Mapletree Commercial Trust – MBC II Acquisition and the Preferential Offering

by: Tam Ging Wien


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In our last post, we discussed how Mapletree Commercial Trust (MCT) is one of the major beneficiaries of the Singapore Government's Greater Southern Waterfront Region rejuvenation plans. We also discussed in the same post the benefits to MCT after being elevated to blue chip status after inclusion into the STI. In this post, we will be discussing the acquisition of Mapletree Business City II (MBCII) and the private placement and preferential offering.

Mapletree Commercial Trust (MCT) announced in the last week of September that it was proposing to acquire a pipeline property from Heliconia Realty for a S$1.55bil, making this the largest acquisition of the S-REITs this year. Heliconia Realty is a wholly-owned subsidiary of Mapletree Investments, MCT’s sponsor. The target property is Mapletree Business City II (MBCII) and the adjacent common premises along Pasir Panjang Road.

The general sentiments of the S-REITs were lifted this year due to expectations of a lower interest rate environment as well as the MAS proposal to increase the gearing limits on S-REITs subjected to a minimum income coverage ratio. Besides the 2 factors above, we also cannot discount the fact that the Hong Kong situation is causing uncertainties for the Hang Seng, indirectly benefiting its next closest peer, the Straits Times.

Since the announcement of the acquisition of MBCII, MCT’s stock price has been on an upward trajectory making it the best performing S-REIT in the last 12 months with capital gains of 49.4%.

As a comparison, the entire market cap of the S-REIT universe has grown approximately 30.2% while the FTSE ST REIT Index has risen 21.1% from 766 to 928. With a large number of S-REIT listings this year on the SGX, the market cap has risen significantly.

With all the good news backing MCT, lets us turn our attention to the details behind the MBCII acquisition.


Source: REITScreener.com

Acquisition of MBC II

Source: Mapletree Commercial Trust

On 27-Sep-2019, MCT announced the proposed acquisition of MBC II comprising of various buildings located at 40, 50, 60, 70 and 80 Pasir Panjang Road, Singapore. The acquisition will include all the common properties such as the carpark, multi-purpose hall, retail areas, landscape areas, driveways and walkways.

The acquisition cost will be approximately S$1,575.8mil and will be funded through a combination of equity and debt. The manager intends to issue up to 500mil new units in MCT through the equity fund raising and the remaining to be funded via debt up to S$800mil.

MCT closed its first round of equity fund raising through the issuance of 200,893,000 new units at S$2.28 a piece through a private placement. The private placement attracted very strong demand and was approximately 7.0 times covered. The private placement alone allowed MCT to raise S$458.1mil.

Next is the issuance of a further 205,589,840 new units in a 71-to-1000 non-renounceable preferential offering at S$2.28 a piece. We expect the preferential offering to also be strongly supported and expect all shares to be placed out raising a further S$460.5mil. 

The total amount raised from both the private placement and preferential offering would be S$918.6mil. The acquisition cost is S$1,575.8mil with the actual valuations being S$1,550mil and the remaining being transaction cost such as stamp duties, professional fees, acquisition fees just to name a few. The remaining S$657.20mil will need to be raised through debt based financing.

According to the manager, the rationale for the acquisition is as follows:

  • Owning the Workplace of the Future
  • Asset Class Provides Steady Rental Growth at Low Volatility
  • Stable Cashflows with Embedded Rental Growth from High Quality Tenants
  • Further Enhances MCT’s Portfolio
  • Attractive Valuation and NPI, DPU and NAV Accretive

About the MBCII Asset

MBCI was acquired by MCT in August 2016 while the MBCII assets have been in the MCT’s pipeline since its completion in April 2016. Before the sponsor divest assets to their child REITs, they will typically help to stabilise the properties first. Office assets in Singapore typically require 3 years to stabilise and mature making 2019 the approximate time for the acquisition.

MBCII is a campus style Grade A building just a 10mins drive from the main Singapore CBD. Within its campus is an extensive amenity such as sports and recreational facilities, lifestyle F&B offerings, communal areas and green spaces. It is also well connected via public transports including busses and MRT. These features make it appealing for tenants to attract a strong workforce especially the millennials.

MBCII has also won numerous awards for its eco-friendly features such as the LEAF-certified Development, LEED Gold Certification and the BCA Green Mark Platinum Award. It’s Eco-friendly features such as solar panels, rain water harvesting systems, rain sensor control, cooling façade glazing and high efficiency cooling systems.

The asset’s vacancy rate is currently stands at 99.4%.

Favourable Macro-Economics of the City-Fringe Office Sector

According to independent market research on the business park spaces in Singapore, CapitaLand-Ascendas-Singbridge is the largest landlord followed by JTC and Mapletree. Of the various areas major business parks in Singapore, the Alexandra/HarbourFront where MBC I and II are located is the closest to the Singapore CBD. There is a two-tier market in the business park sector, the first is the better quality space in the City Fringe submarket while older business parks such as the Singapore Science Park and International Business Park are in the Rest of Island submarket.

Source: Mapletree Commercial Trust

Specifically, in the City Fringe submarket, the vacancy rates have been steadily falling since 2014 to 2018. Going forward, there is no new upcoming supply expected until 2021. Given that the city fringe business parks are generally of higher specifications, have better infrastructure and connectivity and comprehensive modern facilities, they are much sought after by multinationals seeking to provide employees with a high-quality work environment while maintaining a lower rental cost.

Tenants in the infocomm, technology, biomedical and finance sectors are presently among the most prevalent tenants in such business parks. Migrating out from the central CBD into city fringe business parks could reduce their rental expenses by as much as 40% to 50% while still maintaining a similar standard of work environment.


Source: Mapletree Commercial Trust


Source: Mapletree Commercial Trust


Source: Mapletree Commercial Trust

Among prominent tenants that have moved out of the CBD to city fringe business parks of MBC I and II include Google, International Air Transport Association (IATA), Covidien, Novartis, Nike, American Express, SAP IT Company and Unilever.

MBCII’s average passing rents stand at S$6.15psf per month, higher compared to the average city fringe  business parks rentals S$5.95psf per month.

In view of the current micro-climate being favourable in the foreseeable future for city fringe business parks, we think that both MBC I and II will continue an upward demand which will drive up rentals, valuations and directly benefit unitholders of MCT.

MBCII Concentrated in the High Growth Tech-Sector

MBCII currently is 78.8% exposed to the tech-sector, a fast-growing and ever-expanding sector. MBCII’s tech concentration is mainly attributed to Google establishing its new Asia Pacific Headquarters at MBCII taking up about 680,000sqft.

From a portfolio perspective, the tech-sector exposure will increase to 18.0% from 5.5% which further diversify MCT’s tenant base.

Source: Mapletree Commercial Trust


Source: Mapletree Commercial Trust

Well Distributed Debt Expiry Profile

MCT intends to use longer 5/6/7-year term loan and revolving credit facilities to finance the acquisition of MBCII. As these loans mature much later than the existing loans in the portfolio, it lengthens the maturity schedule and evenly distributes all the way to FY27/28. No more than 15% of the loans will mature in any given year.

Source: Mapletree Commercial Trust

Well Distributed Lease Expiry Profile

The lease expiry profile post acquisition is well distributed with no more than 30% of the leases expiring in any single year. The WALE would remain stable at approximately 2.9 years.


Source: Mapletree Commercial Trust

NPI Yield, DPU and NAV per Unit Accretive

Based on the illustrated performance, the MBCII acquisition is expected to be NPI Yield, DPU and NAV per Unit accretive.


Source: Mapletree Commercial Trust

Potentially 4.8% and 4.6% DPU and NAV per Unit Accretive

Before reading on, we suggest that readers gain a better understanding of our views on DPU and NAV per Unit Accretive and how this differs with Yield Accretive acquisitions.

The information in the announcements only provide data assuming a $2.10 equity fund raising price at 420.8mil new units issued. So with the confirmed figures, we reworked the estimates and found that it is expected to boost the DPU for unitholders by about 4.8%. On top of that, the NAV per Unit is expected to increase to $1.67 - a 4.6% accretion. Gearing is expected to marginally increase to 34.8%, pretty much stable in our view assuming that the the interest cost stays at 2.9% per annum.

We illustrate the revised before and after acquisition scenario given all the information presently available based on our own estimates and assumptions:


Source: REITScreener ResearchProButterfly ResearchMapletree Commercial Trust

Based on the above figures, it is certainly a good acquisition mainly because the cost of equity is so low due to the elevated prices of MCT at this point of time.

Rich Valuations, Worth Accepting The Preferential Offer?

At the current price of MCT at this point of writing, it is trading at about 1.50x book value, much much higher than its its historical 1.16x book value. This is is almost 3-Standard Deviations higher that the normal trading rage. The last time MCT traded at such rich valuations was back in Apr-2015.

At the preferential offering price of $2.24 which is about 1.34x forward book value or 1.40x current book value, its still at a rich valuation regardless of the way you look at it.


Source: REITScreener.com

At a 1000-for-71 ratio, that's about a 7.1% increase in the number of units. Given that a forward yield of about 4.8%, it means that the cost of this preferential offering will be recouped in just 1 year and 3 quarters of total dividends. To clarify, the dividends come from both existing shares and new shares.

On the one hand, if unitholders don't take up this preferential offering, they are able to buy back from the market sometime in the future to offset their current dilution at the cheaper price. But the issue is how long one has to wait for this opportunity?

On the other hand, taking up the offer now with full knowledge that the cost will be recouped in just 7 quarters of dividends sound enticing.

Perhaps... this time we will choose to be patient at the risk of loosing 7.1% of our dividends per year.

Conclusion

There is the much to like about the MCT as it is the biggest publicly traded landlord to benefit from the Singapore Government’s Greater Southern Waterfront (GSW) rejuvenation initiative and the inclusion into the STI. Be sure to read about this in our previous article entitled:


Source: Mapletree Commercial Trust

MCT has done well in the past in managing its portfolio and delivering significant growth to unitholders throughout the years. It has maintained a continuously rising DPU trend of 7.1% compounded growth since IPO.

Since its last acquisition of MBCI in 2016, MCT has been able to growth organically.

We think that going forward, the MBCII acquisition will fuel its next leap of growth for unitholders.

After numerous sold-out session in 2019, readers  have been asking for another run of our most value for money REITs investing seminar!

We are hosting our next new and refreshed The Essentials of REIT Investing seminar on the 05th February 2020 (Wed) from 7pm to 10pm at the Maybank Kim Eng Event Hall (Level 3), 50 North Canal Road, Singapore 059304. This is our last event for the year 2019.

For just $15, this is by far the most value for money REITs investment seminar available in Singapore!

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Meanwhile, do also check out the book REITs to Riches: Everything You Need to Know About Investing Profitably In REITs available at all major bookstores around Malaysia and Singapore. To purchase the eBook (PDF) copy, navigate to http://aktive.com.sg/store/reits-to-riches/.

 

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