About the company
Mapletree Investments Pte Ltd is a leading diversified real estate holding company based in Singapore. It owns and manages a portfolio of property assets with a value of S$36.9b (as of end-Sep 16), spanning seven real estate sectors across 12 countries, which include Singapore, China, India, Australia, US and the UK. It also manages four Singapore-listed real estate investment trusts (REITs) and five private real estate funds, which hold a diverse portfolio of assets in Asia Pacific. Its notable properties include Vivocity, Mapletree Business City and Tata Communications Exchange in Singapore, as well as mixed-use developments in the region such as Mapletree Business City Shanghai and VivoCity Shanghai, and Nanhai Business City in China.
Structure of the new bonds
The structure of the upcoming perpetual bonds will be similar to its existing perps issued in 2012 (MAPLSP 5.125% Perpetual Qsov (SGD)). The new bonds will be callable only on the fifth year and every coupon payment date thereafter. However, these bonds will only have a coupon reset upon the 10th year, with a step-up margin of 1%. It is interesting for investors to note that these new perps will have a cumulative coupon deferral feature and dividend stopper and pusher clauses. It will also include a change-of-control call, which gives the option of the issuer to either redeem the bonds at par upon a change of ownership (if Temasek no longer owns at least 50% of Mapletree Investments) or step-up the coupon by 1%.
Temasek-owned entity with resilient recurring income and strong balance sheet
Mapletree Investments is wholly-owned by Temasek Holdings, and is the state-owned investment firm's real estate business arm. The company adopts an asset-light business model, integrating the role of real estate developer, investor and capital manager in order to identify and unlock investment opportunities across real estate classes. Its main revenue driver is from the leasing contributions of property assets managed under its four listed REITs. In FY15/16, leasing revenue comprise 95% (S$1.78b) of its total consolidated revenue of S$1.88b, with the remainder of its revenues derived from fee income.
It is interesting for investors to note that the company sports a strong track record of asset growth and profitability over the years, growing its asset base from S$3.47b in 2005 to the current S$36.9b as of end-Sep 16, representing a CAGR of an annualised 25%. This impressive growth was not at the expense of profitability, however – Mapletree has built a stable recurring income base while maintaining strong EBIT margins of an average 68% over the past 5 years. For full-year FY15/16, excluding revaluation gains, recurring PATMI (profit after tax and minority interest) grew 11.6% to S$529m from S$474m in FY14/15, accounting for more than half (54.8%) of overall PATMI of S$965.2m for the financial year. More recent financials seem to point to a continuing upward trend in recurring PATMI growth, with 1H FY16/17 (end-Sep 16) growing a robust 27.3% y-o-y to S$303m from S$238m over the same period last year.
We note also that in spite of its property acquisitions over the years, its debt and liquidity position has been prudently managed, maintaining healthy credit metrics with its gross debt-to-assets of 41% and net interest cover ratio of 4.8X over FY15/16, with a high proportion of unencumbered assets and well spread out debt maturity, with an average debt maturity of more than 3 years. Additionally, it sports diversified sources of funding, with S$6.8b in available source of liquidity as of end-Sep 16, comprising of S$1.09b of cash reserves on its balance sheet and S$5.7b in undrawn facilities.
Comments on pricing
Mapletree's outstanding perpetual bonds (MAPLSP 5.125% Perpetual Qsov (SGD)) presently trade at a 177bps spread over swaps, which we think may not be indicative as investors may be pricing in an impending call later in July 2017. Hence, the new perps are likely priced based on a premium over Mapletree's outstanding senior debt, which are currently trading at average spreads of around 48bps. To get a sense of the fair spread premium, we may reference SembCorp Industries' perpetual bonds (SCISP 5.000% Perpetual Corp (SGD); SCISP 4.750% Perpetual Corp (SGD)) which share the same structure as Mapletree's upcoming perps. These bonds currently trade at a spread premium of about 126bps over its outstanding senior bonds, which should be fairly indicative of the additional compensation for a subordinated and longer durational exposure to the credit of a Temasek-linked entity (SembCorp Industries is 49.51% owned by Temasek Holdings). This would put Mapletree's new perps at a "fair" yield of around 4.4% if priced off 10-year swaps, making the indicative yield of its new perps (4.7%) attractive. It may serve investors well for us to emphasize that that the upcoming new perpetual bonds do not have a coupon reset feature upon its first call date. Hence, the Mapletree may not have the incentive to call on this issue on the fifth year if interest rates rise materially. However, if prevailing interest rates remain low such that it makes economic sense for the issuer to redeem the bonds early (as is the case for the MAPLSP 5.125% Perpetual Qsov (SGD)), investors are potentially locking in very decent yields for a "quasi-sovereign" credit, with a moderate tenor of 5 years.
