In a nutshell, Mapletree Industrial is proposing to buy 18 Tai Seng Singapore and adding it into its portfolio. A quick overview here from their website.
Source: MIT Investor Presentation Slides
So firstly, MIT is exploring a variety of options to come out with the cash, either by equity or debt or both.
Source: MIT Investor Presentation Slides
LTV, meaning loan-to-value represents the amount of money being loaned with respect to the total acquisition cost. Conventional wisdom does tell us that issuing equity to fund the acquisition will cost a dilution in current unitholders' holdings as the number of outstanding shares increases and each share is worth less prior to the issuance with a lower net asset value (NAV). Similarly, issuing debt will mean that gearing will increase, while NAV might also drop due to an increase in liabilities. From a macro point of view, if interest rates do rise as projected, perhaps it would be better for the reit to go for the equity option, or a 40% LTV option as illustrated above. This can allow them to service their debt more easily. As you can see, a 100% LTV (pure debt no equity option) drives gearing up to 38.7% from 35.1% as opposed to a 40% LTV. There is no 0% LTV here (no debt pure equity option) but it seems that the idea of dilution might not be popular with the unitholders.
The second observation was that 18 Tai Seng is dependent on Sivantos Pte Ltd which makes up 36.6% of its gross rental income. Sivantos is a manufacturer of hearing aids and the income from Sivantos will have the most impact on this new property's income.
Source: MIT Investor Presentation Slides
Although that being said, Sivantos only makes up 1.9% of the entire MIT portfolio. Additional benefit includes reducing the reliance on the other properties in the portfolio, where the top tenant HP drops from 10% to 9.4%.
Source: MIT Investor Presentation Slides
Of course this is a double-edged sword, if Sivantos fails to perform, reducing the reliance on other properties won't really matter too. This is my assumption here, but I will be inclined to think that income from Sivantos will be stable and not volatile, as demand for hearing aids is price inelastic as it is a pretty specialized good.
The final part of interest is of course the effects on distribution per unit (DPU) and NAV.
Source: MIT Investor Presentation Slides
In theory, DPU will be the maximum at 12.11 cents if you use purely debt to fund it (same number of outstanding shares) and the least at 11.83 cents if there is some equity issuance. We note that the predicted number is higher than the current DPU of 11.75 cents. Given the closing price of 1.97 on Tuesday 15 January 2019, the previous DPU translates into 5.96%, the LTV 40% option translates into 6.01% while the LTV 100% option translates into 6.15%. NAV will remain the same at 1.47 if it is 100% debt and increase slightly to 1.49 if there is some equity issuance.
Of course, this probability of the predicted scenario is not guaranteed. Whenever I look at a decision-making process, what I like to look first is the entailing risks which the decision carries.
From my own experience, Tai Seng is not really popular for me and I recall the last time being there was taking driving lessons at Comfort Driving Centre (CDC). So the 'proximity to mature housing estates like Hougang, Bedok and Toa Payoh' point might not draw maximum benefit for the reit and retail elements in the reit may have a risk of not outperforming.
Secondly, the current market price is 1.97 and NAV is 1.47, where you are paying a whopping 50 cents extra for a unit. Although the yield is still pretty acceptable at 5.9-6.0% levels, this is a point of consideration for me. Because assuming they go for the LTV 40% option which is a mixture of equity and debt for a 6% yield, waiting for the price to drop is also a good way to increase dividend yield.
Thirdly, the risk of ecommerce is still there. This might not be very pertinent in the current market but I am going to include it here for my reference (I have written a little about ecommerce in my previous post).
52-week low for MIT is 1.84 which is still a distance away from 1.97.
Technical-wise, price is currently above the 200 exponential moving average which signals a uptrend for now.
Personally, no matter the acquisition, I will not be looking to buy the stock at its current price due to the 50 cent premium over its NAV. I think even the 52-week low of 1.84 is too high for my taste and I am looking at 1.60 levels which was a support in early 2017. The probability of this price happening is pretty low but I will prefer a higher margin of safety at a 13 cent premium.
What are your ideas on this? Looking forward to a constructive discussion.
Good write up. like to add that while we knew market do not price stocks efficiently, usually stronger REITs, the price will move up before we see sufficient investment value. So this can go on a long while of the growth as long is well managed. My experience is to be forward looking in valuing REITs and not based on current valuations as is a moving target usually.
ReplyDeletethanks for the reply! that is also one difficulty that i am struggling to mitigate, but i suppose practice hopefully makes perfect? hope your investing has been fruitful
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