Mapletree Industrial Trust 4QFY20 - UOB Kay Hian 2020-04-29: Held Back By Exposure To SME Tenants

MAPLETREE INDUSTRIAL TRUST (SGX:ME8U)

Mapletree Industrial Trust 4QFY20 - Held Back By Exposure To SME Tenants

Mapletree Industrial Trust generated a respectable 15.4% y-o-y growth in distributable income, driven by accretive acquisitions and asset enhancements. It retained tax-exempt income of S$6.6m for greater flexibility in cash management. 45% of overall portfolio by gross rental income are SME tenants.

Management estimated that close to 10% of tenants may seek rent deferrals. Its data centres are critical for social media and e-commerce and remains fully operational.
Maintain BUY. Target price: S$2.85.

Mapletree Industrial Trust (SGX:ME8U) reported DPU of 2.85 S cents (-9.8% y-o-y), bringing FY20 DPU to 12.24 S cents (+0.7% y-o-y). Tax-exempt income of S$6.6m was withheld in 4QFY20 for greater flexibility in cash management (equivalent to DPU of 0.30 S cents). We estimate payout ratio at 90.5% for 4QFY20. Excluding cash retained, 4QFY20 DPU would have been flat y-o-y.

Gross revenue and net property income grew 3.0% and 3.2% y-o-y respectively due to full quarter contribution from 18 Tai Seng Street, increased contribution from 30A Kallang Place post Asset Enhancement Initiative (AEI), new contribution from 7 Tai Seng Drive (upgraded into a data centre), but partially offset by lower contributions from decantment of tenants for the redevelopment of Kolam Ayer 2 Cluster into a high-tech industrial precinct.

Distributions declared by JVs (two JVs with sponsor Mapletree Investments to invest in data centres in North America) increased 158.7% y-o-y to S$9.8m. The two JVs also recorded fair value gains on investment properties of S$47.3m.

In Singapore, occupancy improved 0.2ppt q-o-q to 90.7% due to higher occupancies for hi-tech buildings (+0.4ppt q-o-q to 98.8%), business park buildings (+1.0ppt q-o-q to 86.1%) and stack-up/ramp-up buildings (+3.6ppt q-o-q to 94.0%).
Occupancy for North American portfolio improved 0.9ppt q-o-q to 98.7% with the addition of 10 powered shell data centres, which were 100% leased. The weighted average lease expiry has increased by 0.3 year q-o-q to 4.2 years.
Hi-tech buildings recorded positive rental reversion of 2.5% in 4QFY20. Overall, retention rate remains healthy at 77.5%.

Tenants at Kolam Ayer 2 Flatted Factory are vacating their premises, which affected occupancy for Flatted Factories segment (-1.3ppt q-o-q to 86.2%). Site preparation and redevelopment are tentatively scheduled to commence in July. 67 out of 108 existing tenants have committed to new leases at alternative Mapletree Industrial Trust flatted factories. These tenants are given preferential rates.
Rental rates for new leases at Flatted Factories would be higher at S$1.87psf (flat reversions), instead of S$1.73psf, if we exclude these relocating tenants.

Loans due in FY21 have already been refinanced in 4QFY20. Thus, there are no loans due for refinancing in FY21. Mapletree Industrial Trust has S$380m of committed credit facilities available in FY21.
Gearing increased to 37.6% (+3.5ppt q-o-q) due to additional loans to finance the acquisition of data centres in North America. Weighted average all-in funding cost was stable at 2.9%. Interest coverage ratio improved to 7.7x (3QFY20: 6.8x).

55% of Mapletree Industrial Trust’s Singapore portfolio by gross rental income (or 45% of overall portfolio) are SME tenants, defined as companies with annual turnover of less than S$100m or employ less than 200 workers. If the pandemic drags on, these tenants may seek relief under the COVID-19 (Temporary Measures) Act. Rental arrears ratio remained stable at 0.2% of rolling 12-month gross revenue as of March.
70% of tenants are operating as usual (mostly from hi-tech buildings). This proportion could drop by 10-20ppt if the government tightens Circuit Breaker measures. Management estimated that close to 10% of tenants may seek rent deferrals.

The US data centre market recorded net absorption of 349.6MW in 2019. Large megawatt deals were executed at lower compressed cap rates in markets across the US. The trend is expected to continue in 2020. Data centres are a critical component of social media and e-commerce. All 27 data centres in North America remain operational.

We trim our FY21 DPU forecast by 3.2% as:
1. we expect occupancy for Flatted Factories to taper off to 80% by 3QFY21, and
2. there will be negative rental reversion of 4.5% for flatted factories (previous: -3.0%).
Our target price of S$2.85 based on DDM (required rate of return: 6.0%, terminal growth: 1.8%).
See Mapletree Industrial Trust Share Price; Mapletree Industrial Trust Target Price; Mapletree Industrial Trust Analyst Reports; Mapletree Industrial Trust Dividend History; Mapletree Industrial Trust Announcements; Mapletree Industrial Trust Latest News.

Growth from data centres located in Singapore and the US.
Acquisition of the remaining 60% stake in portfolio of 14 data centres (first JV) and 50% stake in portfolio of 13 data centres (second JV) from sponsor Mapletree Investments.

Jonathan KOH CFA UOB Kay Hian Research | Peihao LOKE UOB Kay Hian | https://research.uobkayhian.com/ 2020-04-29

SGX Stock Analyst Report BUY MAINTAIN BUY 2.85 DOWN 2.900