuation method (a finite-life Gordon Growth Model), to S$0.81 (from S$0.80) after rolling over our core-operating distribution forecast to FY10 (from FY09) to capture the estimated contributions from the new acquisitions (as well as the impact of the financing assumptions). MLT trades at a 12-month forward yield of 8.2%, based on our revised DPU forecasts.
Catalysts and action
• We maintain our 3 (Hold) rating for MLT. We regard any acquisition-linked equity fundraising positively if it is DPU accretive, and we estimate a modest accretion for this deal from FY10.
• However, we are wary of execution risk, because if there is any hitch in the placement or if any one of the acquisitions fails to be completed in a timely manner, the MLT unit price could be hit badly, in our opinion.
MapleTree – JP Morgan
Incorporating proposed acquisitions and EFR
• Acquisitions and EFR announced. MLT today proposed a private placement of 115million new units to raise S$79 – 82million equity capital, at 8.3 – 8.6% FY09E dividend yield. The net proceeds will be used to finance 3 potential acquisitions with a total value of S$145million, and a weighted average entry yield of 8.4% according to management. Post proposed acquisitions and EFR, gearing for the trust will remain at 38%, and we estimate very modest accretion towards the trust DPU.
• A step forward, but smaller than expected. MLT management has moved into the ‘new strategy’ this year in which they will try to bundle acquisitions together with permanent/stable funding structure being put in place. A successful close of both proposed EFR and acquisitions would signal a step forward for management’s execution capability in our view, but the size of the EFR is smaller than our expectation.
• Fine tuning our estimates. We have fine tuned our estimates to reflect a better than expected earnings announced earlier during results and to incorporate the proposed acquisitions and EFR, assuming done at the bottom of the range. Our DPU estimates for FY09 – FY11 have, as a result, been raised by 3 – 6% and our 1-year forward NPV raised to S$0.67/unit, from S$0.65/unit based on discount rate of 9.4% and LT growth assumption of 0.5%.
• We maintain our Neutral rating on MLT, with Dec-10 DDM based price target raised to S$0.67/unit due to earnings revision above (S$0.65/unit previously). Key risks to our rating and price target include a better than expected rental reversion cycles and management executions on the upside, or a re-tightening of the credit market and management’s inability to close both acquisitions and EFR successfully on the downside.