Mapletree Logistics Trust - DBS Research 2018-07-06: Future Proofing The Singapore Portfolio

MAPLETREE LOGISTICS TRUST SGX: M44U

Mapletree Logistics Trust - Future Proofing The Singapore Portfolio

Acquisition of five modern warehouse properties in Singapore from CWT Ltd.
A quality portfolio with strong attributes; long WALE of 8.7 years offers strong income visibility.
Funding of the deal to come from a combination of divestment proceeds, cash from a planned dividend reinvestment programme or potential issuance of new equity/perpetuals.
Estimates maintained for now; BUY for a firmer future.

Announced the purchase of five modern ramp-up warehouses in Singapore for S$778m, comprising a consideration of S$730m and S$48.3m in upfront land premium (total purchase consideration of S$738.3m).
Properties to be leased back to CWT on a master-lease with a combined WALE of 8.7 years (ranging from 5-10 years) with in-built rent escalation of 1.5% per annum.
Initial net property income yield of 6.2% for the portfolio (ranging from 5.6-6.9%), which we believe to be fair given the lack of availability of quality modern warehouses to be acquired in Singapore, coupled with a fairly long land lease of 32.3 years.
Rights of First Refusal (ROFR) for the acquisition of 47 Jalan Buroh (2.0m sqft of GFA) when the opportunity arises.
Acquisitions are subject to approvals from JTC.

Coming on the back of the decoupling of the relationship between CWT and ARA, MLT has capitalised on the loss in ROFR to the Cache, thus resulting in the REIT being able to accumulate a quality portfolio of warehouses in Singapore.
The properties are fairly new (recently completed back in 2014-2015), have an average age of 4.8 years and have a long weighted average land lease expiry of 32.3 years, which is longer than the usual < 30 years for industrial land in Singapore, available in the government land sales (GLS).

The warehouses are located in specialised zones (4 Pandan Avenue, 52 Tanjong Penjuru and 38 Tanjong Penjuru) in a chemical zone while 6 Fishery Port Road is located in a food zone, which means that competing warehouses with such speciality is limited as they require licensing and are only allowed to operate in these approved zones. io. This means that the underlying rents that the warehouses can charge are typically higher than a normal warehouse.

While exposure to CWT will rise to 9.5% of portfolio gross revenue, 30% of that (or 3.0% of top line) is contributed by third0party end-users under sub-lease agreements. io. However, we believe this risk is mitigated by virtue of the location and quality of the portfolio, which makes demand for space resilient.
The manager has also a 6-month security deposit in cash to mitigate any downside in earnings, if any.

Our initial concerns on the sustainability of the initial yield (6.2%) in the medium term is mitigated from management’s strategy to structure the master leases on assumed multi-tenanted basis (NLA rather than GFA). This minimises downside risk in the event that the master leases are not renewed in the medium term.
Moreover, with the Singapore warehouse market on an uptrend on the back of a decline in supply risk, we believe there is upside risk to rentals in the longer term.

The manager is looking to fund the acquisition through a combination of means which include
1. potential divestment of up to S$200m of assets on the balance sheet that are yielding lower than the target portfolio,
2. potential fund raising from equity or perpetual securities, and
3. potential proceeds from the restart of its dividend reinvestment programme.
Assuming a 40%-60% debt-equity fund raising, the deal is expected to raise DPUs by up to 1.9%.
Our estimates are maintained pending further clarity on the fund raising.

Derek TAN DBS Group Research Research | Carmen TAY DBS Research | Mervin SONG CFA DBS Research | https://www.dbsvickers.com/ 2018-07-06

SGX Stock Analyst Report BUY Maintain BUY 1.480 Same 1.480