Mapletree Commercial Trust - DBS Research 2019-11-08: Scores A Home Run

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MAPLETREE COMMERCIAL TRUST (SGX:N2IU)

Mapletree Commercial Trust - Scores A Home Run

• Acquisition of MBCII a yield-accretive deal.
• Inclusion in MSCI post the acquisition of MBCII which changes the landscape for Mapletree Commercial Trust.
• We believe it is time for a larger Mapletree Commercial Trust to take on development projects in the future.
• Maintain BUY; raised Target Price to S$2.60.

Maintain BUY; raised Target Price to S$2.60.

• We retain our BUY call on MAPLETREE COMMERCIAL TRUST (SGX:N2IU) and raised our street-high Target Price up one more notch to S$2.60.
• With the inclusion in MSCI post the acquisition of MBCII, we believe Mapletree Commercial Trust has hit the ‘home run’ to sit at the ‘high table’. Given improved earnings visibility and being one of the “go-to” stocks in Singapore, we believe investors will remain vested.

Conquering the Greater Southern Waterfront with the acquisition of MBCII:

• Mapletree Commercial Trust announced the long-awaited proposed acquisition of Mapletree Business City Phase 2 (MBCII) for S$1,550m (S$1,300 psf NLA). See Mapletree Commercial Trust Announcements. Total acquisition cost (including fees) is S$1,576m. Committed occupancy stands at 99.4% with WALE of 2.9 years.
• High quality key tenant, Google takes up c. 680,000 sqft (c.57% of MBCII total NLA).
• Average passing rents at S$6.15 psf per month is above city fringe business park rental rates of S$5.80 psf per month.
• 97% of leases are embedded with 2.3% average annual rental step-ups
• Mapletree Commercial Trust’s total asset value will increase from S$7.4bn as at 31 August 2019 to S$8.9bn post acquisition
• The business park segment’s total asset value will increase from 20.6% to 34.4% while retail will reduce from 46.3% to 38.2%
• Post the acquisition, 81% of NPI is estimated to be contributed by Mapletree Commercial Trust’s jewel assets comprising VivoCity, MBCI and MBCII, which are best-in-class assets dominating the Greater Southern Waterfront.
• Property value is at 5% cap rate and 5% NPI yield vs existing NPI yield of 4.7%.
• Based on pro forma, the acquisition is 4% DPU accretive to 9.51 Scts and 2.2% NAV accretive to S$1.74 per unit
• Acquisition will be funded by 45:55 debt and equity. Expected to raise S$800-900m via private placement and non-renounceable preferential offering. Debt assumed interest cost of 2.9%
• Mapletree Commercial Trust raised S$918.5m via equity fund-raising; comprising S$458m by private placement at S$2.28 per new unit and S$460.5m by preferential offering at S$2.24 per new unit.

Steady operational results despite some transitional vacancies in office:

• Mapletree Commercial Trust reported 2QFY20 DPU of 2.32 Scts (+2.2% y-o-y). 1HFY20 DPU of 4.63 Scts (+2.9% y-o-y) represents c.49% of our FY20 DPU estimates. See Mapletree Commercial Trust Dividend History.
• 2QFY20 results were underpinned by 1.9% and 1.7% y-o-y increase in revenue and net property income (NPI) to S$112.0m and S$87.7m respectively.
• Core asset VivoCity (c.50% of revenues) continues to deliver steady returns (5.1% and 4.9% y-o-y increase in revenues and NPI respectively) but offset by some transitional vacancies in Mapletree Anson which saw the latter’s revenue and NPI fall by 18% and 22% respectively.
• 2QFY20 distributable income increased 1.9% to S$66.8m. 1HFY20 distributable income increased 3.0% to S$134.1m.

VivoCity continues to deliver strong rental reversions of +6.8%; expects the new Fair Price to boost traffic and sales:

• VivoCity maintained its robust financial performance with strong growth in revenue and NPI but operational matrix remained a tad weak led by transitional changes in the mall.
• VivoCity maintained its robust financial performance with 2QFY20 revenue and NPI up by 5.1% and 4.9% y-o-y to S$55.5m and S$42.5m respectively.
• The uplift in earnings was largely attributed to slightly better actual occupancy (99.8% versus 94.7% in 2QFY19) and impact of prior quarter’s positive rental reversions.
• The mall maintained its strong positive rental reversion of +6.8% in 1HFY20, its highest since FY17, partially led by a strong 1QFY20 reversion of 7.3%.
• VivoCity’s 2QFY20 shopper traffic and tenant sales continued to fall by 2.8% and 2.0% respectively which were due to some continued impact from the changeover of Giant Supermarket to NTUC Fairprice, which only opened in July 2019, and the mid-autumn festival event which was less popular compared to last year’s Disney Tsum Tsum. However, management noted strong operational performance seen in NTUC Fairprice since its opening. While fashion remains weak, it was mitigated by strong sales from F&B (+c.10%).

Office/business park portfolio marginally impacted by transitional vacancies in Mapletree Anson; new leases to contribute from December 2019 onwards

• Office/business park revenue and NPI fell 1% y-o-y and 1.2% y-o-y respectively, impacted by transitional vacancies in Mapletree Anson.
• Mapletree Business City I (MBC I) reported a 0.6% and 1.1% y-o-y increase in 2QFY20 revenue and NPI respectively, largely led by marginally higher occupancy (98.9% vs 97.8% in 2QFY19) and in-built rental escalations.
• While Mapletree Commercial Trust’s other office properties remain resilient, Mapletree Anson saw 1QFY20 revenue and NPI fall 18% y-o-y and 22% respectively mainly due to transitional vacancies.
• Mapletree Anson’s occupancy fell to 75.1% in 2QFY20 vs 90.4% in 2QFY19 due to tenant vacating the property and new tenants fitting out. The new leases are expected to begin contributing progressively from December 2019 onwards.
• Although occupancy at PSA Building continued to fall (91.3% in 2QFY20 vs 93.5% in 2QFY19), revenue and NPI both grew by 5% y-o-y due to the renewal of PSA lease at a high base. While occupancies are marginally low, we understand part of the vacancy has been filled (93.1% committed occupancy).
• While we understand that WeWork is committed to take up space at various properties (Mapletree Anson and PSA building), total exposure is estimated to be c.2.7%, which we believe is manageable. Moreover, we understand that the majority of the leases are mainly for enterprise business which we believe will be more sticky.

Stable capital structure

• Average cost of debt flat q-o-q at 3.00%.
• The proportion of fixed rate debt increased to 82.6% vs 80.5% in 1QFY20 (vs 85% in 4QFY19).
• Refinancing risks are also mitigated by having not more than 20% of debt due in any financial year.

Maintain BUY; raised Target Price to S$2.60

• We maintain our BUY rating but raised our Target Price to S$2.60 from S$2.39. We increased our FY20F-FY21F DPU estimates by 2% to factor into the acquisition of MBCII.
• With the inclusion in MSCI post the acquisition of MBCII, we believe Mapletree Commercial Trust has hit the ‘home run’ to sit at the ‘high table’, its next near-term re-rating catalyst. Given improved earnings visibility and being one of the “go-to” stocks in Singapore, we believe investors will remain vested.
• Moreover, the larger Mapletree Commercial Trust would now have room to take on development projects (especially Harbourfront Centre).

Where we differ: Above and beyond.

• We are the last remaining BUY rating in the street and raising our already street-high Target Price one notch higher to S$2.60 is a contrarion call. See Mapletree Commercial Trust Analyst Reports.
• Despite the meteoric rise in the share price recently, we are still bullish on Mapletree Commercial Trust with its best-in-class portfolio with dominant attributes within the Greater Southern Waterfront region. See Mapletree Commercial Trust Share Price; Mapletree Commercial Trust Target Price.
• The stock also enjoys a scarcity premium of being one of only two 100%-Singapore-focused large-cap REITs which is highly valued by nvestors.

Rachel TAN DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2019-11-08

SGX Stock Analyst Report BUY MAINTAIN BUY 2.60 UP 2.400