Mapletree Industrial Trust (MINT SP) - DBS Research 2017-09-27: Shedding Singapore “pure-play” Status Will Prove To Be The Right Move Over Time

Mapletree Industrial Trust (MINT SP) - DBS Vickers 2017-09-27: Shedding Singapore “pure-play” Status Will Prove To Be The Right Move Over Time MAPLETREE INDUSTRIAL TRUST ME8U.SI

Mapletree Industrial Trust (MINT SP) - Shedding Singapore “pure-play” Status Will Prove To Be The Right Move Over Time

  • MINT announced expanding investment mandate to include data-centers overseas.
  • Shedding its Singapore pure-play status is positive.
  • Potential for Manager to drive growth given expanded investable universe.
  • BUY maintained, Target Price S$1.94.

What has happened.

  • Mapletree Industrial Trust (MINT) announced the expansion of their Investment Mandate to include overseas income producing real estate primary for datacenter use. The new mandate will be effective from 26th October 2017.
  • Key target markets that the Manager has identified include gateway cities in the Asia Pacific region, Europe and the USA. These cities offer advanced infrastructure power and global connectivity which supports the growth of data-center real estate.
  • Supported by strong government support (including intellectual property rights and data sovereignty) and a pro-business environment, we believe that there will be opportunities for MINT to establish a meaningful presence there.
  • MINT can also tap the Sponsor, Mapletree Investments, for its experience, contacts and expertise in investing worldwide.
  • MINT targets that overseas data-centers could form close to 20% of aggregate asset under management.
  • Based on the REIT’s AUM of S$3.77bn as of 30June 2017, overseas data-centers could comprise up to S$0.6bn.

Our thoughts.

1. Data-centers a niche asset class with attractive attributes; will we see the first acquisition soon? 

  • We are not surprised that MINT is seeking to invest overseas given that the Manager has previously alluded to such a move, given the competitive acquisition climate in Singapore. That said, widening the REIT’s addressable target market will also mean better growth opportunities for DPU and NAVs in the medium term.
  • Data-centers are a niche asset class but not new to MINT given that the REIT has 4 such data-centers in Singapore, 3 of which MINT has developed and/or is developing with end-users taking up long term leases. As such, the Manager, in our view, has acquired strong capabilities in evaluating any potential data-center deals and any prospective targets overseas or in Singapore are likely to come with specifications which will remain somewhat “future-proof” to the fast changing technological and power needs for end users.
  • We believe that MINT is likely to be an investor in bare or core-shell centers, meaning that the need for higher capex for equipment will not be a drag on the REIT’s balance sheet going forward. In addition, given that most end-users typically take up long term contracted leases, we believe that it will also enhance the REIT’s income visibility.
  • However, a key question in our view, is how will the Manager create its own niche and expand meaningfully in a space dominated by global players (such as Digital Realty, Equinix), and also competing capital in Asia from the likes of Keppel DC REIT and Alpha DC Fund for acquisition opportunities.

2. Any near term negative reaction due to the loss of its “Singapore pure-play” status is an opportunity to BUY.

  • While some investors attribute the high P/NAV multiples that MINT trades at is due to the REIT’s highly visible and diversified income stream in Singapore, we believe that with a fairly significant AUM of S$3.7bn and a tapering DPU growth outlook (FY18-19 DPU CAGR of 1.3%), it is time for MINT to venture overseas for better growth prospects.
  • While this might mean taking on more risk and venturing away from its home ground, we believe the risks are mitigated somewhat by the data-center industry’s positive dynamics and stickier tenant base. In fact, we believe that such a strategic move will in fact re-accelerate growth going forward.
  • A Singapore “pure-play” exposure in our view, limits longerterm DPU and NAV expansion prospects for MINT, especially when land-leases for industrial properties are at a maximum of 30 years, meaning significant capital outlay or potential NAV erosion in the longer term. However, this is not a near term risk given MINT’s fairly long weighted average unexpired land lease term of close to 39.1 years (as of 30th June 2017).
  • A precedent has already been set, with Ascendas REIT (AREIT)’s first foray into Australia close to two years ago. Ascendas REIT's share price was under pressure given the “uncertainty” brought about by a new overseas investment mandate but valuations caught up over time as A-REIT delivered strong and consistent DPU growth. The stock is now trading at close to 4-year highs in terms of P/NAV multiple and yield spreads.
  • In addition, we believe that the S-REIT sector has matured and investors have grown accustomed to pure-play overseas REITs (like Frasers Logistics Trust) which is also trading above its NAVs, implying that investors do actually reward for REITs that offer attractive sustainable growth. Thus, we do not see any significant near term negative reaction to MINT’s share price.

Derek TAN DBS Vickers | Melvin SONG CFA DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2017-09-27
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.940 Same 1.940