SINGAPORE (Oct 1): “Nimble and decisive in executing their growth strategy and supported by a Sponsor with strong firepower, the Mapletree Group of REITs have been one of the more active S-REITs over the past 12 months, acquiring close to $3.1 billion in assets in Singapore, Hong Kong, China, Japan and the US,” say DBS analysts Derek Tan, Mervin Song and Carmen Tay in a Monday report.
The research house has “buy” rating on all four of the Mapletree REITs – Mapletree Logistics Trust (MLT), Mapletree Industrial Trust (MINT), Mapletree Commercial Trust (MCT) and Mapletree North Asia Commercial Trust (MNACT), with target prices of $1.50, $2.22, $1.80 and $1.45, respectively.
The four REITs are trading at an attractive cost of capital and raised close to $1.7 billion in new equity with strong investors support, shoring up their balance sheets, positioning them to take on new opportunities come 2019 and beyond.
“We believe that the Mapletree Group of REITs are positioned in the more resilient commercial (mainly retail) and industrial sectors (factories, warehouses and data centres), which in our view, are safer havens given the ongoing macro uncertainties,” says the analysts.
The managers are also seeing a steady improvement in operating outlook for most sectors, especially the industrial and retail sectors, going into 2019.
The analysts believe that MLT and MINT will benefit from abating supply risk in its Singapore operations, boosted by contributions from recently completed acquisitions.
In addition, MNACT has dominant properties in Hong Kong and MCT in Singapore, which could withstand supply challenges and will continue to churn out positive rental upside in the coming quarters.
Meanwhile, the recent Mapletree Bangkok Day saw strong investor interest, which spurs from the group’s ability to grow revenues and keep balance sheet metrics with gearing well within management comfortable limits with access to banks.
“While interest rates are rising, compressing credit spreads and a wider range of debt funding options (through MTNs, etc.) imply that any upward pressure on interest rates is likely to be marginal,” say the analysts.
Diving into the individual REITs, MLT’s manager has seen improved demand and expects to see higher rents in a majority of the markets they operate in. The analysts estimate that in FY20, 83% of the REIT’s income will be derived from “developed markets” in Asia.
The REIT has been on an acquisition spree, adding about $1.8 billion worth of assets over the past year into its portfolio. It is also keeping an eye on optimising portfolio returns through active divestments and asset rejuvenation for older assets.
MLT also recently raised $375 million in new equity through a private placement exercise, resulting in a gearing of about 38%, while portfolio interest cost remains stable at 2.5% given the limited near-term refinancing risk and with more than 80% of its interest costs fixed.
MINT however is still seeing some rental and occupancy pressure in the flatted factories and business park segments in the shorter term, as the rental spreads (expiring rental levels vs market rental levels) are still negative. Nonetheless, the analysts reckon that the industrial market is expected to achieve a steady state in the medium term, due to the drop off in supply from 2019 and drop in new industrial land additions through government tenders.
The REIT’s manager is also looking to grow its overseas data-centre exposure to about 20% of its assets from 10% currently. It is now looking at other jurisdictions in in Europe and UK, which offer interesting acquisition opportunities, while also planning to increase its exposure in US.
The retail sector is currently experiencing some challenges, but fortunately for MCT, Vivo City, which contributes about 40% of portfolio revenues, remains a choice location for retailers and shoppers.
Despite slight shifts in occupancy rates recently due to tenancy movements, the REIT has been successful in the back-filing of the vacated office space, especially at Mapletree Anson and PSA Building, but will see occupancy rates move towards 100% on higher pre-commitment levels. Negative rental reversions as at end-1Q19 should also bottom out going into next year.
In Hong Kong’s Festival Walk, MNACT owns one of the top performing retail malls and at almost 60% of revenues, it remains a key revenue driver in the medium term.
“Apart from stronger operational outlook, further upside is underpinned by the expiry of several anchor tenants through the year,” says the analysts.
The REIT’s properties in China – Gateway Plaza and Sandhill Plaza – are also expected to deliver stable returns going forward. Meanwhile, the analysts believe that the REIT’s commercial properties in Japan will be value accretive and help boost income stability.
As at 12.55pm, units in MLT, MINT, MCT and MNACT are trading at $1.24, $1.98, $1.62 and $1.62, respectively.
