Mapletree Industrial Trust – Acquiring 18 Tai Seng from Sponsor December 17, 2018

PSR Recommendation: ACCUMULATE Status: Upgraded
Last Close Price: S$2.29 Target Price: S$2.03
  • Purchase consideration of S$262mn for a nine-storey mixed-use development with Business 2 industrial, office and retail spaces
  • Sizeable property value of S$268mn adds +6.1% to existing S$4.4bn portfolio
  • Proposed acquisition is subject to unitholder approval at an EGM
  • Upgrade to Accumulate from Neutral; new target price of $2.03 (previously $1.99)

What is the news?

Mapletree Industrial Trust (MIT) announced the acquisition of 18 Tai Seng from its Sponsor, Mapletree Investments Pte Ltd. A date for the extraordinary general meeting (EGM) has not been set, as the Circular is pending approval by SGX. However, the manager is working towards making the date of the EGM known by January 2019. MIT has sufficient debt headroom to acquire the property fully-fund by debt, but a final decision on the funding structure has not been reached. The manager commented that it would be dependent on market conditions.

Pro forma illustrations by the manager for 100%, 60% and 40% loan to value scenarios show that the acquisition is DPU and NAV accretive. Aggregate leverage would rise to 38.7% if fully-funded by debt. The occupancy of the property is currently 87.4%, and committed leases of 95.7% to commence progressively by 1 March 2019.

How do we view this?

The Positives

  • Location, location, location. 18 Tai Seng is located in Paya Lebar iPark and is easily accessible by public transportation and major expressways. The property is directly connected by an underground pedestrian link to the Tai Seng MRT station; and is accessible to three major expressways of Kallang-Paya Lebar Expressway, Pan-Island Expressway and Central Expressway. The property is also newly completed in November 2016 to high specifications of column-free floor plates, full-height windows and BCA Green Mark Gold certification which adds to its attractiveness.
  • Healthy WALE of 3.6 years with back-loaded lease expiry profile. Property weighted average lease expiry of 3.6 years is in line with that of the existing portfolio. However, the lease expiry profile is substantially back-loaded with 78% in FY22/23 and beyond. This provides predictable income visibility for the next four to five years.
  • Lowers tenant concentration risk. Addition of 18 Tai Seng would lower maximum risk exposure to any single tenant from 10.0% (currently Hewlett-Packard) to 9.4%. Top 10 tenants currently contribute 26.3% of gross rental income; and this would be lowered to 25.8%.
  • Existing DRP which resumed for 2Q FY18/19 will ease the funding burden. Recall that the distribution reinvestment plan (DRP) was resumed in the most recent quarter, and that resulted in $22.8mn cash retention for the quarter. To put that into context, it would it would take about 12 quarters of DRP cash retention to cover the total acquisition outlay of S$271mn.

The Negatives

  • Adds Retail space to the MIT portfolio. Retail space accounts for 12.3% of the property’s net lettable area (NLA). According to URA data, Fringe Retail rent peaked in 4Q 2014 and has trended lower since. The latest 3Q 2018 Fringe Rental Index is 17% lower than the peak. We think that the retail component of the property could be potential source of drag in subsequent lease renewal cycles.

Upgrade to Accumulate from Neutral; higher target price of $2.03 (previously $1.99)

We have assumed that the property is acquired fully-funded by debt and DRP is maintained for 12 quarters. Minimal DPU impact for FY18/19, but our FY19/20 DPU estimate increases by 3.4% to 12.42 cents from previous 12.01 cents.

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About the author

Profile photo of Richard Leow

Richard Leow
Research Analyst
Phillip Securities Research Pte Ltd

Richard covers the Transport Sector and Industrial REITs. He graduated with a Master of Science in Applied Finance from the Singapore Management University. He holds the CFTe and FRM certifications and is a CFA charterholder.

He was ranked #2 Top Stock Picker (Asia) for Real Estate Investment Trusts in the 2018 Thomson Reuters Analyst Awards, and ranked #2 Top Stock Picker (Singapore) for Resources & Infrastructure in the 2016 Thomson Reuters Analyst Awards.

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