Industrial Reits: not that defensive says Credit Suisse

Trasferring a Good article about Industrial REIT to share here.
Last week, Credit Suisse issued a report on industrial Reits. Excerpts from report’s Executive Summary.
Not as defensive as perceived: We assume coverage of the Singapore industrial Reits sector with a slightly negative stance as we believe that the perception of its defensiveness (due to longer lease tenures) is misplaced.
… we have done thorough analyses on the factory, business parks and warehouses sub-segments, and conclude that we are most positive on the warehouse sector fundamentals.
… flat to low single-digit growth for factory rents driven by high occupancy, and business park rents to moderate due to the oncoming supply pressure (including new supply of decentralised office space).
Potential weak demand may slow rental growth: Singapore industrial rents have surpassed pre-sub-prime crisis peaks and are at 10-year highs.
… upside is limited from here on, given the moderating economic growth outlook, Singapore’s high exposure to the US and European economies and the appreciating currency which will reduce Singapore’s competitiveness as an industrial location of choice.
However … the few less labour-intensive, higher value-add fields, and sectors/ players with better pricing power, like biotechnology, water technology, environmental/energy sciences will likely be less impacted by cost inflation.
This should underpin rental growth for the class of industrial assets exposed to these sectors.
… expect rents in (logistics) warehouse – our preferred industrial sub-segment – to continue to remain strong on the back of fairly strong 90-91 per cent occupancies based on limited supply completion over the next three years. While supply for all factories over the next five years looks manageable, at 9-10 per cent of existing supply of 332 million sq ft NLA for factories and business parks … rents for older-specs factories could come under pressure especially given current economic uncertainties, which will likely impact SMEs and less cost-efficient companies (those at the lower end of the value chain).
… hi-tech and business park rents to moderate, due to the oncoming supply of business parks over the next four years amounting to 29 per cent of existing supply, coupled with existing high vacancies.
M&A increasingly challenging: Despite the supportive capital-raising environment, in our view, with cap rates continuing to compress on the back of rising competition for land (as industrial assets have the highest yields), … becoming increasingly challenging for a Reit to make an accretive acquisition, particularly in Singapore, where capital values today are at 10-year highs.
Based on our analyses of Ascendas Reit (A-Reit), Mapletree Logistics Trust (MLT) and Mapletree Industrial Trust (MINT), we conclude that (1) A-Reit has the most debt headroom with $1 billion available for future acquisitions; (2) A-Reit and MLT both have the strongest acquisition pipeline, with $1 billion each of injection pipeline from their sponsors; and (3) MINT and MLT have the highest risk of placement, depending on the size of transaction given their gearing levels of 39.3 per cent and 40.6 per cent, respectively.
Three investable names, at this stage: After screening for market cap of over $1 billion and liquidity of US$1.5 million/day, only three of the seven industrial S-Reits are deemed investable: A-Reit, MLT, MINT.

Mapletree reports 24% YoY increase in Q3 FY11 Net Property Income

Mapletree Logistics Trust’s management says it's looking out for weakness in demand for its properties, in the face of global economic weakness.

It reported an increase of 23.7% YoY in Q3 FY11 Net Property Income to S$ 58.9 mln and the Distribution per Unit increased by 10% YoY to 1.69 cents.

The Trust registered organic growth of 6% YoY backed by higher rentals and occupancy.

Year to date, the Trust has sealed 88% of lease agreements expiring in 2011.

The lease agreements revised during Q3 were done at 22% higher rentals.

Occupancy at various investment properties of the Trust continues to remain at 99%, compared to 98% in Q3 FY10.

The weighted average lease term to expiry of the underlying land of the properties is 46 years and the average term to expiry of lease agreements is 6 years.

The debt to total assets ratio at Mapletree Logistics Trust stood at 41% at the end of Q3 FY11 and it continues to enjoy Baa1 rating with a stable outlook from Moody’s.

Management says it's happy with the prevailing debt gearing at 41% of total assets, as it lies within their medium term target range of 40%-50%.

But earlier this year, management announced its ambition to bring down debt gearing to 25% over medium to long term which would also qualify for rating upgrade by Moody’s.

The Trust has reduced the total debt maturing in 2012 to 14% from 31% earlier by arranging re-finance for its JPY 17.3 bln loan.

Hence, the average debt duration has significantly improved to 3.7 years from 2.7 earlier.

The Trust, which is 40.8% owned by Temasek Holdings, has identified 21/23 Benoi Sector in Singapore for re-development, which would add 70,000 sqm to its Singapore portfolio.

Few further details of this development were provided.

Analyst Kevin Tan at OCBC is positive on this development as it reflects Mapletree Logistics Trust’s proactive approach to enhance value.

OCBC maintains its BUY rating on the stock with a slightly increased target price of S$ 1.07 (from S$ 1.06 earlier).

The questions that need to be asked about this story:
1. Management wants to bring debt down to 25% in the medium to long term, but says it's happy with 41% at the moment. What is the time frame for this?
2. How happy are tenants to pay 22% higher rents at a time that the global economy is weakening?
3. What are further details on the redevelopment of the Benoi Sector property?