Mapletree Logistics Trust: 'Retention strategy'

Stable QoQ. Mapletree Logistics Trust posted S$52m in gross revenue (down 2.4% QoQ) and S$45.7m in net property income (down 1.2% QoQ). The revenue decline was primarily due to forex effects, which were hedged at the distributable income level. Total amount distributable to unitholders was consequently stable at S$28.7m (up 0.2% QoQ). MLT will pay out 1.48 S cents for the quarter. Results were better than expected due to our fairly bearish occupancy assumptions. Portfolio occupancy was sustained at 98.3%, versus 98.5% three months ago and 99.6% six months ago. Hong Kong and China, where a property was repossessed last quarter, continue to be the weakest markets.

Occupancy through retention. The manager said 65% of leases expiring in 2009, equivalent to 13% of total portfolio revenue, have already been renewed. It said the average reversion rate was flat due to "priority in retaining tenants" as securing new (higher) leases was too costly in terms of downtime and concessions including rent-free periods. In our view, this strategy is preserving performance today but perhaps at the expense of performance tomorrow. Around 100k sqm or 7% of portfolio revenue still needs to be renewed for 2009. The manager guided that despite some stabilization in the economic environment, in 2H09 "the environment remains challenging and occupancy and rental rates may be under pressure".

Exploring acquisitions. MLT is geared at 37.8% debt-to-assets and has S$107m of debt maturing in the next six months. It plans to refinance that debt using a combination of already secured borrowings, term loan refinancing and working capital lines. The manager was emphatic that it will not raise equity solely to reduce gearing. However, it did indicate its interest in third-party acquisitions, provided these buys are coupled with an equity issue to at least maintain current gearing levels. With MLT's current tenant retention focus, we think acquisitions will be needed, sooner rather than later, to power the next leg of DPU growth.

Still cautious. In line with the 'retention strategy' and some macro stability, we have increased our occupancy estimates to 96-97% over FY09-10 versus 90% previously. On the flip side, we have also worked in lower achieved rents. All in, we expect a weaker 2H09 over 1H09 as occupancy slips and any rent declines to flow through. We are still cautious on the industrial sector but like the quality and diversification of MLT's portfolio. Our new fair value estimate is S$0.52 (prev: S$0.45). Maintain HOLD.

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