MLT – BT
Another Japanese Venture
• Acquiring Hiroshima Centre @ 7% yield
• Japan is an established logistics hub with strong customers
• Maintain BUY with 28% total return to S$1.07 TP
Venturing into Japan again. MLT announced that they have acquired Hiroshima Centre in Chugoku, western Japan for JPY 7.3bn (S$114.2m). The property consists of a 2-storey warehouse for cold/frozen storage and a 2-storey dry warehouse with an ancillary office with a combined GFA of 43,600 sqm. The asset will be leased back to Nippon Access, one of MLT’s current tenants, on a 16-year lease, with a periodic rent review every 5 years. This acquisition further strengthens MLT’s earnings visibility & stability with a long average weighted lease expiry of c. 6 years. In addition, there is opportunity to increase the property’s GFA by another 45,000 sqm, which the manager is keen on, subject to interest.
Initial yield of 7% is accretive. Initial yield is estimated to be c.7% (in line with its recent Japanese transactions which were done in the region of 7.0%-8.6%) and above its current implied yields of 6.5%. MLT is expected to fund the acquisition from debt sources. Post acquisition gearing will inch up slightly to 39.7%, which is close to the 40-45% target ratio. As such, we believe that further acquisitions might be funded partially by new equity, which we have assumed in our forecasts.
Living up to expectations – maintain BUY and S$1.07 TP. Japan continues to remain an attractive investment thesis in the longer term and will continue to play a strategic role in MLT’s strategy as it is an established logistics centre with customers having strong credit profiles. Post acquisition, MLT’s exposure to Japan will increase to 26.4% (from 23.8% previously). This acquisition will meet a third of our S$300m acquisition forecasts, which we believe it is attainable. Additionally, we have assumed an equity raising (40/60 debt – equity ratio) in our numbers. We like MLT for its growth ability, leveraging on its existing client and partners network. MLT now offers a FY11 – 12 DPU yield of 7.4 -7.7%, which is attractive. Maintain BUY.
MLT – BT
MapletreeLog buys 7.3b yen property in Hiroshima
MAPLETREE Logistics Trust (MapletreeLog) is forking out 7.3 billion yen (S$114.2 million) for a property in Hiroshima, Japan.
The industrial real estate investment trust continues to see Japan as an important market, despite natural disasters which hit the country this month.
MapletreeLog is buying the freehold Hiroshima Centre, which consists of a two-storey warehouse for cold or frozen storage and a two-storey dry warehouse with an ancillary office. The buildings have a combined gross floor area of about 43,600 square metres.
The property – some 900 kilometres from the north-east coast of Japan where Sendai and Fukushima are – was not affected by the earthquake and tsunami. Nevertheless, MapletreeLog conducted a building audit to make sure that the building structure was intact.
Nippon Access Group, a food distributor in Japan, is renting the property. There are 16 years left on its lease, which allows for a rental review every five years.
Nippon Access is MapletreeLog’s existing client and is leasing space at another two of its properties in Japan. ‘We foresee many opportunities to work with Nippon Access in the future, both in Japan and elsewhere in Asia,’ said Richard Lai, CEO of Mapletree Logistics Trust Management.
According to MapletreeLog, the acquisition of Hiroshima Centre has an initial net property yield of about 7 per cent, and there is potential for organic growth by adding around 45,000 sq m of gross floor area to the property. ‘We will explore this when there is sufficient level of interest,’ Mr Lai said.
Assuming the purchase and other acquisition costs are fully funded by debt, MapletreeLog’s gearing level is expected to increase to around 39.7 per cent.
MapletreeLog had 14 properties in Japan before the acquisition. Out of these, one in Sendai was affected by the disasters. Nevertheless, the Reit still sees potential in the country.
‘We are relieved that Japan has already started taking concrete steps towards recovery. Taking a long-term view, we continue to regard Japan as a key market for MapletreeLog,’ Mr Lai said.
MapletreeLog units closed trading unchanged at 88.5 cents yesterday.
SREITs – OCBC
Leveraging trend continues in 2011
Leveraging trend. In our year-end S-REITs strategy report in 2010, we highlighted that the trend of leveraging up among S-REITs is likely to continue into 2011, buoyed by the still-low interest rates environment. So far, this has proven to be true, with many S-REITs taking on more debt to fund new acquisitions. Recently, we have seen K-REIT entering into a S$125.1m sale and purchase agreement for Prudential Tower, which will increase its aggregate leverage from 37% to 39.3%. AAREIT has also leveraged up from 32.7% to 33.6% following its S$72m NorthTech acquisition. CACHE is also expected to bump up its gearing from 23.7% to 27.6% on the back of its maiden acquisition of two local logistics properties. CDLHT is also leveraging up from 20.4% to 26.5% with the purchase of Studio M Hotel for S$154m. We noted that most of these transactions to-date (except CDLHT) have been third-party acquisitions – we have yet to witness more sponsor-backed assets being injected into the REIT.
40% watermark increasingly tested. According to our estimates, the top three highest-geared S-REITs are Suntec (40.4%), K-REIT (39.3%) and FCOT (38%). Departing from the previous conservatism seen during the financial crisis, it seems that more S-REITs are now comfortable reverting back to the pre-crisis target gearing levels of 40-45%. We think the next likely candidates to gear up and possibly test the 40% watermark will be MIT, which has yet to make its maiden acquisition to-date; and FCT which is be looking at acquiring Bedok Point from its sponsor.
Sponsor Injections. Going into the remaining three quarters of 2011, we are awaiting more sponsor injections into the REITs, which will likely bring up gearing levels. Apart from Bedok Point, other FY11/FY12 targets on our radar screen include: ION Orchard (CMT), Ocean Financial Centre (K-REIT), Pandan Logistics Hub & CWT Logistics Hub 3 (CACHE), Pandai Hospitals in Malaysia (PLife REIT), 30 Tuas Ave 10 (Sabana), Changi City Point & Centrepoint (FCT), CMA’s China malls (CRCT) and Lippo-Karawaci’s Indonesian malls (LMIRT).
Interest rate hike likely in 2012. The MAS manages the Sing dollar’s strength by buying or selling currencies to keep its exchange rate against major currencies within a policy band. This FX-centred monetary policy regime means that Singapore has effectively imported US’s interest rate policy, despite obvious domestic inflationary pressures. Many economists are expecting the Fed to start normalising rates towards the latter part of 2012 – which, if correct, would imply the Sibor will stay at current low levels through 2011. We thus anticipate the leveraging trend among S-REITs to persist for the remaining of 2011 and possibly the early part of 2012.
Industrial REITs – BT
Industrial S-Reits’ expansion into China poses risk: Moody’s
AS industrial Singapore real estate investment trusts (S-Reits) look at spreading their wings to China, Moody’s Investors Service (MIS) has cautioned about the legal and regulatory risks they face.
In a report on the business risks which industrial S-Reits will face in China, associate analyst Alvin Tan of MIS, a wholly owned credit rating agency subsidiary of Moody’s Corporation, said: ‘Moving into China would have negative credit implications, given the uncertainties associated with entering an unfamiliar market and the associated regulatory risk, which could nullify the potential gains of geographical diversification.’
Mr Tan said that China’s financial, tax, and legal frameworks are still in their infancy, which could have a number of negative ramifications, such as the regulatory risk related to tax policies on profits, the enforcement of lease contracts, and land ownership issues, as well as foreign-exchange risk for the repatriation of capital.
On why industrial S-Reits are seeking expansion into new regions, the MIS report said the competition for industrial properties in Singapore is intensifying. S-Reits’ growing risk appetite and the low interest rate environment have exacerbated the competitive pressure.
Another push factor is that the large supply of new industrial properties opening up over the next two years may limit rental growth in the medium term.
‘In their search for higher yields, the industrial S-Reits are now looking at expanding into new regions,’ said Mr Tan, ‘with several of the S-Reits identifying China, the world’s fifth most active real-estate investment market, as a possibility.’
There are of course ‘positive factors’, said Mr Tan, but they ‘could mitigate, but not fully offset, the impact of these negatives’.
The merits of overseas diversification include lessening the S-Reits’ geographic exposure to Singapore. And those with sponsors that have already established a presence abroad could tap into their sponsors’ China-related experience to reduce the risk associated with operations in a complex regulatory environment.
Also, the acquisition of overseas properties with long-term leases and rental guarantees would provide additional income and stability to medium-term operating results.
AIMSAMPReit – BT
Sale of AIMS Reit’s Japan property completed
AIMS AMP Capital Industrial Reit has completed the sale of Asahi Ohmiya Warehouse – at an effectively lower price of 1.483 billion yen (S$23 million).
The price of the warehouse was effectively reduced from 1.49 billion yen after a joint inspection by the interested parties and an independent engineer indicated 6.9 million yen worth of repairs were required on the property following the massive earthquake on March 11.
The completion of the sale of the warehouse, which is located about 345 km from the epicentre of the earthquake, was earlier delayed pending inspections.
The trust said in late February that it was selling the property to ‘free up capital to provide the trust with greater financial flexibility for future investment opportunities’. It added that the sale was consistent with the manager’s strategy to dispose of its single Japan-based asset.
The net sale proceeds, after repayment of a 989 million yen debt and payment of sale-related costs, will be used to reduce aggregate leverage from 33.6 per cent to 32 per cent.
Based on valuations obtained as at Sept 30, 2010, AIMS Reit consisted of 26 industrial properties located throughout Singapore and one property in Japan (Asahi Ohmiya Warehouse), with an appraised total value of $803.9 million.
Reits with Japanese exposure have been in the spotlight this fortnight.
Saizen Reit sold Johnan Building III in Fukuoka to an independent private investor for about $4.9 million. The building accounted for about 0.9 per cent of the trust’s revenue for the financial year ended June 30 last year. It is not expected to have a material impact on the trust’s financial position.
Proceeds will be used for the partial repayment of a loan that had gone into maturity default in November 2009.
Mapletree Logistics last announced that 13 of its 14 Japanese properties escaped with either no or minimal damage. It was estimated that the worst hit, Sendai Centre, would cost some $9 million to reinstate.
Frasiers Commercial Trust’s three properties in Tokyo and Osaka are intact with minimal damage. Ebara Techno-Serve Headquarters Building and Galleria Otemae Building in Tokyo and Osaka respectively, incurred minor damage with estimated costs of 1.25 million yen as at March 14.
Starhill Global Reit has seven malls in Tokyo. The manager stated that there was no known damage to the malls.
The AIMS AMP Reit counter closed at 20.5 cents yesterday, up half a cent.