Mapletree Industrial Trust - DBS Research 2019-10-23: Hitting The Right Notes

MAPLETREE INDUSTRIAL TRUST (SGX:ME8U)

Mapletree Industrial Trust - Hitting The Right Notes

Mapletree Industrial Trust's operational results showed resilience as DPU rose despite the more subdued growth environment.
Recent acquisitions will anchor near-term growth in distributions.
Rising share of data centres in the portfolio points to longer-term growth.
BUY call maintained.

Despite the more subdued macro backdrop, MAPLETREE INDUSTRIAL TRUST (SGX:ME8U)’s operational performance showed no signs of a slowdown with 1HFY20 revenues and net property income rising by 9.7% and 12.8% to S$201.4m and S$157.9m respectively. See Mapletree Industrial Trust Announcements.
The stronger operational numbers were driven by acquisitions of 18 Tai Seng, 7 Tai Seng and Mapletree Sunview 1. The higher growth in net property income mainly came from the manager keeping costs tighter (+0.3% y-o-y) given lower maintenance expenses, offsetting the higher property taxes for 18 Tai Seng and marketing expenses. As a result, distributable income rose by 11.6% to S$126.7m, more than offset the 7.6% rise in borrowing costs to S$21.6m (taken to fund acquisitions) and 1.9% dip in share in associate income to S$8.7m.
DPU rose by a smaller 3.7% to 6.23 Scts, forming 51% of our estimates. See Mapletree Industrial Trust Dividend History.

Mapletree Industrial Trust's portfolio occupancy rates remained stable at 90.2% with retention rate high at 80% for the quarter.
Mapletree Industrial Trust’s flatted factories saw an uptick in occupancy to 88.1% (c.87.9% in 1QFY20) while that for Business Parks rose to 81.9% (vs 79.3% in 1QFY20). The manager continues to back-fill vacancies at its Synergy in International Business Park but the quarter-end occupancy rates had inched higher to c.85%, which is positive as this level provides the manager with more bargaining power to negotiate rentals going forward.
We note some transitional vacancies at the stack-up/ramp-up properties (90.4% in 2QFY20 vs 92.4% in 1QFY20) where the manager has filled part of the vacated space. Hence, they should see an improvement in subsequent quarters.
The 10-ppt dip in occupancy rates at its Light Industrial property (81.0% from 91.3% in 1QFY20) came as one of its properties saw a master-lease expiry but the impact on the overall portfolio is marginal as the sub-asset class forms < 2.0% of total exposure.

We do see some improvement q-o-q as most segments are experiencing smaller declines, especially in the flatted factory space (at < -3.0%) and stack-up/ramp-up buildings while its high-specification properties saw positive rental reversions. The business park properties saw a slight dip in rental reversions as the manager adopted an occupancy-focused strategy to keep tenants.
The outlook for rental reversions remains mixed at this juncture as the manager looks to balance the ongoing tenant shifts at Kolam Ayer 2 cluster going into 1H20, while also keeping occupancy resilient.

Looking ahead, we remain excited about the outlook for Mapletree Industrial Trust, driven by ongoing asset rejuvenation from the development of Kolam Ayer 2 cluster (at a cost of S$263m, completing in 2H22) and completion of its proposed acquisition of 13 data centres in the US with its Sponsor.
The recent completion of the development of 7 Tai Seng will anchor near-term earnings growth.
See Mapletree Industrial Trust Share Price; Mapletree Industrial Trust Target Price.

Derek TAN DBS Group Research | Rachel TAN DBS Research | Singapore Research Team DBS Research | https://www.dbsvickers.com/ 2019-10-23

SGX Stock Analyst Report BUY MAINTAIN BUY 2.750 SAME 2.750