First Acquisition in S’pore in Four Years; Prefer MINT

• Mapletree Logistics Trust (MLT)’s SGD778m purchase of five logistics properties possibly signals its homecoming and industrial sector recovery.
• While near-term tenancy risk rises, MLT’s growing logistics ambition suggests longer-term upside from expiring leases.
• How the deal will be funded is still unclear – we see risk of a placement as it will take time to divest SGD200m of low-yielding assets to free up its balance sheet. As such, this funding gap could create an overhang.
• We prefer Mapletree Industrial Trust (SGX:ME8U; Rating: BUY, Target Price: SGD2.25) for its stronger balance sheet and DPU growth profile.

Acquiring Five S’pore Properties at 6.2% NPI Yield

Mapletree Logistics Trust (MLT) announced it will acquire five modern logistics properties in Singapore for SGD778.3m (including a SGD48.3m balance lease top-up) from CWT through a sale-and-leaseback. It has also secured a right of first refusal (ROFR) on CWT’s Mega Integrated Logistics Hub (47 Jalan Buroh) subject to a prior ROFR to JTC.

The assets were part of a ROFR pipeline for Cache Logistics Trust (SGX:K2LU; Rating: BUY, Target Price SGD0.95) that expired after ARA acquired CWT’s share in its REIT and property manager. io. They are new, with a weighted average age (by NLA) of 4.8 years and are well-located in the three key western logistics clusters with connectivity to the upcoming Tuas Mega Port and 20-mins to the city centre.

Mapletree Logistics Trust expects the deal to be DPU-accretive and offer 6.2% NPI yield, with the leaseback terms on a combined WALE (by revenue) of 8.7 years, and built-in rental escalation of +1.5% per annum.

Tenancy Risk Up, End-user Demand Well-supported

Tenancy risk has increased with contribution from CWT leases rising from 6.5% to 9.5% of its gross revenue, although secular growth drivers - rapid e-commerce expansion, increasing supply chain efficiency – will support underlying end-user demand, in our view.

Mapletree Logistics Trust (MLT) will further leverage its widening logistics provider network in direct leasing arrangements with remaining 30% of third-party end-users to drive occupancies and rentals.

Funding Options Aplenty; Equity Most Likely

While the deal funding structure has yet to be finalised, Mapletree Logistics Trust is targeting SGD200m in divestments of older low-yielding assets to boost its balance sheet, together with a reactivation of its dividend reinvestment plan.

We believe an equity fund raising will be likely, given the funding gap and lead time for asset sales, which could result in an overhang.

Swing Factors 

Upside 

• Earlier-than-expected pick-up in leasing demand for logistics space driving improvement in occupancy. 
• Better-than-anticipated rental reversion trend. 
• Accretive acquisitions. 

Downside 

• Prolonged slowdown in economic activity could reduce demand for logistics space, resulting in lower occupancy and rental rates. 
• Termination of long-term leases contributing to weaker portfolio tenant retention rate. 
• Significant volatility in AUD, JPY, MYR and KRW could impede hedging efforts and impact DPU estimates. 
• Sharper-than-expected rise in interest rates could increase cost of debt and negatively impact earnings, with higher cost of capital lowering valuations. 

Source: Maybank Kim Eng Research - 06 Jul 2018