Mapletree Commercial Trust - Mixed results

2Q performance boosted by better retail contributions
MCT’s 2Q and 1HFY3/18 DPU of 2.24 Scts/4.47 Scts was in line with our projections, accounting for 25.6%/51.2% of our FY18 forecast. The 9.3% rise in DPU was due to a 22%/23% expansion in revenue and NPI respectively, thanks to the acquisition of Mapletree Business City 1 (MBC1) and better performance at VivoCity. This was partly offset by weaker contributions from Merrill Lynch Harbourfront (MLHF), PSA Building (PSAB) and Mapletree Anson. Portfolio occupancy stood at 97.6%, slightly weaker qoq.  
 
Robust performance at VivoCity
VivoCity posted a 4% rise in revenue to S$102.2m in 1HFY3/18 (+3.2% in 2Q) led by positive rental reversions of 2% from new and renewed leases post the completion of AEI at B2, L1 and 3. Tenant sales rose 1.1% yoy in 1H while shopper traffic held steady. The uplift in rents was slightly higher than the 1.7% reported in 1Q. It has a remaining 2.5% of retail income expiring in 2HFY3/18 and another 18.4% in FY3/19. We expect rental outlook to remain positive but modest over the medium term.
 
Office revenue could stabilise in coming quarters
Office/business park portfolio saw a 9.2% decline in 1H. Excluding MBC1, other office assets experienced a 4.4% dip in re-contracted rents. Inclusive of rents from a replacement tenant for a pre-terminated lease, office portfolio rental reversion would have been +0.1%. Looking ahead, we believe office rental revenue should remain relatively stable on higher pre-committed occupancy of 97.4-100% (vs. 91.6-94.4% 
as at end 2Q). The trust has 0.6% of office lease to be renewed in 2HFY3/18 and 7.2% in FY3/19

Healthy balance sheet
Gearing is at a healthy 36.4% with no refinancing needs for the remainder of FY18. About 78% of its debt is in fixed rates and all in cost of debt is at 2.7%. MCT plans to conduct a new AEI to add a 3,000 sq m library on L3 of VivoCity. This will free up some bonus GFA for the property which can be used to extend the leaseable area at B1. This exercise is expected to cost c.S$10m and can be funded with its robust balance sheet. When completed in 3QFY19, this could further boost earnings and property returns at VivoCity.  
 
Retain Add rating
We tweak our FY18-20 DPU estimates post results as we update the portfolio lease expiry profile. Accordingly, our DDM-based target price is lowered slightly to S$1.75. We believe MCT’s earnings are likely to remain stable underpinned by better performance at VivoCity and office rental income. In the longer term, a lack of new business parks supply should be supportive of rents. Risks are continued drag on retail and office rents.

Frasers Logistics & Industrial Trust - Why you can keep FLT in your pocket

Why you can keep FLT in your pocket
FLT’s ability to tap FCL's Australian development pipeline (via FPA), and a favourable Australian industrial market are two key investment merits for the REIT. This is especially as there is an increasingly low availability of prime assets in Australia, mopped by capital chasing core assets. This puts FLT at an advantage vs. the other S-REITs which are diversifying into Australia. Further, its maiden portfolio acquisition of seven properties (mix of completed and development assets) demonstrates strong sponsor commitment.
 
FLT could maintain A$150m-200m acquisition rate over FY18F-19F
Given FPA’s development pipeline of A$850m (based on completed value), we believe FLT could maintain an acquisition rate of A$150m-200m over the next two years. If we were to incorporate this, we would derive a DDM-based TP of S$1.23. Thinking longer term (>three years), as Australian property market peaks and contingent on market cycles, we cannot exclude the possibility that FLT could acquire European assets from Geneba Properties, FCL’s newly acquired European logistics and industrials platform.
 
Australian industrials in an up-cycle
Our desktop research found the Australian industrials remaining firmly in an up-cycle. We highlight some of the metrics tracked by Knight Frank which include vacancy, take-up and average letting up period. These metrics all point to an “up”. In summary, Sydney remains the strongest market, thanks to limited available space and strong economic activity. Melbourne is also benefiting from good demand and population growth. Brisbane remains challenging but the worst is likely over, in our view. 

Raising FY18F-19F DPU by 2.8-4.6%
We incorporate FLT’s first portfolio acquisition of seven properties (valued at A$169.3m or initial portfolio yield of 6.41%) as well as the accompanying equity fund raising (private placement of 78m new units at S$1.01/unit) into our earnings model. To reiterate, we view the portfolio acquisition positively given the quality characteristics (long WALE of 9.6 years, 100% take-up) as well as the evident sponsor commitment.
 
Maintain Add with higher TP of S$1.2
Along with our DPU upgrade and the rolling forward of our DDM valuation, our target price is raised from S$1.10 to S$1.20. We maintain our Add rating, projecting total returns of 17% for FY18F (upside of 10.3% + FY18F yield of 6.7%). FLT is due to report its 4QFY17 results before trading hours on 2 Nov 2017. Nearer-term re-rating catalysts could be portfolio cap rate compression. We believe FLT's operations would remain steady. Downside risk could be an unexpected downturn in Australian industrials.