Singapore Industrial REITs - UOB Kay Hian 2016-10-26: Results For MIT And MLT In Line

Singapore Industrial REITs - UOB Kay Hian 2016-10-26: Results For MIT And MLT In Line Singapore Industrial REITs MAPLETREE INDUSTRIAL TRUST ME8U.SI MAPLETREE LOGISTICS TRUST M44U.SI

Singapore Industrial REITs - Results For MIT And MLT In Line

  • Results were in line for MIT; maintain SELL with a reduced target price of S$1.61 (from S$1.70). Outlook is challenging with the likelihood of negative rental reversions for flatted factory and stack-up/ramp-up space next year. 
  • Results were in line for MLT; maintain BUY with a reduced target price of S$1.21 (from S$1.28). Overall rental reversion is positive. Management remains stoically upbeat on portfolio resilience despite a cautious outlook. MLT has also suspended its DRP programme. 
  • Maintain OVERWEIGHT on the sector.


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

Mapletree Industrial Trust (MINT SP/SELL/S$1.75/Target: S$1.61)

Results in line with expectations. Maintain SELL with a reduced target price of S$1.61 (from S$1.70) based on DDM (required rate of return: 6.6%, terminal growth: 1.1%).

  • Mapletree Industrial Trust (MIT) reported 2QFY17 DPU of 2.83 S cents (1.4% yoy).
  • 2QFY17 gross revenue was up 1.8% yoy on higher rental rates and occupancy for hitech buildings, outpaced by net property income which grew 4.3% yoy due to lower property maintenance, property taxes and utility expenses. The results were in line with expectation, with 1HFY7 DPU representing 51.4% of our full-year estimate.
  • While maintaining FY17 estimates, we lower FY18-19 DPU estimates by 0.6-2.4%, reducing rental assumptions by (2ppt for business park/hi-tech, 7ppt for flatted factory and stack-up/ramp-up). We have reduced our terminal growth assumptions by 50bp to 1.1% from 1.5%, factoring in a further weakness in the growth outlook.

Likelihood of negative rental reversions in FY18. 

  • Management alluded to the likelihood of negative reversions (1-3%) for flatted factories and stack-up/ramp-up in FY18. These segments account for the bulk of the 32.8% in expiring leases come FY18 ( > 20%). 
  • With tenant retention and maintaining high occupancy (at least 90%), management has hinted at greater flexibility on rents, especially in these two segments.

Mixed bag of rental reversions in 2QFY17. 

  • Sub segments which saw rental reversions under pressure included stack-up/ramp-up (-2.3%) and hi-tech (-0.5%), while flatted factories (+2.7%) and business park (+0.5%) held up relatively well.

AEI/development updates. 

  • Phase 1 of the HP built-to-suit project obtained TOP on 21 October, with Phase 2 expected to obtain TOP by 2Q17. The S$226m project is 100% committed by HP for 10.5+5+5 years. HP will be MIT's largest tenant upon lease commencement. Rental income from Phase 1 will stream in by 3QFY17, and we have already factored this into our estimates. 
  • Construction work also commenced for the asset enhancement initiative (AEI) at Kallang Basin in Aug 16. 
  • At an estimated cost of S$77m, the project is slated for completion come 1Q18 with estimated NPI yield on cost of about 8%. The asset is currently 0% pre-committed, with better leasing visibility likely six months before completion.

Still engaging Johnson & Johnson

  • Still engaging Johnson & Johnson, which accounts for 2.3% of gross rental income (GRI) Should J&J choose not to renew its lease at The Strategy (which expiries mid-18), leasing downtime is to be expected, with backfilling likely to take 9-12 months.
  • Management has previously 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. 

  • 2QFY17 saw all-in borrowing costs increase 10bp qoq. Replacements of expiring interest rate hedges are expected to be more costly due to the low interest rates of these expiring hedges. Of the S$150m of hedges due to expire in 2HFY17, S$50m have been extended/replaced. 
  • MIT is still on the lookout for opportunities in which favourable rates could be locked. 
  • We note that MIT has already let some of the existing hedges expire, with fixed debt now at 68.6% of total debt (1QFY17: 87.6%).

Challenging outlook to exert pressure on rental and occupancy. 

  • Management expects the muted global economic outlook, supply headwinds and domestic economy restructuring to weigh on the sector, putting pressure on rentals and occupancy. 
  • Its strategy is to focus on tenant retention, and shift towards performance-based contracts where feasible. 
  • About 6.8% of leases by gross rental are due in FY17.

Mapletree Logistics Trust (MLT SP/BUY/S$1.055/Target: S$1.21)

Results in line; maintain BUY with a reduced target price of S$1.21 (previously S$1.28) based on DDM (required rate of return: 6.7%, terminal growth: 1.1%). 

  • Mapletree Logistics Trust (MLT) reported 2QFY17 DPU of 1.86 S cents, 0% yoy. The quarter saw gross revenue and NPI increase by 4.7% yoy and 5.3% yoy respectively, on the back of full contributions from its Australia, Vietnam and Korea acquisitions. 
  • 2QFY17 distributable income increased a slower 1% yoy due to higher distributions to perp holders and borrowing costs. The results were in line with expectations, coming in at 50.4% of our full-year estimate.
  • We have lowered our terminal growth by 50 bps to 1.1% from 1.5% factoring in a further weakness in the growth outlook.

2QFY17 overall portfolio rental reversions at +2%

  • 2QFY17 overall portfolio rental reversions at +2%, underpinned by leases renewed/replaced in Singapore (+3%), Hong Kong (+4%) and South Korea (+6%). This was somewhat mitigated by marginal rental reversions in Japan (flat) and China (+0.4%).
  • Management has alluded to possible negative rental reversions in China, especially in secondary cities like Wuxi. We note that China only accounts for 2% of expiring leases by NLA in FY17, while Chinese secondary cities merely account for about 1% of FY18’s expiring leases (17% by NLA).

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

  • Pro-active leasing efforts resulting in well-spread out lease expiry profile, with 10.1% and 17.0% of total leases by NLA expiring in FY17 and FY18 respectively. 
  • Of these expiring leases, China only accounts for 2% in FY17, with secondary cities (Wuxi, Zhengzhou) accounting for about 1% of the leases due in FY18. In S. Korea, management is actively negotiating to backfill 50- 80% of its Pyeongtaek Port asset once the anchor tenant vacates in end-16.

Potential cost savings from refinancing of perpetual security in 2017. 

  • Management was quick to remind that the callable date for 2012’s issuance of perps (S$350m at 5.375%) is due next Sep. 
  • Against its recent S$250m issuance at 4.18%, refinancing could imply cost savings of S$3.5m for every 1ppt decline.

DRP suspended forthwith. 

  • MLT has suspended its dividend reinvestment plan from and including 2QFY17 distributions, with shareholders to receive quarterly distributions in cash. 
  • Management has stated this was due to low take-up rate, impeding the efficiency of the DRP as an effective fund-raising platform.

Asset recycling stymied by authorities in Singapore. 

  • Attempts to divest lower-yielding assets in Singapore were rebuffed by JTC. Instead, management intends to recycle its low-yielding overseas assets in South Korea, Japan and Malaysia.

Cautious optimism. 

  • Management seemed stoically upbeat on forward performance, with the moderation of upcoming SUA expiries (4.1% respectively in both 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). Management did also note that tenants have been relatively cautious, renewing their leases at lower tenures (2-3 years), likely due to a more tepid outlook.

Overseas acquisitions. 

  • Management highlighted target markets Vietnam and Australia to potentially deploy an unutilised S$89m from May’s perp issuance. 
  • Management has also expressed its willingness to expand its Australian footprint beyond Sydney. 
  • MLT currently derives about 60.7% of overall asset value from overseas assets.

Vikrant Pandey UOB Kay Hian | Derek Chang UOB Kay Hian | http://research.uobkayhian.com/ 2016-10-26
UOB Kay Hian SGX Stock Analyst Report SELL Maintain SELL 1.61 Down 1.700
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.21 Down 1.28