MBC II Acquisition Ups DPUs by 4-6%; Prefer FCT

• MAPLETREE COMMERCIAL TRUST (SGX:N2IU)‘s Mapletree Business City Phase 2 (MBC II) acquisition from its sponsor was widely anticipated – post-deal its AUM rises 21% to SGD8.9b with a higher 18.0% technology sector concentration. Its units have outperformed the S-REITs by 23% YTD.
• We estimate a 4-6% DPU accretion but see this event as largely priced in at 4% div yield on 3% DPU growth; we will adjust forecasts after its (mid-Oct) EGM. Its 32% gearing post-deal should support its 1.8m sf NLA sponsor pipeline.
• Plans to refresh Singapore’s southern waterfront are underway, but the primarily office properties would suggest longer term upside.
• FRASERS CENTREPOINT TRUST (SGX:J69U) (BUY, Target Price SGD2.80, see report: Singapore REITs - Raising Limits, Adding Growth; Frasers Centrepoint Trust - Rerating On Retail) is our preferred retail play, given its suburban mall footprint.

Strong Asset, Positive Growth Fundamentals

• The asset, a 1.2m sf NLA development valued at SGD1.55b comprising a business park (1.17m sf) and common property (eg carpark), is adjacent to its MBC I and boasts similar Grade A office specs. It is backed by 99.4% committed occupancy with ~97% of leases embedded by +2.3% pa rental step-ups on average, and 2.9-year WALE (by gross rental income).
• Mapleetree Commercial Trust’s three best-in-class assets (VivoCity, MBC I & II) now contribute ~81% of its NPI (from ~77%) but tenant concentration risks have also risen; Google occupies 680k sf or 13.5% of its enlarged NLA as its single largest tenant.

DPUs Get a Boost, But Valuations Have Run Harder

• We are positive on Singapore’s business park growth fundamentals given the government’s decentralisation efforts – 53% of business park tenants at MBC II had relocated from the CBD while 29% were led by upgrades to higher quality space. Rental growth outlook is supported by:
  1. high pre-commitment on new supply and demand especially for assets at the city-fringe; and
  2. a widening rental gap between Grade A office and business parks. Its capital value at SGD1,308 psf, is higher than for MBC I (at SGD1,285 psf), with the additional 8% in ancillary income.

A Likely 45-55 Debt-equity Funding, Higher Accretion

• The purchase will be funded by debt up to SGD800.0m at 2.9% interest cost pa and an equity fund raising of up to 500.0m new units.
• Management sees 4% DPU accretion (pro-forma) based on the proposed funding structure. We believe the strong unit price appreciation suggests more.

Source: Maybank Kim Eng Research - 30 Sep 2019