Mapletree Logistics Trust (MLT SP) - Oversupply still a drag; Prefer AREIT
4Q17 in line; Extending acquisition-led growth
- MLT reported 4Q17 DPU of SGD1.86cts (+3% YoY), with FY17 DPU of SGD7.44cts (+1% YoY) in line with the street and our estimate.
- MLT has driven operational improvements in FY Mar17 in line with expectations, as accretive acquisitions helped offset transitory vacancies within its diversified portfolio caused by conversions of its single user assets (SUAs).
- Looking ahead, we see further push in its acquisition-led growth but logistics oversupply remains a key drag on organic fundamentals.
- We maintain our DPU forecasts and HOLD rating with DDM-based TP of SGD1.20. We prefer business parks within the Singapore industrial REITs space given stronger demand-supply dynamics, and reiterate AREIT (AREIT SP, BUY, TP SGD2.85) as our top sector pick.
4Q/FY17 results slightly ahead
- The better performance in 4Q/FY17 was attributed to a stabilisation of converted SUAs, higher rentals on existing assets, contributions from asset enhancement initiatives, and accretive acquisitions (in Australia, Malaysia, and Vietnam); these partly offset lower transitory occupancies in Singapore and S. Korea, redevelopment properties, and divestments.
- Portfolio occupancy was stable at 96.3%, with rental reversion at +0.4% (from +2.0% in 3Q17).
Stretched balance sheet profile
- Aggregate leverage was 38.5%, down from 39.6% a year ago, with borrowing cost stable at 2.3%. About 81% of total debt is hedged into fixed rates with 72% of FY18 income hedged into/derived in SGD.
- The sharp drop in cap rates for MLT’s portfolio was largely due to a change in valuers (now disclosed on a net basis from gross previously).
- Redevelopment projects are budgeted for in Singapore (SGD100m to boost GFA 1.8x at 76 Pioneer Road targeted for completion in 3Q18) and China (SGD70m for the Ouluo Logistics Centre with GFA up 2.4x over two phases until 4Q20).
Maintain DPU forecasts and TP
- We have fine-tuned our model and introduced FY20 estimates. We expect NPI margins to stabilise during FY18-19E. Acquisitions should stay in focus for MLT, with management hinting at third-party assets in Australia and S. Korea, and from its sponsor in Hong Kong. Maintain HOLD and DDM-based TP of SGD1.20.
- Our TP of SGD1.20 is based on a DDM model. We use a DDM-based valuation methodology for REITs given the reliance on underlying asset cashflows as a significant return component.
- Key assumptions in our valuation for MLT include a risk-free rate of 2.5% and a market risk premium of 6.5% against our beta assumptions.
- Risks to our TP are:
- interest rate impact on valuations;
- systemic shocks to the economy slowing down leasing and rents; and
- sharp currency swings impeding hedging efforts.
- Earlier-than-expected pick-up in leasing demand for logistics space driving improvement in occupancy.
- Better-than-anticipated rental reversion trend.
- Accretive acquisitions.
- 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.