Thursday, July 07, 2016

Mapletree Commercial Trust - Landmark acquisition

Buying Mapletree Business City P1 
MCT has proposed to acquire Mapletree Business City P1 (MBC) for S$1.78bn. This works out to be S$1,042psf or at a cap rate of 5.6%. MBC is a large-scale integrated business hub with 1.71m sf of office and business park NLA, with a high committed occupancy of 99% and remaining average lease expiry of 3.5 years. The property has a prominent frontage along Pasir Panjang Rd, and is well connected to public transport and located a short 10 minutes’ drive from the CBD. 
Strategic diversification into a stable asset class
We are optimistic about this acquisition as it offers MCT exposure to the stable business parks segment, as well as diversifies its portfolio concentration risk at Vivocity from 60% to 42% of AUM. The top 10 tenants account for 69.6% of the property’s GRI, and these include notable names like HSBC, IDA, Samsung, Unilever, SAP, Singapore Power and Mapletree Invts. Post purchase, MCT’s AUM and market cap will grow to c.S$6.2bn and >c.S$4bn, respectively, making it one of top 6 largest listed S-REITs. 
DPU accretive with more upside from forward renewals
In terms of impact, a full year’s contribution from the new property is expected to boost DPU by about 3% and lift book NAV to S$1.31/unit. Current blended rents average S$5.94psf/mth with inbuilt escalation clauses of 3%. About 10.8%/12.3% of the leases are due to expire in FY17/18. With office and business parks’ market rents of S$6-7psf/month, we expect to see positive rental reversions upon renewal, thus providing more earnings upside going forward. 
Funded by new equity raising and debt
The purchase is expected to be funded by a combination of debt (S$920m) and new equity. Up to 795m new units could be issued via a private placement and non-renounceable preferential offering exercise to existing unitholders. This will raise overall gearing to 39.4%, still within the S-REIT guideline ceiling of 45%. While details of the equity fundraising exercise are not yet available, our revised forecast assumes an issue price of S$1.40/unit for the new units. 
Upgrade to Add
We upgrade our recommendation to Add from Hold. We believe this purchase will not only be DPU accretive but will strategically enhance MCT’s portfolio in terms of size and stability. Our FY17-19 DPU estimates are raised by 1.1-3% to factor in income from this acquisition. Our DDM-based target price is lifted by a higher 9.5% to S$1.62 as we include the new contributions as well as tweak our cost of equity assumptions to 7.7% (from 8.1%) on the back of the slower interest rate growth outlook. 

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