Mapletree Group of REITs - DBS Research 2017-03-30: One (Day) in Bangkok

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MAPLETREE COMMERCIAL TRUST N2IU.SI MAPLETREE GREATER CHINACOMM TR RW0U.SI MAPLETREE INDUSTRIAL TRUST ME8U.SI MAPLETREE LOGISTICS TRUST M44U.SI

Mapletree Group of REITs - One (Day) in Bangkok

• Hosted Mapletree group of REITs to a tailored conference in Bangkok.
• Improving outlook for most REITs in 2017-2018.
• Ability and availability of acquisitions a key differentiating factor.
• Strong financial metrics and liquidity from banks to limit interest rate pressures.

Mapletree Bangkok Day. 

• We hosted a Mapletree REIT day in Bangkok, tailored for the management of four listed Mapletree REITs - Mapletree Commercial Trust (MCT), Mapletree Greater China Commercial Trust (MAGIC), Mapletree Logistics Trust (MLT) and Mapletree Industrial Trust (MINT). 
• Investors who met management had the opportunity to gain deeper insights into the strategies employed by the various REIT managers to grow.
• Key discussion points were as follows: 

Pick-up in operating outlook from 2017 a positive. 

• We are sensing a general improvement in operating outlook for most sectors (industrial and office) in 2017-2018. This is mainly on the back of abating supply risk, especially in the industrial sector (positive for MLT and MINT) where we see a gradual turnaround in demand on the back of positive manufacturing numbers. If sustained, this will imply business expansion and positive take-up rates in the medium term.
• Despite the weakness in the near-term retail sector outlook, MCT's and MAGIC’s portfolios stand tall against competition in their respective sub-markets of Singapore and Hong Kong.
• Both REITs are expected to continue reporting positive rental reversions, ahead of peers.

Ability to acquire accretively a key differentiating factor.

• The Mapletree group of REITs, given their large market cap, liquidity and strong sponsor lineage, typically enjoy better valuations and lower cost of capital than peers (three out of four REITs trade above their respective net asset values [NAV]).
• This is supportive of acquisition activities, providing the REIT with an added avenue of growth. Among the four REITs, we believe that MLT offers the most exciting acquisition prospects given an extensive pipeline of stabilised assets which we believe are ready for acquisition.

Strong financial metrics limit interest rate risks. 

• Balance sheet metrics remain strong with gearing well within management's comfortable limits, with access to banks. While interest rates are rising, compressing credit spreads mean that upward pressure to interest rates are marginal.

Mapletree Logistics Trust (MLT) 

More favourable industry outlook. 

• MLT expects the operating environment across its various markets to see improvement compared to a year ago. Key pressures to net operating income (NOIs) in the past has eased with 
  1. the number of property conversions (mainly from Singapore warehouses) falling off from FY17F onwards while 
  2. the back-filling of vacated spaces have meant that average portfolio occupancy rates will see sequential improvement with income contribution to kick-start in subsequent quarters.

Majority of markets to see improved performance. 

• The manager sees improved operational stability and higher rents in a majority of the markets that they are in. Hong Kong (c.15% of revenue) and Australia (c.8% of revenue) are expected to see the highest growth in rents driven by strong demand for space. 
• Even Singapore (c.40% of revenues), its biggest exposure, has seen worse days with the supply pressure now easing off. Japan (c.19% of revenues) remains stable given its long lease profile. However, China and Malaysia (collectively c.11% of revenues) are expected to see some weakness in occupancy rates and rental rates given heightened supply competition.

Acquisition opportunities. 

• The manager continues to see more acquisition opportunities in Australia and Korea. However, the REIT has an extensive pipeline of warehouses that is developed from the sponsor, a majority of which is in China in various stages of development and leasing. 
• We understand that the manager plays an active role in sourcing for land and leasing out the space to end tenants. Based on the leasing status of the various assets in the pipeline, we see potential acquisitions from Hong Kong, China and potentially Vietnam which could be injected through the course of FY18F.

Upcoming refinancing needs. 

• With interest rates expect to remain on an uptrend in 2017-2108, the manager has undertaken proactive measures to lock in interest rates with close to 76% of its debt hedged or drawn in fixed rates. 
• In addition, we expect interest savings from the potential buyback of its 5.375% perpetual securities by September 2017, which is one of its first reset dates. With MLT being able to issue new perpetual at a lower rate of 4.18%, we see potential savings if MLT calls back the perpetuals on its first reset date in September 2017.

Mapletree Industrial Trust (MINT) 

Supply risk abating. 

• The high number of completing industrial supply (25 mil sqft) completing through 2017 will remain an overhang for the REIT. Given increasing competition for space, the manager sees limited ability to hike rental rates and sees rental reversions trending towards to 0-2% level, while selective leases might see a drop in renewal rents. A key focus will be to maintain portfolio occupancy levels.
• While Singapore’s recent manufacturing output and industrial production data point towards a gradual recovery in the outlook of the manufacturing sector, the manager believes that it is still too early to call a bottom. 
• While downside to occupancy rates are limited, the manager believes that it will take time to absorb the high number of new industrial supply and any meaningful recovery will likely come from 2018 onwards.

Development projects to complement flattish organic growth.

• The manager’s focus is to deliver a steady distribution growth profile for investors. This is mainly driven from the completion of development project (HP building in phases from October 2016) and the continued execution of development projects – Kallang Basin and new built-to-suit data centre project. Even with these planned development projects, MINT’s gearing level is expected to remain.
• In addition, we see opportunities from potential redevelopment of its existing portfolio into higher-spec industrial properties. This is to cater to the changing needs for the manufacturing sector in the medium term. 

Minimal refinancing risk. 

• With interest rates expected to remain on an uptrend in 2017-2108, the manager has undertaken proactive measures to lock in interest rates with close to 67% of its debt hedged. 
• All-in interest cost is expected to trend higher from the current 2.6% but should be at a measured pace. 

Mapletree Commercial Trust (MCT) 

MCT to continue benefitting from retailers focusing on high performing malls. 

• Despite an improvement in the recent retail sales index, the outlook for Singapore retail is expected to remain challenging in the near term. Given the constraints in hiring foreign labour, high cost of labour and soft retail sales, the profitability of retailers remain under pressure. 
• We understand that consolidation remains a key trend with retailers still looking to rationalise and are seeking to close some of their underperforming stores but will expand the size of selected stores in the higher-performing locations. 
• Fortunately for MCT, we believe that its mall, VivoCity (contributes c.40% of the portfolio revenues) is one of the few malls in Singapore which continue to draw shoppers and remain a choice location where a majority of retailers would like to maintain a presence in. 

Boost from MBC acquisition. 

• While spot office rents are on the downtrend near term given the elevated supply, MCT should benefit from the full-year contribution from the recently acquired Mapletree Business City 1 (MBC 1) come FY18F which will more than compensate for the near-term rental pressures that the REIT is seeing in other office assets – PSA building and Mapletree Anson. 
• In addition, there remains some opportunity to increase rents at MBC 1 given average passing rents are still below current spot rents. 

Some risk at PSA Building. 

• There is some near-term vacancy risk at MCT’s PSA Building (c.14% of 9MFY17 NPI). 
• Approximately 15% of the property is filled by tenants from the oil and gas sector which are suffering from low oil prices. 
• In addition, MCT has yet to find a replacement tenant for Hanjin (bankrupt shipping line) whose lease is scheduled to expire at the end of March. 

To remain a Singapore-focused REIT. 

• Based on investor feedback and opportunities still present in Singapore, MCT intends to remain a Singapore-focused REIT, and management believes that investors will continue to accord them a premium in terms of valuations. 

Mapletree Greater China Commercial Trust (MAGIC) 

Festival Walk to remain an out-performer. 

• In Festival Walk, MAGIC owns one of the top performing retail malls in Hong Kong and at close to c.70% of revenues, the mall will remain a key driver for the REIT in the medium term. 
• While tenant sales and rental reversions at Festival Walk have been moderating due to the high-base effect as well as softness in the Hong Kong retail market, performance has been more resilient that its competition. This is mainly due to the positioning of the mall (serving the nearby local residents and university community) and location of the mall (above two train stations) which result in strong daily traffic flow. As such, we believe that Festival Walk is expected to outperform the overall Hong Kong market and provide steady returns going forward. 

Approaching end of near-term tax drag. 

• Contribution from China (c.30% of the portfolio) was negatively impacted by the change in the property tax calculation in Beijing (implemented in the middle of 2016). While this will continue to be a drag on earnings over the next six months, from the middle of 2017, the y-o-y comparison will improve due to the uplift in contribution from Sandhill Plaza (located in Shanghai) which is expected to deliver positive rental reversions. 

Potential pipeline of properties to be acquired. 

• MAGIC has the first right of refusal (ROFR) over several properties from its sponsor, the Mapletree Group. One potential acquisition for MAGIC in the medium term is an office tower in Kowloon East, Hong Kong which is currently under construction. 
• In addition, MAGIC’s sponsor also has a business park property in Beijing that could be injected into the REIT. 
• Beyond the ROFR properties, MAGIC may have an opportunity to acquire retail malls or mixed development properties from the private funds that its sponsor is managing. 

Derek TAN DBS Vickers | Mervin SONG CFA DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2017-03-30

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