Mapletree Greater China Commercial Trust - CIMB Research 2018-03-28: Maiden Foray Into Japan

Mapletree Greater China Commercial Trust - CIMB Research 2018-03-28: Maiden Foray Into Japan MAPLETREE GREATER CHINACOMM TR RW0U.SI

Mapletree Greater China Commercial Trust - Maiden Foray Into Japan

  • Mapletree Greater China Commercial Trust buys six Japan commercial properties for a total acquisition cost of S$770.5m.
  • Deal will diversify portfolio and income stream.
  • Acquisition to be earnings accretive, room for more upside from rental reversions.
  • To be funded via debt and new equity.
  • Upgrade to ADD with a higher Target Price of S$1.30.

Buys six commercial properties in Japan 

  • Mapletree Greater China Commercial Trust (MAGIC) announced it is acquiring a 98.47% stake in a portfolio of six Japan commercial properties from MFOJ Pte Ltd, a private real estate fund managed by its Sponsor. 
  • The six properties have a total NLA of 1.6m sqft and are located in Tokyo, Yokohama and Chiba. They are 99.9% occupied and 60% of the leases are fixed-term leases. The top four tenants include blue-chip names such as Fujitsu, Seiko Instruments, PERSOL and Japan Information Processing Service. The deal is subject to unitholders’ approval at an EGM.

Diversifying portfolio while improving income visibility 

  • We view this transaction positively as it diversifies MAGIC’s portfolio exposure to the still rising Japan commercial market. Rental growth there have picked up on the back of stronger economic activity amid low vacancy rates. 
  • Japan is expected to make up 12- 13% of the enlarged AUM and NPI post acquisition. The trust’s occupancy and income visibility will also be strengthened with a longer weighted average lease to expiry (WALE) of 3.1 years (vs 2.7 years currently).

Purchase to be DPU accretive, upside from positive rental reversion 

  • We have assumed the deal will be completed by mid-CY18. The acquisition is projected to be DPU accretive as the Japan portfolio’s NPI yield of 4.8% is significantly higher than the current cost of funding. 
  • There is also room for further yield improvements as some of its leases are under-rented. About 15.5% of the leases are expiring in FY3/19, thus enabling the trust to benefit from positive rental reversion when re-contracted.

Acquisition to be financed by debt and new equity 

  • The total acquisition cost is S$770.5m after taking into account the aggregate consideration of S$753.4m and other related fees and is expected to be funded via a private placement of 296.4m new units to raise S$323.1m and new debt of S$441.6m. This would likely increase the trust’s leverage to c.41-42%. However, we anticipate this ratio to fall when its existing portfolio of assets are revalued at the end of FY3/18, particularly given the sharp rise in asset values in HK.

Upgrade to Add 

  • We tweak our FY19-20F DPU estimates up by 0.4-2% to include the new contributions.
  • MAGIC would maintain its strategy to hedge its income on a 4-quarter rolling basis. Our DDM-based Target Price is lifted to S$1.30 with the additional income and a change in our blended cost of equity to 8.5% (from 8.9% previously). Hence, we upgrade our call to Add. 
  • We would be buyers into any share price weakness. MAGIC offers FY19-20F DPU yields of 6.4-6.5%. 
  • Downside risk includes delays in completing the transaction.

LOCK Mun Yee CIMB Research | YEO Zhi Bin CIMB Research | http://research.itradecimb.com/ 2018-03-28
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