Mapletree Industrial Trust - DBS Research 2018-12-14: Doubling Up In Tai Seng Area With Another Quality Purchase

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MAPLETREE INDUSTRIAL TRUST (SGX:ME8U)

Mapletree Industrial Trust - Doubling Up In Tai Seng Area With Another Quality Purchase

• Acquiring 18 Tai Seng, a top quality project within Paya Lebar iPark.
• Attractive 6.8% initial yield, with upside from occupancy improvements.
• Yet to reach a decision on funding options which may include part-funding by equity.
• Estimates unchanged for now pending deal completion; Target Price S$2.22 and BUY call maintained.

What’s New

Proposed acquisition of 18 Tai Seng.

• Mapletree Industrial Trust (MINT) announced the proposed acquisition of 18 Tai Seng, an integrated development from Sponsor, Mapletree Investments, at an agreed property value of S$268.3m (all-in acquisition cost of S$271.0m) which reflects a 0.6% discount to higher of two valuations commissioned (Savills and Colliers).
• The property was developed by the Sponsor which won the site back in 2013 through a government land sales (GLS) exercise.

Top notch property within Paya Lebar iPark.

• In our view, 18 Tai Seng is one of the best industrial properties within Paya Lebar iPark. The property is built to high specifications and offers tenants direct access through an underground link to Tai Seng MRT station. The property attracts a high-quality pool of tenants looking for quality space within Tai Seng.
• The nine-storey high specification mixed use development has a gross floor area of 443,810 sqft (NLA of 384, 212 sqft) and comprises of business 2 industrial, office and retail space.

Our Thoughts:

An attractive investment-grade addition to MINT.

• In our view, we believe this acquisition ticks all the boxes that investors look for in an acquisition –
  1. a quality addition which strengthens MINT’s portfolio,
  2. good location which boosts the asset’s attractiveness to potential tenants and improves tenant stickiness, and
  3. accretive to distributions.
• The retail portion with a variety of food options and a FairPrice supermarket is a plus point for tenants in the building and those working around the vicinity, in our view.

Attractive initial yield of 6.8%; upside to come from occupancy improvements.

• The property is 94% committed (87.4% actual occupancy rate) with vacancy left in both the industrial and office spaces. At the committed occupancy rate, we estimate that the initial yield of the property is close to 6.8%, based on the agreed property value. Income is fairly secured supported by a long weighted average lease expiry of 3.6 years. However, we note that most of the retail leases, representing close to 20% of the property’s gross rental income, will expire in FY20F, its first renewal cycle.
• While we understand that the retail space sees robust trading performance in the weekdays, supporting the needs of the working population within the vicinity, we believe that given the asset’s small footprint and location, weekend trading performance is likely to be lower. Therefore, this may cap the manager’s ability to raise retail rents when they fall due.
• Upside will then come from re-letting the remaining vacant space, which could push yields towards the 7.0% level.

A value accretive deal; Manager to consider funding options towards completion of the deal.

• As of 3QFY19, MINT’s gearing stood at 35.1% which empowers the REIT with significant debt capacity to fully fund this acquisition with debt, which based on the proforma analysis provided by the Manager, will bring its gearing towards the 38.1% level. In addition, the Manager has re-started its dividend reinvestment program (DRP) which would slowly pare down the REIT’s gearing over time.
• Based on a 100% debt-funded scenario at a 3.0% assumed cost of debt, this acquisition will drive DPU 3.1% higher.
• The Manager has also provided illustrative alternative funding scenarios which include 40%/60% equity funding, under which DPU is expected to rise by 1.5% and 0.7% respectively. Gearing levels in a 40% and 60% equity funding scenario will be 35.4% and 36.4% respectively.

Our BUY call and earnings estimates maintained.

• We leave our estimates intact for now, pending the closure of deal after an extra-ordinary meeting (EGM) which will be called to approve this deal, given that it is a related party transaction.
• Our call is BUY, with Target Price of 2.22.

Derek TAN DBS Group Research | Mervin SONG CFA DBS Research | Carmen Tay DBS Research | https://www.dbsvickers.com/ 2018-12-14

SGX Stock Analyst Report BUY MAINTAIN BUY 2.220 SAME 2.220