Singapore REITs - UOB Kay Hian 2016-04-27: 1Q16 Results Of MIT (Above) And Parkway Life REIT (In Line)

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REIT PARKWAYLIFE REIT C2PU.SI  MAPLETREE INDUSTRIAL TRUST ME8U.SI 

REITs − 1Q16: Results Of MIT (Above) And Parkway Life REIT (In Line)

• Results marginally above expectations for MIT, maintain HOLD with unchanged target price of S$1.61. Management continues to expect a challenging business environment due to supply-side pressure and rising interest rates. Suspension of DRP to avoid lazy balance sheet. 
• Results in line with expectations for PLife, Maintain HOLD with unchanged target price of S$2.38. Drop in DPU as final tranche payout of divestment gains was completed in 4Q15. Watch out for potential acquisitions in Japan.

WHAT’S NEW

• Mapletree Industrial Trust (MIT) and Parkway Life (PLife) reported their quarterly results.

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Mapletree Industrial Trust (MINT SP/HOLD/ S$1.64/ Target: S$1.61)

 Results above expectations. 

• Maintain HOLD with an unchanged target price of S$1.61. 
• MIT reported a 4QFY16 DPU of 2.81 S cents (+6.0% yoy). 
• 4QFY16 gross revenue saw growth of 5.8% yoy on higher occupancy and rental reversions, as well as contributions from the Equinix project. 
• NPI also saw growth of 7.4% yoy. 
• The results are marginally above our expectations, representing 103% of full-year forecast. 
• Entry price is S$1.40.

 Operational highlights. 

• Portfolio occupancy remained stable at 94.6% in the quarter, which may dip next quarter (recent departure of master tenant). 
• Gearing declined 1.1ppt qoq to 28.2% (3QFY16: 29.3%), on portfolio valuation gains and debt repayment. 
• 4.6% and 14.9% of borrowings are due respectively in FY17 and FY18. Borrowing costs crept up by 0.1ppt qoq to 2.5% (3QFY16: 2.4%). 
• 4QFY16 saw passing rents rise 0.5% qoq to S$1.90psf pm while average portfolio occupancy hovered at 94.6%. Tenant retention rate was relatively healthy at 71.8% (3QFY16: 84.2%).
• Positive rental reversions across the sub-segments were registered, with the sole exception of Hi-Tech buildings (-4.9% rental revisions), due to incentives dangled to its top five tenant Celestica (1.7% by gross rental).

 Limited upside from future leasing activities. 

• 21.1% of leases by gross rental income are due for renewal in FY17. 
• Within the flatted factory space, the largest source expiries in FY17, and new and renewal rents range from -5.1% to 4.0% above passing rents (3QFY16: 5.7 to 10.8% above). 
• The possibility of current tenant Johnson & Johnson (150,000sf) taking up premises at Ascendas’s Ascent may add pressure on MIT’s business park rentals (new leases signed in the quarter at 8.3% above passing rents). However, management is confident it can take on new tenants (3,000-5,000sf space each) if Johnson & Johnson vacates, with backfilling to take 9-12 months.

 Heightened possibility of higher borrowing costs. 

• 4QFY16 saw all-in borrowing costs increase 0.1ppt qoq, a trend which could continue as MIT extends its fixed interest rate hedges. Of the original S$470m of hedges due to expire in FY17, S$210m have been extended/replaced. 
• Current three-year spot rates are in the range of 1.8-2%, higher than when the expiring rates were first locked in. Despite this, MIT is still on the lookout for opportunities in which favourable rates could be locked into. 
• The REIT manager has also not ruled out letting some of the hedges expire, pointing to the high percentage of debt already on fixed rates (88% of total debt)

 Suspension of DRP to avoid lazy balance sheet, with gearing at 28.2% in 4QFY16 implying debt headroom of c.S$712m (40% gearing level assumed). 

• In the previous quarter, the REIT manager announced the suspension of the distribution reinvestment plan (DRP) after 3QFY16’s distribution. 
• Management attributes the suspension to the dearth of large-scale projects in the near term (apart from the Hewlett Packard BTS and Kallang Basin projects). 
• We thus reckon it is keen to avoid a lazy balance sheet, as we also opine that attractive acquisitions are few and far between for the REIT manager.

 AEI/development update. 

• Provisional approval has been obtained to create additional GFA for the planned asset enhancement initiatives (AEI) at Kallang Basin. The planned additional GFA created will now stand at 336,000sf, up from the 317,000sf, resulting in a 14-storey project from the planned 13 storeys. At an estimated cost of S$77m, the project is slated for completion come 1Q18 with estimated NPI yield on cost of c.8%. 
• MIT’s BTS development for Hewlett Packard (824,500sf by GFA) should see fruition in Phases 1 and 2 come 4Q16 and 2Q17 respectively, with NPI yield of c.10%. Hewlett Packard has undertaken to fully occupy the facility for 10.5+5+5 years. The 10-year lease takes into account a rent-free period of six months.

 Challenging outlook in Singapore. 

• Management continues to expect a challenging business environment due to supply-side pressure and rising interest rates. 
• According to data from URA REALIS, median rents in the multiple-user space stood at S$1.88psf pm in 1Q16 (-1.1% qoq), while median business park rentals reached S$4.29psf pm (0% qoq). 
• Management expects a softening in the flatted factory space with muted rental growth due to the higher supply. Its strategy is one underpinned by tenant retention, a shift towards performance-based contracts and the implementation of locking in of fixed interest rates.

Parkway Life REIT (PREIT SP/HOLD/ S$2.45/ Target: S$2.38)

 Results in line with expectations. 

• Maintain HOLD with an unchanged target price of S$2.38. 
• PLife reported a 1Q16 DPU of 2.99 S cents (-7.0% yoy) due to the absence of the divestment gains paid out in 1Q15. 
• Stripping out capital distributions, DPU actually grew 5.1% yoy. 
• Gross revenue and NPI both saw respective growth of 8.6% and 8.5% yoy, on acquisitions, positive rental reversions and a stronger yen. 
• The results are within our expectations, with 1Q16 DPU representing 25.0% of our DPU estimates. 
• Entry price is S$2.07.

 Operational highlights. 

• Portfolio occupancy remained at 100% in the quarter. 
• Gearing saw a 1.1ppt qoq increase to 36.4% in the quarter (4Q15: 35.3%), due to long-term borrowings taken to finance its Japan nursing home acquisition on 31 Mar 16 (Silver Heights). 
• Borrowing costs dipped to 1.5% this quarter (4Q15: 1.6%), with average debt maturity at 3.5 years. 98% of debt has been hedged against interest rate risk (4Q15: 95%), with the REIT manager almost fully leveraging on cheap yen debt.

 Active asset recycling in Japan to improve portfolio quality. 

• We reckon the Matsudo Manufacturing Facility (S$33.6m) could be the next target for divestment given its odd fit in the Japanese portfolio of nursing homes. 
• Recall that PLife divested of seven nursing homes in Japan, before acquiring two new ones (Ocean View Shonan Araski and Habitation Jyosui) in 4Q14. The successful divestment of the aforementioned properties saw gains of S$9.1m to be paid out in a series of four quarterly tranches, starting from 1Q15. 
• Capital gains paid out in 4Q15 represented the final tranche payment from the divestment.

 Growth to revolve around potential acquisitions and AEIs, supported by sufficient debt headroom and capital recycling. 

• The REIT manager completed the acquisition of nursing home facility Silver Heights Hitsujigaoka Ichiban-kan & Niban-kan (for c.S$13.6m). 
• At an estimated S$101.5m in debt headroom (assuming comfortable gearing level of 40%), we opine future acquisitions will continue to underpin near-term growth. The prospect of future AEI has also not been ruled out. 
• In the longer term, we understand PLife is also looking to tap on the expertise of its Japanese nursing home partners as it grows it portfolio, as well as to potentially explore small-scale developmental opportunities in Malaysia.

Vikrant Pandey UOB Kay Hian | Derek Chang UOB Kay Hian | http://research.uobkayhian.com/ 2016-04-27

UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 2.38 Same 2.38

HOLD Maintain HOLD 1.61 Same 1.61