Industrial REITs - UOB Kay Hian 2019-07-28: Unearthing Key Trends In Mapletree Logistics Trust and Mapletree Industrial Trust Post-Results Briefings

Mapletree Logistics Trust and Mapletree Industrial Trust | SGinvestors.io MAPLETREE INDUSTRIAL TRUST (SGX:ME8U) MAPLETREE LOGISTICS TRUST (SGX:M44U)

Unearthing Key Trends In Mapletree Logistics Trust and Mapletree Industrial Trust Post-Results Briefings




MAPLETREE LOGISTICS TRUST (SGX:M44U) (HOLD / Target Price: S$1.39)


Resilient showing but turned more cautious on outlook.

  • Management noted the softer global economic growth in 1H19, as trade and manufacturing activities decelerated. Leasing demand for warehouse spaces has so far been resilient, although customers are becoming more cautious on renewals and capacity expansion.
  • Transhipment hubs Singapore and Hong Kong are seen as more vulnerable to the escalating trade conflict. However, management noted that the bulk of Mapletree Logistics Trust’s exposure in Singapore and Hong Kong (about 70%) was concentrated on domestic consumption. The logistics sector could experience weakness after a time lag (following other sectors, such as manufacturing). The overall impact on the macro economy is likely to become clearer in the coming months.
  • Management remains vigilant amid an evolving environment. Mapletree Logistics Trust has hedged 83% of total debt in fixed interest rates and 83% of distributable income over the next 12 months in Singapore dollars.

Weakness in occupancies for trade-sensitive Singapore and Hong Kong.

  • Overall occupancy edged lower by 0.4ppt q-o-q to 97.6% in 1QFY20, dragged down by Singapore (-0.9ppt q-o-q), Hong Kong (-1.2ppt q-o-q) and South Korea (-0.6ppt q-o-q). China (+0.9ppt q-o-q) saw higher occupancies, while Japan, Australia, Malaysia, and Vietnam portfolios maintained occupancy at 100%.
  • Average rental reversions were up 1.8% for the 218,459sqm of leases renewed or replaced, mainly contributed by China (+3.3%), Hong Kong (+2.6%), Vietnam (+3.7%), as well as Malaysia (+0.4%).

Slight deleveraging as outlook turns more uncertain.

  • As at Jun 19, Mapletree Logistics Trust's portfolio comprised 137 properties with total AUM of S$7.9b. During the quarter, Mapletree Logistics Trust divested five low-yielding assets with older specifications for JPY17.5b (S$213.3m) in Japan. There was a slight decline in gearing to 36.8% (-0.9ppt q-o-q).
  • Total debt outstanding declined by S$127m, mainly due to repayment of loans (S$188m) using proceeds from divestment of Japan assets, but this was also offset by additional loans of S$37m drawn to fund capex and higher net translated loans of S$24m attributable to appreciation of the JPY and HKD.

1QFY20 results in line with expectations.

  • Gross revenue and NPI increased by 13.6% y-o-y and 18.2% y-o-y respectively in 1QFY20, underpinned by a stable performance from existing properties, as well as contributions from the completed redevelopment of Mapletree Ouluo Logistics Park Phase 1 and accretive acquisitions completed in FY19 (five ramp-up logistics properties in Singapore and 11 Grade A logistics properties in China). Interest expense increased by 28.7% y-o-y.
  • Mapletree Logistics Trust also recognised gains of S$34.4m for divestment of five logistics properties in Japan. DPU was 2.025 S cents (+3.5% y-o-y) for 1QFY20, representing 25.6% of our full-year estimate.

Maintain HOLD with a target price of S$1.39.

  • Our valuation is based on DDM (required rate of return: 6.8%, terminal growth: 1.5%). Entry price: S$1.26.


MAPLETREE INDUSTRIAL TRUST (SGX:ME8U) (HOLD / Target Price: S$1.94)


US-China trade conflict affects electronics and precision engineering.

  • Management noted that business sentiment among local companies has edged up slightly, after three consecutive quarters of decline. They also expect a lukewarm manufacturing sector in 2QFY20, with economic uncertainties and trade conflicts posing particular challenges for the electronics and precision engineering sectors.

MINT suffered negative rental reversions across the board

  • Mapletree Industrial Trust suffered negative rental reversions across the board on renewals for Flatted Factories (-4.0%), High-tech Buildings (-8.2%), Business Park Buildings (-4.5%), and Stack-up/Rack-up Buildings (-9.7%).
  • Singapore portfolio saw average passing rents improve marginally to S$2.10psf pm (+1.5% q-o-q), while US portfolio passing rents remained at US$2.06psf pm (flat q-o-q).

Singapore portfolio occupancy improved to 90.5% (+0.7ppt qoq),

  • Singapore portfolio occupancy improved to 90.5% (+0.7ppt qoq), largely attributable to the High-tech Buildings segment (+2.4ppt q-o-q) and Stack-up/Ramp-up Buildings (+0.8ppt q-o-q). Business Park (-0.1ppt q-o-q) and Light Industrial (-6.2ppt q-o-q) declined in occupancies, while Flatted Factories remained at the same level (flat q-o-q). US portfolio occupancy rate was unchanged at 97.4% (flat q-o-q).

Resiliency from long WALE.

  • Overall WALE stood at 3.4 years (flat q-o-q), comprising of the Singapore portfolio (3.3 years) and US portfolio (4.8 years). Only 12.3% of the leases remain due for renewal in FY20. Management prefers to renew ahead of expiry for more stability. However, most tenants are willing to renew only a few months ahead of expiry. Only larger tenants will renew significantly ahead (ie one year in advanced).

Mapletree Industrial Trust is keen to further expand data centres.

  • Management cited 451 Research, in noting that the US currently represents 32% of the global insourced and outsourced data centre space by operational sf. Both leased data centre supply (by operational sf) and demand (by utilised sf) are expected to grow at a CAGR of 4.6% and 7.6% respectively, between 2017 and 2023F, driven by growth of data and cloud computing, proliferation of consumer devices, as well as need for data to be stored close to end users and at multiple locations for geographical diversity.
  • Management has flagged interest in acquiring data centres located in selected cities in Europe and Asia. They also noted their preference for portfolio transactions (vs acquisitions on a piecemeal basis), due to savings in cost and time spent on due diligence. Piecemeal acquisitions could also make sense, as they can pick and choose assets.

Embarks on largest development project with total cost at S$263m.

  • Mapletree Industrial Trust plans to redevelop the Kolam Ayer 2 Flatted Factory Cluster into a high-tech industrial precinct. The redevelopment increases utilised plot ratio from 1.5 to 2.5 and expands GFA by 71% to 865,600sf. Mapletree Industrial Trust will build a 7-storey build-to-suit facility with GFA of 211,000sf (24.4% of the enlarged GFA) for a global medical device company headquartered in Germany.
  • The anchor tenant has committed to fully lease the building for 15 years with annual rental escalations. For the second block with total GFA of 654,600sf, management targets high value-add and knowledge-based companies from advanced manufacturing, information & communications technology. The property is located near Geylang Bahru MRT station.

Results came in line with our expectations.

  • Gross revenue grew 8.8% y-o-y to S$99.6m in 1QFY20, largely driven by new revenue contributions from 18 Tai Seng (acquisition completed in Feb 19), 30A Kallang Place (AEI completed in Feb 18) and Mapletree Sunview 1 (build-to-suit data centre completed in Jul 18). Property operating expenses declined 1.7% y-o-y due to lower property maintenance expenses.
  • Net property income grew 12.2% y-o-y to S$77.9m in 1QFY20. Distribution declared from Mapletree Industrial Trust’s 40% interest in the portfolio of 14 data centres in the US increased 16% y-o-y to S$3.7m.
  • Mapletree Industrial Trust's 1QFY20 DPU increased by 3.3% y-o-y to 3.10 S cents, on an enlarged unit base (private placement of 103.4m new units completed in Feb 19). 1QFY20 DPU accounted for 24% of our full-year forecast.

Maintain HOLD with a target price of S$1.94,

  • Maintain HOLD with a target price of S$1.94, based on DDM (required return: 6.8% and terminal growth of 2.0%). Entry price: S$1.82.


ACTION


Stay cautious on industrial REITs.

  • The stalemate in trade negotiation continues to cause disruption to the manufacturing supply chain in Asia. The latest bad news being Hasbro, the largest toymaker in the world, accelerating plans to shift production away from China to Vietnam and India.
  • Maintain HOLD for Mapletree Logistics Trust and Mapletree Industrial Trust.





Jonathan KOH CFA UOB Kay Hian Research | Peihao LOKE UOB Kay Hian | https://research.uobkayhian.com/ 2019-07-28
SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.940 SAME 1.940
HOLD MAINTAIN HOLD 1.390 SAME 1.390



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