REITs Singapore - UOB Kay Hian 2016-07-27: 2Q16 Results ~ MIT (In-line) and MLT (In-line)

REITs Singapore - UOB Kay Hian 2016-07-27: 2Q16 Results ~ MIT (In-line) and MLT (In-line) Singapore Property MAPLETREE INDUSTRIAL TRUST ME8U.SI  MAPLETREE LOGISTICS TRUST M44U.SI 

2Q16: REITs’ Results – MIT (In-line) and MLT (In-line)

  • Results were in line for MIT; maintain SELL with an unchanged target price of S$1.70. The likelihood of sustained business park rental pressure remains with key tenant J&J potentially shifting out. 
  • Results were in line for MLT; maintain BUY with a lower target price of S$1.28 (previously S$1.32). Negative overall portfolio reversions are attributable to MLT’s South Korean Pyeongtaek asset. Management stoically upbeat as expiring SUA leases moderate. 
  • Maintain OVERWEIGHT.


  • Mapletree Industrial Trust (MIT) and Mapletree Logistics Trust (MLT) reported their quarterly results.

Mapletree Industrial Trust (MINT SP/SELL/ S$1.75/ Target:S$1.70)

Results in line with expectations. 

  • Maintain SELL with an unchanged target price of S$1.70 based on DDM (required rate of return: 6.6%, terminal growth: 1.5%). 
  • Mapletree Industrial Trust (MIT) reported 1QFY17 DPU of 2.85 S cents (+4.4% yoy). 1QFY17 gross revenue grew 3.0% yoy on higher rental rates and occupancies, and was outpaced by net property income which expanded 6.0% yoy due to lower property maintenance, taxes and utility expenses. 
  • The results are in line with our expectation, with 1QFY7 DPU representing 26.4% of our full-year estimate. 
  • We tweak our FY17 DPU forecast upwards by nearly 2% to account for earlier recognition of the HP project.

Mixed bag of rental reversions. 

  • Subsegments which saw rental reversions under pressure included Business Park (-1.5%) and Stack-up/Ramp-up (-4.9%), while Flatted Factories (+1.3%) and Hi-Tech (+2.1%) held up well.

Likelihood of continued pressure in business park segment. 

  • This quarter saw negative reversions in the business park segment, which could see further deterioration from the likely departure of key tenant Johnson & Johnson (J&J) (150,000 sf). Accounting for 2.3% of rental income, J&J is likely to take up premises at Ascendas’s Ascent. Leasing downtime is to be expected, with backfilling likely to take 9-12 months. 
  • Management has stated its confidence in taking on new tenants (3,000-5,000 sf space each) if J&J vacates.

Heightened possibility of higher borrowing costs. 

  • 1QFY17 saw all-in borrowing costs remain flat qoq, though that could trend upwards as MIT extends its fixed interest rate hedges. Of the original S$470m of hedges due to expire in FY17, S$200m have been extended/replaced. 
  • MIT is still on the lookout for opportunities in which favourable rates could be locked in. However, 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)

AEI/development updates. 

  • MIT’s Built-to-Suit development for Hewlett Packard (824,500sf by GFA) is slated for phased completion in 4Q16 and 2Q17 (Phases 1 and 2 respectively). Under the revised lease agreement, the rent-free period of six months per phase will be spread over 18 months instead of the first 6 months post completion.
  • The planned asset enhancement initiative (AEI) at Kallang Basin has been awarded its construction contraction. At an estimated cost of S$77m, the project is slated for completion come 1Q18 with estimated NPI yield on cost of about 8%.

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$1.82psf pm in 2Q16 (-3.2% qoq), an accelerated decline. 
  • Despite seeing flat qoq growth in 1Q16, median business park rentals saw increased pressure in 2Q16, declining 4.4% qoq to reach S$4.10psf pm. 
  • Management has stated expectations of muted rental growth in the flatted factory space due to increased supply. Its strategy is one that is underpinned by tenant retention, a shift towards performance-based contracts and the implementation of locking in fixed interest rates.

Mapletree Logistics Trust (MLT SP/BUY/S$1.055/Target:S$1.28)

Results in line; 

  • ... maintain BUY with a reduced target price of S$1.28 (previously S$1.32), based on DDM (required rate of return: 6.6%, terminal growth: 1.5%). 
  • MLT reported 1QFY17 DPU of 1.85 S cents. Excluding divestment gains, core DPU of 1.79 S cents reflects a decline of 3.3% yoy. 
  • The quarter saw gross revenue and NPI increase by 5.3% yoy and 5.7% yoy respectively, on the back of full contributions from recent acquisitions in Australia, Vietnam and South Korea. 
  • 1QFY17 also saw a S$17.2m loss in fair value of financial derivatives, which had no impact on distributable income. 
  • The results were in line with expectations, coming in at 24.5% of our full-year estimate. 
  • We lower FY17 and FY18 estimates by 2.5-3.8%, factoring in lower contributions from Singapore and South Korea and payout from May’s issuance of S$250m in perps.

Negative average portfolio rental reversions at -6%

  • Negative average portfolio rental reversions at -6%, due to the master lease expiry at Pyeongtaek Port (guided for last quarter), which saw rental reversion of -20%. Management attributed this to rental adjustment to market rates (after fixed annual escalations since 2011) for Pyeongtaek’s underlying tenant E-Land. With E-Land slated to vacate the property by the end of the year, MLT is currently negotiating with prospective tenants (chaebols) for 66% of the space, with leasing downtime to be expected.
  • Excluding the impact from Pyeongtaek, the overall portfolio would have seen average positive rental reversions of +3%, with reversions ranging from +1% to 11% for various geographies (Singapore: +0.8% rental reversion).

Pro-active leasing efforts resulting in well spread out lease expiry profile, 

  • ... with 13.5% and 16.9% of total leases by NLA expiring in FY17 and FY18 respectively. Single user asset (SUA) leases account for 5.1% and 5.9% of leases due in FY17 and FY18 respectively. Expiring leases to watch out for include Baekam 1 and Yeoju in South Korea (1.4% of portfolio value), and Iruma in Japan (0.8% of portfolio value) next year. 
  • We also note that tenants have been relatively cautious, renewing their leases at lower tenures (2- 3 years), likely due to a more tepid outlook.

Lower occupancy this quarter

  • ... (-80bp qoq), on the back of occupancy declines in Singapore (multi-tenancy conversion), China (oversupply in Wuxi), as well as Hong Kong and Malaysia (replacement leases have been secured).

Asset recycling/enhancement. 

  • An option to purchase has been signed with a potential buyer for 20 Old Toh Tuck (formerly Popular), now subject to HDB approval, while efforts are underway for a prospective buyer for 531 Bukit Batok (former Armstrong). 
  • Meanwhile, the ongoing redevelopment of 76 Pioneer Road into a 5-storey ramp-up facility (1.8x increase in GFA) is slated for completion by 3QFY18.

Cautious optimism. 

  • Management seemed stoically upbeat on forward performance, with the moderation of upcoming SUA expiries (5.1% and 5.9% respectively in FY17 and FY18). However, it has acknowledged the likely challenges posed by the lower rental income and potential leasing downtime from its Korean asset (mentioned above).

Overseas acquisitions. 

  • Management highlighted target markets Vietnam and Australia. While Sydney remains favoured for its robust market fundamentals, management remains open to other Australian geographies. 
  • MLT currently derives about 65.7% of overall asset value from overseas assets.

Vikrant Pandey UOB Kay Hian | Derek Chang UOB Kay Hian | http://research.uobkayhian.com/ 2016-07-27
UOB Kay Hian SGX Stock Analyst Report SELL Maintain SELL 1.70 Same 1.70
BUY Maintain BUY 1.28 Down 1.32