Category: MMP
SREITS – OCBC
Surprise rule change on REIT M&A. In our 2007 strategy report dated 11 Dec 2006 “M&A theme a strong possibility in 2007/08”, we had articulated that M&A could be another avenue for growth. This scenario is now coming closer to reality with the Securities Industry Council’s (SIC) surprise announcement on Friday that it will extend the Singapore Code of Takeover & Mergers to REITs. This move is significant as it means that there is now clarity on M&A rules for S-REITs. Now anyone who acquires 30% or more of any REIT must make a general offer (GO) for the remaining units. Furthermore, anyone who owns 30%-50% of any REIT and acquires a further 1% of the units must also make a GO for the rest of the units.
Market getting more competitive. The key issue with the high-beta REITs such as CCT, MLT, CMT, ART, AREIT is the ability of the managers to meet market growth expectation. This is particularly so in a property up-cycle where fewer properties are available to be acquired. Some are venturing overseas, while others remain domestic focus (AREIT, Cambridge). Another avenue for asset size growth is via own development (AREIT, CMT), but this is a riskier strategy and is constrained by REIT guidelines. However with the SIC rule change on M&A, the REIT manager has another avenue to meet market’s growth expectations
A function of risk appetite. In our opinion, the market has segmented SREITs into two camps, i.e. REITs with high and low growth expectations. The key differentiating factor is the P/B ratio. We see potential for both camps, and the choice for investors for either is a function of their risk appetite. The high-beta REITs are those with high P/B ratio. As the market has already priced in growth, the risks are higher. On the other hand lowbeta REITs, we see minimal downside risks. In fact with them now being eyed as targets for acquisitions, we see a strong upside possibilities.
Potential winners in M&A. We see the likely winners in the new M&A rules to be those trading with higher yield and low price to book relative to their peers in the same sector. We see these REITs to be Allco, Cambridge, Macarthur, MM Prime and First REIT. (Winston Liew)
MMP
COMPLETION OF ACQUISITION OF PORTFOLIO OF SIX PROPERTIES IN TOKYO
MMP – OCBC
Finally delivers on acquisition promise
Flattish growth. Macquarie MEAG Prime REIT’s (MMP) 1Q06 came in within expectation. Top-line came in at S$23.4m, improving 3.5% QoQ, but Net Property Income (NPI) of S$17.3m (-0.4% QoQ) led to flat distributable income per unit (DPU) of 1.47 cents. The top-line benefited from positive rental reversion, while the lower NPI was attributed to higher property expenses (mainly depreciation) as the result of the installation of escalators linking Wisma Atria basement to Orchard road and higher cost for changing the tenancy mix.
Organic growth to come from office. MMP’s office space is presently under-rented with rents at about S$5psf/mth, whereas market rents are approaching the S$8-10psf/mth mark. More importantly, with 182,000 sq ft (about 70% of office space) of leases due for renewal over the next two years, we see a lot of upside potential.
Finally bought something but accretion marginal. On the acquisition front, MMP has been fairly disappointing since its IPO in 2005. However recently, it has made up for lost time by making two separate acquisitions in two different countries. One was in Tokyo (7 retail properties) for a total of S$182.5m, while the other was for a 50% stake in a Chengdu retail mall
for S$30m. Though in absolute terms these purchases are small and has no material impact on its asset size of S$1.5bn, it is nevertheless a step in the right direction. With gearing at only 26%, debt funding makes the most sense. We estimate that if the acquisitions were fully debt funded,
the full year DPU accretion is about 0.2 cents. As our FY07 and FY08 forecasts already contain growth assumptions, we will retain our numbers for now and will review them in 2H07. We also remain hopeful that more meaningful assets can be acquired.
Maintain BUY. MMP remains one of the very few REITs with a low price to book ratio. It is currently trading at about 1.1x P/B. This implies that market has not factored in growth and that upside surprise is possible if a meaningful acquisition is done. Finally with a DPU yield of about 5.0% and a capital value upside of about 6.5%, total return of over 10% is possible. We thus remain positive on MMP and see it as one of the lowest-risk REITs in the market. Maintain BUY with a fair value of S$1.32.
MMP – Phillip
First Acquisitions since listing
MMP REIT has done its first acquisitions since listing on the 20th Sept 05. MMP has entered into three separate conditional sale and purchase agreements to acquire seven properties in Tokyo, Japan for a total purchase price of approximately S$182.5m. This represents a discount of 1.5% to the appraised value of approximately S$185.4m. Properties under management will increase by 12% to S$1683m.
Minimal DPU Impact. The pro forma financial effect of the acquisitions on DPU for the FY06 would be an additional 0.108 cts per unit, representing an initial yield accretion of 1.9%. The Manager will finance the acquisitions wholly with debt. Upon completion of the acquisitions, the gearing ratio of MMP REIT is expected to increase from 25.6% to 34.0%. The date of completion may be extended until 31 May 2007. This translates to an additional DPU of 0.04 cts for FY07F, representing a yield accretion of 0.7%. We estimated that a distribution income of approximately S$1.0m would be contributed annually from the acquisitions. This works out to be only 1.8% of FY06 distribution income. Hence, we feel that the acquisitions will not have much impact to MMP DPU. This is mainly due to the low opportunity cost in Japan.
Acquisitions Information. The properties are acquired with an initial yield of approximately 4%. Local asset manager from Japan will manage the properties, with the management fee contributed by MMPs property managers fee. Profit will be taxed under Japan by approximately 12%. Average lease term for tenant is estimated to be 5.7 years. Four of the properties are under master lease. Rental rate are expected to be stable without increment during the lease term. Japan property recovering. We believe that Japan property market will rebound after 15 years of decline, backed by the recovering economy and low cost of debt. In addition, the strong demand from investment funds is also pushing up the property prices in capital city like Tokyo. We also expect Japanese yen to appreciate limiting any currency risk involved.
Valuation and recommendation. Although the DPU impact is not great, we feel that this acquisition will benefit MMP in long term. We feel that this will be a good start, and applause to MMPs first acquisitions. We expect to see more acquisitions in future. We also believe that MMPs orchard properties will continue to appreciate, increasing MMPs NAV by at least 10% this year.
With a WACC of 7.2% and a growth rate of 3.0%, we arrive at the fair value of S$1.37 for MMP. This translates to a 4.2% dividend yield and a price to net asset value of 1.1x for FY07. It represents an average spread of 1.5% as compared to the risk free rate of 2.7%. We upgrade MMP to a Buy with a 9.6% return.
MMP – DMG
Maiden Acquisition
MM Prime REIT has made its maiden acquisition of seven properties, predominantly for retail purposes, in Tokyo for about S$182.5m. The acquisitions will anchor MMP with a strategic foothold in Japan. Based on pro forma NPBT of S$0.7m from the properties these assets could add 0.108 cents to DPU, to be felt from FY08. We are maintaining our FY07 forecast of 5.8 cents, translating to a yield of 4.8%. Maintain BUY with a price target of S$1.28.
Acquired seven properties in Tokyo. MMP has entered an agreement with Yugen Kaisha Triton Property and Fund Creation Co. Ltd to acquire six completed retail properties under the Fund Creation portfolio located in prime areas of Tokyo, Japan for S$110.4m. Currently these properties are enjoying close to 100% occupancy.
The 7th property, the FLEG America-Bashi Building, is a seven-storey retail-cum-office development located in the Ebisu area, which is expected to be completed in September this year. This property will be acquired for S$72.1m from FLEG International a major Japanese retail leasing group and a growing real estate developer.
Full impact to be felt from FY08. The acquisitions will be yield accretive to MMP’s distribution per unit (DPU). The pro forma financial effect would be an additional NPBT of S$0.7m or 0.108 cents per unit, representing an initial yield accretion of 1.8%. As completion of transaction is expected at end May 07, the boost to income would be felt from FY08.
Capacity for expansion. The acquisition would be funded by debt, thus further enhancing to bottomline post acquisition. MMP would have a gearing ratio of 34.0%, up from 26.5% previously. This leaves the group with significant funding capacity for new purchases.
Maintain FY07 forecast. We are maintaining our FY07 forecast of 5.8 cents, translating to a yield of 4.8%. Maintain BUY with price target of S$1.28.