Mapletree Industrial Trust - UOB Kay Hian 2020-06-24: Zeroing In On Growth From Data Centre

MAPLETREE INDUSTRIAL TRUST (SGX:ME8U)

Mapletree Industrial Trust - Zeroing In On Growth From Data Centre

Mapletree Industrial Trust is proposing to acquire the remaining 60% interest in 14 data centres in the US from sponsor Mapletree Investments. The acquisition expands its exposure to data centres from 31.6% to 39% of AUM. The proportion of freehold properties will also increase from 37.9% to 51.8% of the enlarged portfolio.
The transaction is expected to boost pro-forma FY20 DPU by 3.4% to 12.66 S cents, and NAV per share by 3.7% to S$1.68.

Mapletree Industrial Trust (SGX:ME8U) has proposed to acquire the remaining 60% interest in 14 data centres in the US from sponsor Mapletree Investments for US$210.9m (S$299.5m). Mapletree Redwood Data Centre Trust’s (MRDCT) 14 data centres are located across the US, totalling 2.3m sf NLA on freehold land. They are primarily leased on a core-and-shell basis with triple net leases on a WALE of 4.6 years. Occupancy is high at 97.4%.
Mapletree Industrial Trust had entered into a 40:60 JV with its sponsor to acquire these 14 data centres in 2017.

The purchase consideration of US$210.9m (S$299.5m) is derived from 60% of adjusted NAV of the holding entity. Mapletree Industrial Trust has to take on MRDCT's group debt of US$450m (S$639m) and estimated net liabilities of US$21.8m (S$31m). The agreed value of properties at US$823.3m (100% basis) is 0.7% lower than the independent valuation by Newmark Knight Frank, and in line with the independent valuation by Cushman & Wakefield Western.
Management estimates NPI yield at 6.8% based on the first full-year of contributions.

North American data centres will account for a higher 32.5% share of Mapletree Industrial Trust's AUM, from 24.4%.
Overall, the hi-tech buildings segment, including data centres, will expand 4.9ppt to account for 59.9% of AUM. The proportion of freehold properties (by land area) will also increase from 37.9% to 51.8% of the enlarged portfolio.

Cloud providers have reported strong demand for data-centre space. The COVID-19 pandemic has accelerated the pace of cloud adoption due to remote working, video streaming and online gaming. There is strong leasing demand from social media, e-payment and software-as-a-service. These providers are likely to lease (not build), so as to quickly meet customers' demand. Global revenue from cloud computing is expected to grow at CAGR of 14% in 2018-24.

All MRDCT tenants are on triple net lease structure where all outgoings, such as maintenance, property taxes and insurance, are borne by tenants, thus minimising Mapletree Industrial Trust's capex. Some 97.8% of MRDCT’s portfolio has annual rental escalations of 2% and above, providing growing cash flows. The MRDCT acquisition augments Mapletree Industrial Trust's tenant base with data centre tenants, such as AT&T.

The transaction is expected to boost Mapletree Industrial Trust's pro-forma FY20 DPU by 3.4% to 12.66 S cents, and NAV per share by 3.7% to S$1.68.

The US$218m (S$309.6m) acquisition outlay comprises the purchase consideration of US$210.9m, transaction cost of US$2.2m and acquisition fee of US$4.9m. The acquisition fee will be paid in the form of new units. Excess proceeds raised will be used towards debt repayment, future acquisitions or working capital purposes.

We assume the acquisition of 60% stake in MRDCT would be completed in Sep 20. We cut our FY20 DPU by 5.7% due to Mapletree Industrial Trust’s COVID-19 assistance & relief programme, which is estimated to cost S$20m.
We raise our FY21 DPU forecast by 2.5% due to full-year contributions from the acquisition of 60% stake in MRDCT.

We raised our Mapletree Industrial Trust target price to S$3.08 based on DDM (required rate of return: 6.0%, terminal growth: 2.0% (previous: 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.
Share price catalyst:
- Growth from data centres located in Singapore and the US.
- Acquisition of the remaining 50% stake in portfolio of 13 data centres (second JV) from Mapletree Investments.

Jonathan KOH CFA UOB Kay Hian Research | Peihao LOKE UOB Kay Hian | https://research.uobkayhian.com/ 2020-06-24

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