First acquisition of the year

Amid a tight acquisition market, MLTrecently announced its proposed acquisition of an industrial warehouse in Iskandar Malaysia –itsfourth property in this areaupon completion. Although we are positiveon the deal, the impact onearningsis expected to be limited. We maintain our Hold ratingandDDM-based (discount rate: 8.1%) target price.

What Happened

MLT recently announced itsproposed acquisition of an industrial warehouse in Iskandar Malaysia from Mapletree Industrial Fund for RM88.5m (S$34.3m). This property comprises seven blocks of single-and double-storey industrial warehouses and one office block with a total GFA of 63,750 sqm. At the moment, theproperty is leased to a subsidiary of LCTH Corporation Bhd on a 12-year triple net lease, expiring in May 2020. At RM88.5m, this acquisition is expected to generate an initialNPI yield of 8.4% and shall be MLT’s fourth asset in Iskandar. Management highlighted that this acquisition will be funded by debt and is expected to be completedby 3QFY14/15.

What We Think

In view of thetight acquisition marketin Singapore, we view this dealpositively as MLT continues to receive support from its sponsor. The acquisition price is lower than the valued price of RM91m-95.4m, while the initial yield of 8.4% is higher than the implied property yield of 7.1% for MLT’s existing Malaysianportfolio. Based onour estimates, debt-funding for this acquisitionis expected to bring about growth in dividend of 0.085Sct/share (+1.2% from FY13 DPU) on a pro-forma basis. Upon completion, MLT’s leverage is expected to rise to a manageable 34.9%.

What You Should Do

This acquisitionforms part of our estimated debt-funded acquisition target of S$150m for FY14.Given the size of thedeal, we expect limitedimpact onFY14/15 earnings. We continue to recommend aHold as we await for more meaningful catalysts.

Acquires Iskandar warehouse

• Initial NPI yield of 8.4%
  
• Acquisition to be DPU-accretive
  
• Fully funded by debt
  

Acquisition of warehouse in Iskandar Malaysia

Mapletree Logistics Trust (MLT) proposed to acquire an industrial warehouse in Iskandar Malaysia last Friday. The property was put up on sale via a closed tender exercise by Mapletree Industrial Fund, a closed-end fund managed by MLT’s sponsor. Hence, the acquisition is considered an interested party transaction. We note that the purchase price of RM$88.5m (~S$34.3m) is below the valuations of RM$91.0m-RM$95.4m by the two independent valuers. Management guided that the property is likely to generate an initial NPI yield of ~8.4%, higher than the implied yield of 7.1% for MLT’s existing Malaysia portfolio. We estimate the income from the asset will add 0.1 S cents to MLT’s DPU on an annualised basis, thus making the deal DPU-accretive.

Details on warehouse

The warehouse, which is located within Johor Technology Park in Zone E of Iskandar Malaysia, will mark MLT’s fourth asset in this special economic region. The property comprises seven blocks of single and double-storey industrial warehouses and one office block, and has a GFA of ~63,750 sqm. In addition, the asset is designed with good building specifications and is easily accessible via the North-South Highway and Senai Highway. At present, the property is leased to a subsidiary of LCTH Corporation Bhd on a 12-year triple net lease expiring in 2020, which is in turn sub-leased to a subsidiary of Nasdaq-listed Flextronics. Due to the long lease in place, the weighted average lease to expiry post acquisition is expected to improve to 5.0 years from 4.9 years, thus enhancing MLT’s earnings visibility

Maintain HOLD

Management intends to fund the acquisition wholly by debt, which should see its aggregate leverage increase marginally by 0.5ppt to 34.9% upon completion. However, we do not expect any near-term impact to its DPU and gearing given that the transaction is projected to complete by 3QFY15 (Dec 2014). Nevertheless, as we switch our valuation method from RNAV to DDM due to uncertainty in cap rate movement, our fair value on MLT drops from S$1.11 to S$1.06. Maintain HOLD.

Developments to take front seat

• Weak JPY impacting performance; DPU of 1.82 Scts in line
  
• Tapering acquisition assumptions; more development projects unveiled to extract value
  
• Maintain BUY with S$1.16 TP based on DCF; attractive yields of 6.5%-6.7%
  

Highlights

Weak JPY affecting performance. The depreciation of the JPY against the SGD resulted in Mapletree Logistics Trust (MLT) reporting a 0.6% and 1.3% decline in gross revenue and net property income to S$77.1m and S$66.6m respectively. Excluding the forex impact, topline would have increased by 3.6% instead. The stronger performance was largely attributable to contribution from the acquisition of Big Box in South Korea, supported by positive rental reversions of c.24%, coming mainly from its properties in Singapore/Hong Kong. Portfolio occupancy levels also improved sequentially to 98.7% (vs 98.2%). Distributable income came in 7.5% higher at S$44.5m (DPU of 1.82 Scts, 0.02 Scts from divestment gains), supported by lower interest rates of 1.9% achieved upon refinancing activities , while its JPY exposures are substantially hedged out for this financial year.

Our Views

More development projects to extract value. MLT continues to execute strongly through its development arm – the completion of its new 1m sqft ramp-up warehouse at Benoi Sector is on track to complete by 3QFY14 and will start contributing soon. In addition, the Manager has unveiled a new development project at 5B Toh Guan Road East, involving maximizing of the site’s plot ratio to 2.5x (from 0.93x), thereby creating an enlarged c600 sqft warehouse (the Manager expects to spend cS$100m on this development which we have factored in). In addition, the manager alludes to more of such value-enhancing redevelopment opportunities that can be executed upon in the medium term.

Tapering acquisition expectations. Acquisitions (3rd party and sponsor-related) are likely to remain more selective but the manager is understood to be working closely with the sponsor to tap its pipeline. Given a moderate acquisition outlook, we have tapered our acquisition assumptions to S$100m (from S$250m) over 2 years.

Recommendation

BUY; TP S$1.16. Despite a moderated growth outlook, we like the strategy of extracting value within its portfolio for growth which enables the portfolio to remain contemporary. Acquisitions from sponsor are likely to be re-rating catalysts for MLT. Maintain BUY, with a TP of S$1.16 based on DCF.

Delivering steady growth

• 2QFY14 DPU up 6.4% YoY
  
• Positive reversion of 24% achieved
  
• New redevelopment project in early FY15
  

2QFY14 results within expectations

Mapletree Logistics Trust (MLT) reported a 1.3% YoY drop in 2QFY14 NPI to S$66.6m, as its Japan portfolio saw lower translated income on weaker JPY. Stripping out the forex impact, NPI would have increased by 3.4% due to positive rental reversions and contributions from its past three acquisitions. Total amount distributable to unitholders grew at a faster pace of 7.5% to S$44.5m, as MLT substantially hedged its income streams from Japan, benefitted from lower financing costs, and distributed S$0.6m (0.025 S cents/unit) in divestment gains from 30 Woodlands Loop. For the quarter, DPU came in at 1.82 S cents, representing a 6.4% growth YoY. We deem the results to be in line with our expectations, as 1HFY14 DPU of 3.62 S cents have met 49.9% of our fullyear DPU forecasts (consensus: 51.0%).

Firm leasing demand at MLT’s portfolio

While the global economic outlook remains murky, leasing demand at MLT’s logistics facilities has held firm. Starting with 15% of its leases due for expiry in FY14, MLT has managed to renew/replace ~62% of the leases. Portfolio occupancy also improved 50bps QoQ to 98.7%, boosted by higher take-up rates at MLT’s China, Hong Kong and Korea portfolios. More importantly, positive rental reversion of 24% was achieved, higher than the 17% growth seen in previous quarter. This is somewhat more positive than management’s previous guidance for a moderating rate going forward.

Continued focus on yield optimization

MLT reiterated that it will continue to optimize the portfolio yield through repositioning, enhancement and redevelopment opportunities. We understand the redevelopment of Mapletree Benoi Logistics is on track for completion in 3QFY14, while pre-commitment is unchanged at 94%. Following this, MLT will be embarking on its next redevelopment project at 5B Toh Guan Road in early FY15, which will see the site transform from a 3-storey warehouse to a 6-storey modern ramp-up facility (GFA up 2.7x). We make minor adjustments to our forecasts but lower our fair value marginally to S$1.11 (S$1.15 previously) on higher risk-free rate assumptions. Maintain HOLD.

Growing nicely

• DPU of 2.43 Scts in line
  
• Steady earnings growth backed by decent operational performance and completion of development projects
  
• BUY, TP revised to S$1.52
  

Highlights

1Q14 DPU of 2.43 Scts in line. Mapletree Industrial Trust (“MINT”) reported gross revenue and net property income of S$75.1m and S$52.5m respectively, which were higher by 12% and 9% y-o-y. The better performance was largely due to higher rental reversions achieved portfolio-wide (average portfolio rents increased by 1.7% to S$1.71 psf), supported by higher occupancy levels achieved in Flatted Factories, Business Parks and Hi-Tech Buildings. MINT’s portfolio occupancy continues to remain stable at c95.4%. Distributable income was 9% higher y-o-y at S$40.2m (DPU of 2.43 Scts). On a sequential basis, distributions grew by c3.3%.

Outlook

Manager expects operational outlook to remain stable. Looking ahead, the Manager is looking to improve portfolio WALE (currently at 2.4 years) and income certainty for the REIT through offering tenants longer-term leases, which offer lower-than-market starting rents and staggered rental escalations. Take-ups have been positive, resulting in the strong retention rates of c84% for the portfolio. In addition, the Manager has back-filled c10% of the space vacated by Credit Suisse (which contributed c.4.3% of income). While sequential performance might see a dip, the loss of income is expected to be partly offset by positive rental escalations of up to c10% given the positive spread between expiring and spot rents.

On track to deliver asset enhancements/developments. MINT is investing close to cS$233m in various asset enhancement initiatives (Woodlands Central, Toa Payoh North 1 and The Signature) and developments (Kullicke & Soffa and Equinx), which remain on track for completion by towards the end of 2013/2014. These properties should contribute positively to the trust’s performance in the medium term. In addition, management continues to look at acquisition opportunities and might look towards potential development projects in Malaysia (after the expiry of its Singapore mandate in Sept’13).

Recommendation

BUY, TP S$1.52. At FY14F-15F yields of 6.8%- 7.2%, MINT offers investors a steady growth profile which is visible and achievable. Upside surprise is expected to come from acquisitions which we have not factored in. Our TP is revised to S$1.52 as we raise our risk free assumption to 2.6% from 1.8%.