Mapletree Industrial Trust (MIT) - UOB Kay Hian 2017-04-26: 1Q17 Results Above Expectations

MAPLETREE INDUSTRIAL TRUST ME8U.SI

REITs − Singapore - 1Q17: Results Of MIT (Above)

MIT’s results came in above our and consensus expectations.
Maintain HOLD on MIT with a higher target price of S$1.69 (previously S$1.60).

Maintain HOLD with a higher target price of S$1.69 (previously S$1.60). Entry price: S$1.48. Our valuation is based on DDM (required rate of return: 6.6%, terminal growth: 1.1%).
Mapletree Industrial Trust (MIT) reported 4QFY17 DPU of 2.88 S cents (+2.5 % yoy).
4QFY17 gross revenue was up 4.5% yoy due to higher rental rates for Flatted Factories, Hi-Tech Buildings and Stack-up/Rampup Buildings and rental contributions from Phase 1 of the Hewlett-Packard project. NPI increased 2.5% yoy due to lower property maintenance expenses and marketing commissions.
The results were above our and consensus expectations, with FY17 DPU representing 104.6% of our full-year estimates, primarily due to lower-than-anticipated property expenses and borrowings costs.
We have revised FY18-19 DPU estimates upwards by 4% by inputting lower property expenses and lowering interest expenses, and rolled forward our DPU estimates.
4QFY17 portfolio rent was up 0.6% qoq at S$1.94 psf, while overall occupancy rate grew 1ppt qoq to 93.1% in 4QFY17, due to higher occupancies at Hi Tech and Business Park Buildings. However, tenant retention rate fell 6.8 ppt qoq to reach 68.7% in 4QFY17.

The quarter saw valuation gains of S$190.8m booked from a combination of portfolio revaluation (S$70.2m), and capitalised development/improvement cost (S$120.6m).
HP BTS building Phase 2 expected to TOP by 2Q17. The S$226m project is 100% committed by HP for 10.5+5+5 years. HP is MIT's largest tenant (5.3% by gross rental income) and is currently finalising lease commencement details for Phase 2, which should result in HP accounting for approximately 10% of MIT’s gross rental income.

No replacement tenants have been found for Johnson & Johnson's lease (2.2% of MIT's gross revenue) which terminates on 30 Sep 17. According to management, the large space quantum of the lease (159k sf) hampers its ability to find prospective tenants, as they are generally looking for smaller spaces.
The REIT manager has not confirmed distribution plans for the $3.1m in compensation paid (roughly 6 months in rent), although we expect that the amount to be paid out by Mar 18. We also note that the compensation is unlikely to cover downtime from backfilling the vacant space.

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.

Vikrant Pandey UOB Kay Hian | Derek Chang UOB Kay Hian | http://research.uobkayhian.com/ 2017-04-26

HOLD Maintain HOLD 1.690 Up 1.600