Category: MLT
MapleTree – OCBC
Likely to turn to inorganic growth
Waiting for stabilization. We expect Mapletree Logistics Trust (MLT) to report 3Q results in three weeks’ time and are keen to get an update on occupancy levels (prev: 98.3%). We will also focus on the tone of guidance versus 2Q, where the manager cautioned that “the environment remains challenging and occupancy and rental rates may be under pressure”. Business conditions have improved since then and this may ease downward pressure on rents and capital values, in our view. Still, there is a big difference between stabilization and recovery.
Turning to inorganic growth. We believe tenant retention, as opposed to positive rent reversion, continues to be a key priority for the existing portfolio. As such, MLT may turn to acquisitions to support and grow DPU. MLT is geared at 37.8% debt-to-assets. At 2Q results, the manager said it would not raise equity solely to reduce gearing. But it did indicate interest in third-party acquisitions, provided these buys are coupled with an equity issue to at least maintain (or reduce) current gearing levels. MLT’s rerating (up 114% YTD) and relatively looser credit conditions are conducive to this stance. The sticking point is property yields, which would have to be fairly high for the transaction to be DPU accretive. Third-party buys are more likely to clear this hurdle than the S$300m development pipeline from MLT’s sponsor in our view.
Prefer top-tier industrial names. We find a large divergence in value among the industrial REIT space. Price to book range is wide: MacarthurCook Industrial REIT [NOT RATED] trades at the low of 0.36x 2Q CY09 NAV but A-REIT [NR] trades at 1.21x book. The sub-sector is highly geared, with an average leverage of 39.7%. A-REIT has raised equity twice, and Cambridge Industrial Trust [NR] has raised funds once. This space offers some of the highest yield opportunities but gearing levels and an uncertain outlook continue to concern us. Consequently, we prefer to focus on the top-tier industrial names for now.
Attractive total return. We find MLT’s valuations (0.84x book, 7.4% estimated FY09 yield) fairly attractive. We also like the quality and diversification of its portfolio. We have not made any changes to our earnings estimates but have lowered our discount and cap rate assumptions to less rigorous levels. We revise our fair value estimate for MLT to S$0.78 from S$0.52 previously. While upside of 5% to current price is limited, total return of 12% is attractive (in our view). Upgrade to BUY.
REITs – OCBC
Opportunities for yield arbitrage
Yield divergence. S-REITs have re-rated strongly YTD on the risk rally but the gains haven’t been equally distributed. We are seeing some interesting pockets of yield divergence. Using consensus estimates, Suntec REIT is trading at a 300 points yield premium to CapitaCommercial Trust (CCT) despite support from its retail portfolio and fairly similar gearing. Similarly, consensus DPU estimates for Suntec and K-REIT are identical over FY09-10, but Suntec still trades at a significant yield premium. Part of the premium, in our view, is driven by expectations of an equity issue. Meanwhile, CDL Hospitality Trusts is trading at a 260 basis points premium to Ascott Residence Trust (ART). Gearing and geography may play a part here.
Outlook driven? There is also some notable yield divergence between sectors. Pure foreign plays (excluding Saizen and First REIT) are trading at an average consensus yield of 8.8% versus the office REITs at an average of 10.1%. This is an interesting discrepancy that is overriding the typical country risk premium that is awarded to some of those names. Industrial and office REIT yields are at par on average, but average price to book is 0.7x for the industrials versus 0.5x for the office owners.
Arbitrage opportunity. Economic data is still really sideways, in our view – there is some recovery and bottoming out thanks to stimulus efforts but private sector and consumer activity is still a question mark. As such, we don’t expect much capital appreciation for the sector ex major news flow. We do expect opportunities for yield arbitrage as the divergence corrects, especially as clarity increases on the office outlook.
Rights issues, repackaged. Recent activity in the sector includes equity issues (A-REIT, round two); acquisitions (Suntec and K-REIT); and a combination of both (Fortune REIT). Things don’t change as much as branding does: managers will toss around buzz words including “position of strength” and “acquisition opportunities” but the end result will be the same: further equity issues. This is not always a bad thing, in our opinion, as either avenues of growth open up or gearing is lowered (still desirable). We expect more activity as: 1) managers exploit significant re-rating; 2)laggard REITs start de-leveraging; and 3) managers resort to inorganic options to propel the next leg of DPU growth, or even to sustain DPU. We identify Suntec, Mapletree Logistics Trust and Frasers Centrepoint Trust as likely candidates for an equity/acquisition two-for-one in the next six months. Maintain NEUTRAL; top picks are CCT and ART.
REITs – DBS
Time to be selective
• 2Q09 results in line or at higher end of estimates
• Outlook stabilizing, sector recapitalization largely over
• Focus shifting to acquisition opportunities
• Top picks include CDL HT, ART, FCT, Suntec, MLT
Results generally in line. Sreits continued to put on a good showing in 2Q09, with yoy revenue, NPI and
distribution income growth of 9.2%, 11.7% and 8.2% respectively. On a qoq basis, revenue remained flat while
NPI and distribution income remained in positive territory. The key driver to this set of better results was the ability of retail and office landlords to retain high occupancies despite falling rents as well as better cost management; while hospitality players were able to partially offset a weaker topline with more prudent expense control measures.
Outlook stabilizing. Outlook for retail landlords appear to be stabilizing amid a moderated GDP projection and improving, but still lower yoy, retail sales. FY09 income had been largely secured with only a small quantum of renewals left for the rest of 2009. For office landlords, rentals are expected to be renewed positively in 2009, although negative reversions are expected to start kicking in from 2010 on weak supply/demand fundamentals. Hospitality landlords expect a better 2H09 vs 1H09 with improved forward booking patterns.
Sector has been substantially recapitalized, focus moving to acquisition opportunities. Sreit sector gearing
has declined to 31% with the $3.7b of capital raisings issued YTD. At this point, we believe any further capital raising exercises would be opportunistic or to fund new acquisitions given the current much lower cost of capital. In addition, the credit environment is starting to ease with strong liquidity flows and declining corporate credit spreads. We believe that Sreits that are likely to be better placed to benefit from acquisition growth as driver, would be those with sponsorbacking as well as Sreits in the industrial segment.
Top picks. Sreit sector is currently yielding a weighted average 7.5% on our FY10 estimates and trading at 0.76x P/bk NAV. Within the sector our top picks would be those with near term catalysts such as CDL HT and ART, which are key beneficiaries of the IRs and is projected to experience a recovery in earnings on the back of a better tourism outlook. We continue to favour retail landlords such as FCT for its suburban retail exposure and strong asset injection pipeline as well as Suntec on valuation grounds. Amongst industrial players, we prefer MLT for its higher than average yield of 9.4% and attractive P/NAV multiples.
MapleTree – CIMB
Holding ground
• In line. Distribution income of S$28.7m (+27%) and DPU of 1.48cts (-23%) are in line with Street and our expectations (27% of full-year forecast). DPU contracted 22.6% yoy due to additional units from a rights issue in Aug 08, while qoq growth was marginal at 0.7%. 1H09 DPU of 2.95cts forms 53% of our full-year forecast. Revenue in 2Q09 slipped 2.4% qoq mostly due to a depreciation of the HK$ and ¥ against the S$. The impact of this on net property income (-1.2% qoq) was mitigated by reduced property expenses (-11% qoq) while the effect on distributable income was cushioned by the hedging of income streams from Hong Kong and Japan.
• Occupancy stable at 98.3%; renewals on track. Portfolio occupancy improved 0.3% pt to 98.3% in Jun 09. About 65% of the leases expiring in 2009 were successfully renewed in 2Q09. Average rental reversion rate was flat. Tenant arrears remained small at 1% of annualised gross revenue.
• Capital management. As at end-Jun 09, MLT had S$107m due for refinancing in 2009. Some S$40m has been earmarked from 1Q09 for partial refinancing of its medium-term note due in Oct 09. The remainder will be financed with a S$29m term debt and S$38m revolving credit facilities. In the longer term, management intends to reduce the concentration of debt due in 2012. Current asset leverage is 37.8% (excluding S$40m of borrowings ear-marked for refinancing). Weighted-average cost of debt fell to 2.7% from 3% in 1Q09. Management reiterates that it would not resort to an equity rights issue to lower asset leverage, and future acquisitions are likely to be funded by debt and equity, rather than completely debt.
• Maintain Neutral and target price of S$0.62. We maintain our estimates and DDM-derived target price of S$0.62 (discount rate 9.4%). Although the pressure to maintain occupancy and rents remains, we are encouraged by its relatively high tenant retention rate of 80% and success in securing refinancing at lower interest rates. We believe MLT will be able attain our forecast distribution for FY09.