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Fitch Affirms Mapletree Industrial Trust at 'BBB+'/Stable
August 22, 2017 / 9:03 AM / 2 months ago

Fitch Affirms Mapletree Industrial Trust at 'BBB+'/Stable

(The following statement was released by the rating agency) SINGAPORE/JAKARTA, August 22 (Fitch) Fitch Ratings has affirmed Singapore-based Mapletree Industrial Trust's (MIT) Long-Term Issuer Default Rating (IDR) at 'BBB+'. The Outlook is Stable. The agency has also affirmed MIT's SGD405 million outstanding senior unsecured medium-term notes at 'BBB+'. The notes are issued by MIT's subsidiary Mapletree Industrial Trust Treasury Company Pte. Ltd. and guaranteed by DBS Trustee Limited, which acts as trustee for MIT. The affirmation follows MIT's continued strong operating performance in spite of a challenging domestic environment for industrial properties in Singapore. The trust's financial profile is strong for its rating, but the rating is constrained by its business profile compared with higher-rated global REIT peers. KEY RATING DRIVERS Diversified Portfolio, Stable Performance: MIT has continued to post strong operating performance since its 2010 listing, underpinned by its diversified portfolio of industrial property assets in Singapore. In the last two years, average rent on MIT's portfolio continued to increase with only a limited 2% dip in portfolio occupancy, even as a glut in industrial properties and a weak domestic manufacturing sector weighed on the sector's performance. MIT's portfolio consisted of 86 properties across five segments valued at SGD3.77 billion at end-June 2017. Its 10 largest tenants accounted for 21.1% of the portfolio's gross rental income. New Developments Drive Cash-Flow Growth: MIT's performance is supported by rental income from the first phase of its SGD226 million build-to-suit (BTS) development for HP Singapore (Private) Limited, which was completed during FY17 (fiscal year ends 31 March). The second phase will contribute cash flow from 1 September 2017. The trust is also developing a SGD77 million hi-tech building at Kallang Place, and announced the development of a BTS data centre at an estimated cost of SGD76 million, to be completed in 1Q18 and 2H18, respectively. The BTS projects include long-term leases with built-in annual rent increases, which support the trust's long-term cash-flow growth. Limited Risk from Lease Renewals: We expect MIT's high lease renewals to limit risk to cash flows in the year ending March 2018 (FY18). MIT has already renewed leases amounting to 7.8% of gross rental income in 1QFY18, while portfolio rental reversions and occupancy have remained mostly stable. Our expectation is underpinned by the competitive passing rents of MIT's portfolio. Passing rent for its flatted factories and business parks stood at SGD1.80 and SGD3.80 per square foot per month (psf), respectively, at end-June 2017. Comparatively, the median market rent for such assets were SGD1.81 psf per month and SGD4.10 psf per month, respectively. Improving Economic Activity: Fitch forecasts Singapore's GDP growth to pick up to 2.2% in 2017, from 2.0% in 2016. Real GDP grew by 2.9% yoy in 2Q17, against 1.9% in 2Q16, supported by improving exports and continued strong growth in government consumption spending. Singapore's manufacturing sector has continued to expand in the 11 months to July 2017, which should help to improve leasing conditions for industrial properties and mitigate risks arising from the continued high supply of new industrial space in Singapore this year. Credit Metrics Strong for Rating: MIT's financial profile is strong for its ratings, as reflected in its FFO fixed charge cover of 7.7x, net debt to investment property value (loan-to-value ratio) of 29% at FY17, and FFO adjusted net leverage at 4.7x. The trust has been able to expand its EBITDA annually over the last few years, supported by its committed BTS and data-centre developments, and EBITDA margins have improved to 66.7% in FY17 from 63.2% in FY14 as a result. We expect the trust to spend around SGD160 million in capex in the next two years, mostly on its new development projects, and we expect most of this to be incurred in FY18. DERIVATION SUMMARY MIT's 'BBB+' IDR compares well with its peers, Global Logistic Properties Limited (GLP, BBB+/Stable), STAG Industrial, Inc. (BBB/Stable) and Unibail-Rodamco SE (Unibail, A/Stable). GLP is an investment manager of a globally diversified portfolio of industrial properties - it has the largest industrial portfolio in China, Brazil, and Japan, and is the third-largest industrial landlord in the US. MIT is considerably smaller than GLP, although GLP's rating is constrained because of its aggressive portfolio expansion strategy. STAG has a portfolio of mostly secondary-market single-tenanted logistics properties in the US. Fitch expects STAG's same-store net operating income to decline at a low single-digit rate through 2017, as occupancy losses offset its solidly positive leasing spreads. Compared with STAG, MIT has a portfolio of well-seasoned assets with higher tenant granularity. MIT also has a stronger financial profile, justifying a rating that is one notch above STAG's. Unibail's rating reflects its geographically diverse portfolio of prime shopping centres that generates robust rental income. It has a portfolio valued at more than EUR30 billion, occupancy rates of around 97%, strong rent renewal and high tenant retention. The portfolio is also diversified in 11 countries across Europe, and across asset types with retail amounting to 82% of rent, office 10%, and exhibition centres making up 7%. This supports a higher rating for Unibail than MIT. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Portfolio occupancy drops to 91.5% in FY18 from 92.4% in FY17 on a large supply of new industrial properties and a high 20% of rental income coming up for renewal in the nine months to 31 March 2018 - Portfolio average rental rate to remain flat in FY18 - Revenue to grow by 1.8% in FY18 and 5.3% in FY19 supported by new developments such as the HP BTS phase two - Fitch estimates total capex of around SGD160 million to be spent in FY18 and FY19, including maintenance capex of 3% per revenue per annum RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action -No positive rating action is expected in the medium term given MIT's geographic concentration in Singapore and limited scale relative to higher-rated global property investment companies. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action -FFO fixed-charge coverage sustained below 5x -FFO adjusted net leverage sustained above 6x and the ratio of net debt to investment property value sustained above 40%-45% -The rating of MIT's senior unsecured notes may be downgraded if the ratio of unencumbered assets/unsecured debt falls below 2x (end-FY17: 3.5x) -A sustained and material weakening in the competitive position of MIT's assets, as evidenced in weaker rental renewal rates and occupancy levels, resulting in EBITDA margin sustained below 60% LIQUIDITY Strong Liquidity, Market Access: MIT's liquidity is strong. At end-March 2017, the trust had SGD686 million of approved undrawn credit facilities and SGD38 million of cash, which will help it to comfortably meet near-term debt maturities of SGD115 million, and also fund our expectations of negative FCF in the next 12 months. Fitch believes MIT's relationship with its sponsor, Mapletree Investments Pte Ltd, which is owned by the Singapore government's (AAA/Stable) investment company, Temasek Holdings Private Limited, underpins the trust's strong market access. Contact: Primary Analyst Hasira De Silva, CFA Director +65 6796 7240 Fitch Ratings Singapore Pte Ltd. One Raffles Quay South Tower #22-11 Singapore 048583 Secondary Analyst Bernard Kie Associate Director +6221 2988 6815 Committee Chairperson Vicky Melbourne Senior Director +612 8256 0325 For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. 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