Mapletree Industrial Trust - DBS Research 2017-11-08: Powerful Combination Of Certainty And Growth

Mapletree Industrial Trust - DBS Vickers 2017-11-08: Powerful Combination Of Certainty And Growth MAPLETREE INDUSTRIAL TRUST ME8U.SI

Mapletree Industrial Trust - Powerful Combination Of Certainty And Growth

  • Mapletree Industrial Trust (MINT)'s strong share price reaction post equity fund raising is seen as a strong mandate from investors for management to pursue growth.
  • US data-centers to re-accelerate MINT’s growth profile with more to come in the medium term.
  • Estimates raised by 2%; TP raised to S$2.15.



Maintain BUY with a street high TP of S$2.15. 

  • We maintain our BUY call and raise our TP to S$2.15. We believe that Mapletree Industrial Trust (MINT) can continue to prove naysayers wrong and continue command premium valuations underpinned by steady DPU FY18-20F CAGR of 3.0% driven by the proposed US datacenter acquisitions; and well-timed contribution from its development projects over FY18-19F. 
  • A still conservative gearing of c.34% empowers the REIT to deliver more inorganic growth surprises. BUY! 


Where we differ. Diversity is the right strategy. 

  • We believe that we are among the few who are firm believers of MINT’s overseas ventures. While investors have long attributed to MINT’s premium valuations for its Singapore “pure-play” status, we believe that this view is changing, especially with a strong share price reaction post its recent fund raising to fund its acquisition of a portfolio of 14 data-centers in the USA. We see this as a green light from investors to execute on this diversification strategy as it re-accelerates the REIT’s growth profile. 
  • We raised our earnings estimates by c. 2%, and TP to S$2.15. In addition, we have not priced in upside from development potential on the sites given the sizable land area available to satisfy tenant’s expansionary demand.


Turnaround in operational results. 

  • While we have imputed flattish reversionary trends in our estimates, we acknowledge that weakness in rental reversions is expected to abate from FY19F onwards as supply tapers off. 
  • Higher than projected rental reversions could mean upside to our DPU estimates.


Valuation

  • MINT’s resilience is a value trait in this market and has yet to be reflected in its current share price. We maintain our BUY call and raise our TP to S$2.15 based on DCF.


Key Risks to Our View

  • Rising interest rates. An increase in refinancing rates will be negative to distributions. However, we note that MINT has minimised this risk by hedging c.74% of its borrowings into fixed rates.



WHAT’S NEW - New era of Certainty of Growth 


Non-Deal Roadshow (NDR) Feedback 

  • We brought management of Mapletree Industrial Trust (MINT) on a roadshow to meet investors in Singapore, USA and UK post recent results and announcement of its maiden overseas acquisition of 14 data-centers located in the USA. 
  • Feedback from investors were largely positive. Most were comforted by the Manager’s measured approach towards its overseas growth ambitions as it limits portfolio cashflow volatility, and ensures that distributions will continue to grow steadily over time.


1. Maiden acquisition in the USA to reaccelerate growth outlook.


Joint Venture with Sponsor with an option to buy-out the Sponsor’s stake in the medium term. 

  • Mapletree Industrial Trust (MINT), via a 40%-60% joint venture (JV) with Sponsor, Mapletree Investments, will acquire a portfolio of 14 datacenters in the USA for US$750m (S$1,020m). MINT’s 40% stake in this acquisition amounts to US$300m (S$405m). 
  • The agreed purchase price for the portfolio is at a c.3.4% discount to independent valuers’ appraised value. The structure of the acquisition will be through an unlisted single purpose trust, The Mapletree Redwood Data Centre Trust, to achieve better tax efficiency (effective tax rate of 10%-15% of net property income).
  • Post completion of this deal sometime in 3QFY18, MINT will derive c.9.9% of its total portfolio asset value from overseas assets. Together with its data-centers in Singapore, this subasset class will form c. 15% of total portfolio value.

Measured approach in investing in US data-centers. 

  • The vendor is Carter Validus Mission Critical REIT, which we understand is approaching its end of its fund life and thus exiting. Out of the available 20 data-centers in the fund, MINT is understood to have chosen 14 properties which fit its investment strategy of mainly shell-and-core assets backed by triple net leases. We believe it is a preferred structure for MINT given that cashflows and returns are visible, resilient and most importantly, limits capex obligations which might eat into returns over time.
  • The geographic focus to invest in USA, which is one of the largest data-center market globally according to the Manager will prove over time to be the right strategy for MINT, given that the USA represents a sizeable and deep market for data-centers, backed by strong growth from end-users and data-center operators. This implies that most data-center operators are likely to look to expand in the medium term and even in the scenario of a tenant vacating the premises, there is a ready pool of replacement tenants.

Recapitalised exercise to part fund acquisition well supported by investors; DPU accretion of 2.0%. 

  • While MINT’s low gearing of c.30% meant that the REIT can gear up to fully debt-fund this deal, the Manager has chosen to raise equity to maintain financial flexibility. The REIT successfully raised close to S$156m in new equity to part fund this deal. This represents close to c.37% of the total investment quantum, with the remainder to be funded by US-dollar denominated debt at an estimated interest rate of 2.5%. 
  • Pricing of the new units was at S$1.90, which represents 1.2% discount to the adjusted VWAP of S$1.92 Scts/unit. The strong share price reaction after the equity fund raising, in our view, is a mandate from investors to execute on its overseas investments strategy. 

Acquisition “Shells but not infrastructure” a positive strategy.

  • Investors generally were receptive of management’s strategy of acquiring data-center “shells” which limits the risk of potential infrastructure obsolescence given the fast changing technological needs in data-centers. 
  • While returns might be lower at c. 6.9% yield, we believe that this compensates for lower capex that MINT will have to incur as part of its landlord obligations during the course of the lease.


2. Accretive deal with a myriad of positives.


Improved cash flow visibility backed by a sticky tenant profile.

  • The Manager believes that the acquisition of a sizeable portfolio together with Sponsor adds value to unitholders as it provides further diversification for the REIT amid limited acquisition opportunities within Singapore. 
  • The target US data-center portfolio’s WALE is 6.7 years (longer than the current portfolio average 3.7 years), improving income visibility and boosting stability. 
  • The 14 datacenters are leased to 15 tenants, including Fortune Global 500 corporations and NYSE/Nasdaq listed companies, implies a strong credit profile. Most of the leases are on a triple-net basis, meaning that cashflows are generally quite stable with minimal downside in the medium term.
  • We are attracted to the resilient cashflows and tenant stickiness for this datacenter asset class. This is mainly due to the significant capital expenditure invested by tenants to fit out the premises which imply that tenants are usually more sticky, and are likely to renew when leases are due.

Freehold land tenures an added positive. 

  • We believe that another attractiveness of the acquisition is the freehold land tenure that the data-centers sit on, which will over the medium term, stabilise the portfolio’s NAV, given that land-leases for the REIT’s Singapore properties are typically shorter term in nature at around 20-30 years. 
  • The portfolio’s land-lease tenure before the acquisition of data centers stood at close to 38.8 years.

Development upside in the medium term not priced in yet. 

  • We note that the total net lettable area (NLA) of 2.3m sqft is only close to a quarter of the 8.2m sqft of land that the properties are sitting on. This means that there is significant development capacity for MINT in the event that existing or prospective tenants intend to expand within the existing compound. This development strategy is likely to be executed in the medium term, in our view. We have not priced in any upside from development at this point.

Accretive deal on the onset; with gearing inching up to a more optimal 34%. 

  • Post acquisition and equity fund raising, MINT’s gearing will increase but still remain conservative at 34%. Based on our estimates, the acquisition of the data-centre portfolio will raise DPU by up to c.2% and add 1Sct to the REIT’s NAV. 
  • Our TP is raised to S$2.15 as we price in the acquisition and adjust our WACC assumptions to reflect higher growth profile for the REIT.


3. 2Q18 DPU of 3.0Scts in line of expectations.

  • MINT reported a steady 2.0% rise in DPU to 3.0Scts in 2QFY18, which is a respectable 6.0% higher y-o-y. This is on the back of 9.9% and 11.1% y-o-y growth in topline and net property income to S$92.6m and S$70.7m respectively. 
  • The higher performance was largely due to the contribution from the built-to-suit (BTS) facility for HP Singapore and pre-termination compensation received from Johnson & Johnson Pte Ltd. This had offset the drop in portfolio occupancy to 90.4% (vs 92.6% in 1QFY18), which in our view is transitional in nature.
  • Portfolio rental reversionary rates (renewal and new leases) were largely mixed across the portfolio with the Hi-Tech and Business Park space the most stable. This trend is likely to remain going forward. 
  • Portfolio rental retention rate was steady at 78.7%.




Derek TAN DBS Vickers | Melvin SONG CFA DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2017-11-08
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 2.15 Up 1.940



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