SINGAPORE (Mar 29): CIMB is upgrading its call on Mapletree Greater China Commercial Trust (MGCCT) to “add” compared to “hold” previously, with a higher target price of $1.30.
This came on the back of the trust announcing yesterday that it is acquiring a 98.7% stake in a portfolio of six Japan commercial properties from MJOF, a private real estate fund managed by its sponsor, for $753.4 million.
See: MGCCT acquiring six properties in Japan for $753 mil; to be renamed Mapletree North Asia Commercial Trust
In total, the six properties have a NLA of 1.6 million sq ft and are located in Tokyo, Yokohama and Chiba.
Currently, these properties are 99.9% occupied, with 60% of the leases being fixed-term leases. Some of the key tenants include blue-chip companies such as Fujitsu, Seiko Instruments, PERSOL and Japan Information Processing Service.
In a Wednesday report, analyst Lock Mun Yee says, “We view this transaction positively as it diversifies MAGIC’s portfolio exposure to the still-rising Japan commercial market.”
The rental growth in Japan has been picking up due to stronger economic activity amid low vacancy rates. Japan is expected to make up 12- 13% of the enlarged AUM and NPI post acquisition.
With this acquisition, the trust’s occupancy and income visibility will also be strengthened with a longer weighted average lease to expiry (WALE) of 3.1 years, as compared to 2.7 years currently.
“We have assumed the deal will be completed by mid-CY18. The acquisition is projected to be DPU accretive as the Japan portfolio’s NPI yield of 4.8% is significantly higher than the current cost of funding,” says Lock.
Moreover, there is also room for further yield improvements as some of the leases are currently under-rented. And about 15.5% of the leases will be expiring in FY19, hence enabling the trust to benefit from positive rental reversion when re-contracted.
On the other hand, the trust plans to fund this acquisition through a private placement of 296.4 million new units to raise about $323.1 million and new debt of $441.6 million, which would likely increase its leverage to about 41-42%.
However, the analyst expects this ratio to fall when its existing portfolio of assets are revalued at the end of FY18, particularly given the sharp rise in asset values in Hong Kong.
“We would be buyers into any share price weakness,” adds Lock.
As at 11.32am, units in MGCCT are trading 1 cent higher at $1.16 or 0.97 time FY18 book with a dividend yield of 6.39%.