Mapletree Industrial Trust - UOB Kay Hian 2017-10-26: 2QFY18 Results Of MIT In Line

Mapletree Industrial Trust - UOB Kay Hian 2017-10-26: 2QFY18 Results Of MIT In Line MAPLETREE INDUSTRIAL TRUST ME8U.SI

Mapletree Industrial Trust - 2QFY18 Results Of MIT In Line

  • Results of Mapletree Industrial Trust (MIT) in line with our expectations. Noting that the industrial space outlook will remain challenging in Singapore due to supply-side pressures, MIT management is looking to the US for growth with its S$1.02b acquisition of 14 data centres. 
  • Maintain HOLD on MIT with a raised target price of S$1.88 (from S$1.78). 

Mapletree Industrial Trust (MINT SP/ HOLD/ Target:S$1.88)

2QFY18 results in line with expectations. 

  • Maintain HOLD with a raised target price of S$1.88 (from S$1.78), based on DDM (required rate of return: 6.6%, terminal growth: 1.7%). This mainly factors in the DPU accretion from its US datacentre acquisition and 0.3% increase in terminal growth rate on better growth prospects. 
  • MIT reported 2QFY18 DPU of 3.00 S cents, up 6.0% yoy. Results are consistent with our expectations, with 1HFY18 DPU representing 51.5% of full-year estimates. 

Gross revenue and NPI grew by 9.9% and 11.1% yoy respectively. 

  • Growth was attributed to the revenue contribution from build-to-suit (BTS) project for HP Singapore and a pre-termination compensation of S$3.1m from J&J, partially offset by lower portfolio occupancy.

Portfolio review. 

  • Overall occupancy rate shrunk 2.2ppt qoq to 90.4% in 2QFY18, due to the short time gap between the completion of Phase Two of BTS project for HP and its lease commencement on 1 Sep 17. Portfolio rents decreased marginally by 0.5% qoq to S$1.94 psf pm.

Average lease expiry of 3.7 years by rental income. 

  • Only 8.4% of the leases by rental income are due in FY18, and another 20.4% expiring in FY19.

Challenging outlook to exert pressure on rental and occupancy in Singapore

  • Challenging outlook to exert pressure on rental and occupancy in Singapore, despite continued strength in manufacturing sector, due to the continued supply of competing industrial space and exit of tenants. Management is focused on maintaining a stable portfolio through tenant retention, which rose by 2.4 ppt qoq to reach 77.2% in 2QFY18.

Completed a 11-storey hi-tech building and 8-storey hi-tech building for HP

  • Completed a 11-storey hi-tech building and 8-storey hi-tech building for HP, which will be 100% committed by HP for a lease term of 10.5 + 5 + 5 years with annual rental escalations. Phase Two lease has commenced on 1 Sep 17 with a rent-free period of 4.5 months.

Acquisition of 14 data centres in the US for US$750m (S$1,020m) in 40:60 JV with Mapletree Investments. 

  • The 14 data centres are strategically located in established data centre markets, situated on freehold land with NLA of about 2.3m sf, enjoy 97.4% portfolio occupancy and WALE of 6.7 years, and leased to 15 high-quality tenants (such as AT&T, The Vanguard Group, General Electric, Level 3 Communications, Equinix) from diversified industries (like telecommunications, IT, and financial services).

US portfolio is old, but of quality. 

  • The average age of its US portfolio is just slightly over than 40 years, with the age of majority of its 14 properties ranging between 30-40+ years. However, management is confident in the fundamentals and suitability of its assets (structurally sound buildings, floor loading, central location, connectivity etc.) for use by data centres.
  • Well-staggered leases, and run on triple net basis (where all outgoings such as maintenance, tax and insurance are borne by the tenants), minimising any leasing and operating risks for MIT. The risk of losing and having to find replacement tenants is also low, due to the stickiness of customers who have made a lot of investments into the fittings.

Purchase consideration comes at 3.4% discount to asset valuations by independent valuer C&W. 

  • Total acquisition cost including acquisition related expenses is expected at US$754.2m (S$1,025.7m). The acquisition will be fully funded through private placement (~29.6% of MIT total acquisition cost) and bank borrowings (~70.4% of MIT total acquisition cost).

Expected yield accretion. 

  • Management expects an initial NPI yield of about 7% with escalations built in place, and expects acquisition to be yield accretive.

Acquisition is in line with expansion of investment strategy to acquire data centres outside Singapore. 

  • The acquisition facilitates MIT’s strategic entry into the US, the world’s largest data centre market (representing about 28% of the global data market in the second quarter of 2017). 
  • MIT's Singapore exposure will reduce to 90% (from 100%) post the acquisition with US accounting for the remaining 10%. Hi-tech buildings segment exposure is expected to increase to 36.6% of the portfolio (up from 29.6%). Data centres are also expected to comprise 16.0% of the enlarged portfolio (up from 6.7%). 
  • The transaction will also allow MIT to diversify its tenant base (such that risk exposure from any single tenant by gross rental income will fall from 10.5% to 9.7%).

Vikrant Pandey UOB Kay Hian | Loke Peihao UOB Kay Hian | http://research.uobkayhian.com/ 2017-10-26
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 1.880 Up 1.780