Mapletree Industrial Trust - DBS Research 2020-07-01: Reaching For The Stars; Growing Datacenter Focus

MAPLETREE INDUSTRIAL TRUST (SGX:ME8U)

Mapletree Industrial Trust - Reaching For The Stars; Growing Datacenter Focus

Acquisition of the remaining 60% stake in portfolio of 14 datacenters in the US; key earnings driver in 2HFY21.
Higher contribution from datacenters to underpin higher valuations.
Fund raising to boost liquidity; potential inclusion into MSCI Singapore index.

Mapletree Industrial Trust (SGX:ME8U) is proposing to acquire the remaining 60% stake in a portfolio of 14 datacenters located in the USA from its Sponsor, Mapletree Investments (Mapletree). This portfolio was jointly acquired by Mapletree Industrial Trust (40%) and Mapletree (60%) back in 2017 in their first foray into the datacenter space for US$750m.

The purchase consideration for the 60% stake is US$210.9m (S$299.5m) which implies a property value of US$494m (60% interest of the portfolio or US$823.3m on a 100%basis). This is in line with the latest valuation of the portfolio as of 31 March 2020 by Cushman & Wakefield and 0.7% discount to the latest independent valuation commissioned by Newmark Knight Frank Valuation & Advisory LLC as at 31 May 2020.

Mapletree Industrial Trust raised S$410m from a recent private placement exercise to existing and new shareholders, higher than its initial target of S$350m. The placement price was S$2.80/unit, at the top end of the indicative deal range and 1.6% discount to the adjusted VWAP. The funds will be used to part fund the acquisition of the 14 datacenters and the balance will be used to pare down its gearing.

The acquisition of the portfolio will further pivot Mapletree Industrial Trust’s exposure towards high-tech specification (High specs) assets, including datacenters which is deemed to be positive for the Trust. This acquisition increases the Trust’s earnings resilience within this industrial sub-segment as this class of assets is deemed to be future proof, supporting continued evolving needs of the new economy.
Mapletree Industrial Trust’s increased exposure to datacenters from 31.6% pre-acquisition (7.2% SG, 24.4% USA) to c.39% (6.5% SG, 32.5% USA) aligns with management’s longer term strategy to diversify its income diversity and anchor itself in the datacenter space.
This should also be a re-rating catalyst for Mapletree Industrial Trust, in our view. We believe that Mapletree Industrial Trust has an opportunity to close the gap with the other datacenter focused peers like SGX-listed KDC REIT.

We note that this portfolio of datacenters are majority powered shell data-centres (c.81.6% by gross rental income) where tenants typically pay triple net lease structures and outgoings are borne by the tenants. The portfolio has a well staggered lease expiry of c.20% within the next 3 years. Since the portfolio was acquired back in 2017, the properties have maintained stable occupancies while revenues have risen by c.2.4%, driven mainly by rental escalations.
Freehold properties as a percentage of the enlarged portfolio’s land area has expanded to 51.8% from 37.9%. The weighted average land lease expiry is 36.8 years.

Based on our estimates, the acquisition will increase our projected DPUs for Mapletree Industrial Trust by c.3.0% on an annualised basis and at the same time, keep gearing within an optimal c.39% level. We have adjusted our estimates to account for the following:
1. assume recent acquisition completes in Sept 2020;
2. new share issuance in June 2020,
3. rental reliefs of c.S$20m in FY21.
As a result, DPU in FY21F is adjusted down by 2%, while we pencil in a 7% increase in FY22F. See Mapletree Industrial Trust Dividend History.

We maintain our BUY call on Mapletree Industrial Trust and lift our Target Price to S$3.25.
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.
With the recent acquisition of a portfolio of datacenters, Mapletree Industrial Trust is on track to transform itself into an alternative datacentre play. Improved earnings visibility and capacity to still grow in this space should keep valuations at a premium.
Our Target Price for Mapletree Industrial Trust is raised to S$3.25 as we
1. factor in recent acquisitions and
2. lower cost of equity assumptions.
Potential inclusion into the MSCI Singapore Index in the upcoming reviews in 2H2020 could be a catalyst for further upside.

Derek TAN DBS Group Research | Dale LAI DBS Research | https://www.dbsvickers.com/ 2020-07-01

SGX Stock Analyst Report BUY MAINTAIN BUY 3.25 UP 2.700