Mapletree Commercial Trust - DBS Research 2019-07-18: Completing The Sequel


Mapletree Commercial Trust - Completing The Sequel

  • Incorporating S$1.5bn acquisition of MBC II (5.1% cap rate) and S$900m equity-raising.
  • Expected c.2% uplift to Mapletree Commercial Trust's FY21-22 DPU.
  • Jump to being the fourth largest S-REIT and increased exposure to the upturn in the office sector to sustain recent Mapletree Commercial Trust’s share price rally.
  • Street-high Target Price of S$2.25 after incorporating MBC II purchase and lower-for-longer interest rates.

Best in class.

  • We retain our BUY call on MAPLETREE COMMERCIAL TRUST (SGX:N2IU) with a revised Target Price of S$2.25. We remain bullish on Mapletree Commercial Trust given it owns two of the best-in-class retail and office/business park assets.
  • As its key asset VivoCity is valued at a cap rate of only 4.6%, higher than mall transactions at 2.6- 4.2% for arguably less-dominant malls, we believe Mapletree Commercial Trust can maintain its premium P/Bk multiple.
  • Furthermore, as Mapletree Commercial Trust continues to deliver consistent DPU growth, and the market prices in the scarcity premium of being one of only two 100% Singapore-focused large-cap REITs, we believe Mapletree Commercial Trust will sustain the rally over the next year.

Where we differ: Pricing transformative MBC II acquisition.

  • We have a street-high Target Price of S$2.25 after pricing in the acquisition of Mapletree Business City II (MBC II) in FY21 for c.S$1.5bn at a cap rate of 5.1% with a S$900m equity-raising. As Mapletree Commercial Trust has a low cost of capital, while MBC II is within the first lease renewal cycle and has a c.99% committed occupancy, there is a high probability that the acquisition will take place over the coming year.
  • Beyond the expected 2% DPU accretion, we believe the MBC II acquisition will elevate Mapletree Commercial Trust to become the fourth largest S-REIT. But more importantly, this would position Mapletree Commercial Trust as an office REIT which trades at lower yields, given the current upcycle in office rents which should drive Mapletree Commercial Trust’s share price higher.

Improving office/retail market.

WHAT’S NEW - Pricing in transformative MBC II acquisition

Is MBC II ready to be acquired?

  • Mapletree Business City II (MBC II) is a right-of-first-refusal asset (ROFR) asset that had achieved 99.7% occupancy as at 31 March.
  • Typically, Sponsors consider selling assets to their REITs at around the first lease renewal cycle. While we are not privy to Mapletree Commercial Trust nor its Sponsor Mapletree Group’s intentions, given MBC II was only completed in April 2016, the property should be starting or in the process of completing its first lease renewal cycle as typical leases in Singapore are three years in length. Thus, we believe, there is a high chance of this acquisition occurring in the next 12-24 months.

MBC II overview

  • MBC II is a business park property with NLA of c.1.18m sqft, located adjacent to Mapletree Business City I (MBC I) which Mapletree Commercial Trust currently owns. MBC II is itself a 30-storey building set within a 2.8-ha natural landscape greenery with extensive sports and recreational facilities complementing the existing state-of-the-art business facilities and lifestyle amenities currently available at Mapletree Business City precinct. Both properties are within walking distance to the Labrador Park MRT station and ARC, a retail amenity hub which is also owned by Mapletree Commercial Trust.
  • A 10- to 15-minute drive from the CBD, MBC II offers tenants the convenience of being located close to the city, Grade A office specifications but at a c.40% discount to CBD Grade A rents. We understand from press reports that tenants for MBC II include Google (c.500,000 sqft), Medtronic (c.56,000 sqft) and Wirecard (c.25,000sqft).

What price for MBC II? – Potentially S$1.5bn

  • At this stage, MBC II’s passing rent and income figures are unclear. However, we estimate MBC I’s passing rent at close to c.S$6.36 psf/mth. Assuming the property is acquired in FY21, we believe the passing rent could be c.S$6.50 as we are in the midst of an upturn in the office market with limited new supply of business park space.
  • Applying the 5.1% cap rate used for MBC1 for the property’s last valuation as at 31 March and similar 82% NPI margin, we derive a valuation of S$1,471m or S$1,253 psf. While the 5.1% cap rate is lower than the 5.6% initial yield and S$1,042 psf for MBC I, we believe this is reflective of the upturn in rents and tighter cap rates since MBC I’s acquisition. Since 31 March 2016, the reference point for rents in MBC I’s acquisition slides, Grade A office, Grade B and fringe business park rents have risen approximately 13%, 8% and 7% respectively.
  • Cap rates used for office buildings by valuers for various office REIT’s have likewise compressed by 10-25bps to 3.5-4.0%. In addition, office buildings over the past year have been sold in the low 3% or high 2% cap rates. For business parks owned by Mapletree Industrial Trust (SGX:ME8U), cap rates used by valuers have compressed by 10bps to 5.90%. Meanwhile, for Ascendas REIT (SGX:A17U)’s business and science parks, cap rates at the top end of the range have risen by 10bps which we attribute to the challenges faced by older science park properties to fill up their vacancies, thus not the most accurate reference point for MBC II’s valuation.
  • Overall, the cap rates used for Ascendas REIT and Mapletree Industrial Trust’s business parks currently range from 5.75-6.40%. While this is higher than the 5.1% cap rate we have used for MBC II, we believe MBC II should trade at a premium valuation. This is because MBC II is a newer building and its land tenure is longer at c.77 years versus c.50 years for Ascendas REIT and Mapletree Industrial Trust’s business parks.

Funding structure – mix of placement and preferential offering

  • Based on our observation, S-REITs over the past few years have targeted DPU accretion of between 1% and 3% when announcing acquisitions. For the MBC I acquisition, based on the actual placement and preferential offering and sensitivity analysis in the circular, its proforma DPU accretion would have been 3-4%.
  • For the prospective MBC II acquisition, we estimate Mapletree Commercial Trust to target a c.2% DPU accretion, resulting in its 3-year DPU CAGR increasing from 2% to 3%. To that end, we have assumed a S$900m equity-raising with the remainder to be funded with debt at c.3% interest rate similar to Mapletree Commercial Trust’s current cost of funds. This is equivalent to a 61%/39% equity/debt split.
  • Given the large equity-raising, we expect a mix of equity placement and preferential offering similar to the MBC I acquisition. We have assumed a S$500m equity-raising at S$1.88 per share and S$400m preferential offering at S$1.825 per share (1.3% discount to the placement price similar to the recent Frasers Centrepoint Trust (SGX:J69U) preferential offering). Post the acquisition and equity-raising, we expect gearing to stabilise at c.35% from c.33% as at end-March 2019.

Benefits to flow from being the fourth largest S-REIT and perception as an office REIT

  • Post the S$900m equity-raising, we see Mapletree Commercial Trust jumping up one position from the fifth to fourth largest S-REIT, switching places with Suntec. Its market cap will increase to S$6.9bn from S$6.0bn. More importantly, its free float will increase by c.19% to S$4.7bn from S$3.9bn assuming Mapletree Group takes up its pro-rated entitlement in the preferential offering but does not participate in the equity placement. We estimate Mapletree Group’s stake in Mapletree Commercial Trust to drop from 34.2% to c.31.7%. While some investors may be concerned by this drop, we believe Mapletree Group still retains a large stake in Mapletree Commercial Trust but more importantly the higher trading liquidity should boost interest in the stock and potentially tighten Mapletree Commercial Trust’s trading yield.
  • Following the acquisition of MBC II, Mapletree Commercial Trust’s exposure to the office sector will increase by value/NPI from 55%/53% to 62%/61%. We believe over time, the perception of Mapletree Commercial Trust as a retail stock will erode and switch into an office REIT which typically trades at tighter yields during an office upturn. While we expect some investors to push back on this change in perception given the business park zoning for MBC I and MBC II, we believe many investors will treat these best-in-class assets as an office derivative with greater downside volatility in rents.

Target Price raised to a street-high S$2.25

  • On the back of higher earnings due to the acquisition of MBC II, lower risk-free rate (2.5% versus 3% previously) and borrowing costs (3.25% versus 3.5% previously) to price in lower-for-longer interest rates, we raised our DCF-based Target Price to a street high of S$2.25 from S$2.00.

Maintain BUY

  • With an expected 12-month total return in excess of 14%, we maintain our BUY call. While Mapletree Commercial Trust has achieved a total return of over 24% year to date, we believe Mapletree Commercial Trust’s share price rally can be sustained on the back of an improvement in earnings from an upturn in the office sector, continued delivery of steady earnings of VivoCity and the transformative acquisition of MBC II which will take investors’ interest in Mapletree Commercial Trust to the next level.

Mervin SONG CFA DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2019-07-18
SGX Stock Analyst Report BUY MAINTAIN BUY 2.25 UP 2.000