Mapletree Industrial Trust - UOB Kay Hian 2020-07-23: 1QFY21 “Minting” Growth Through Data Centres

MAPLETREE INDUSTRIAL TRUST (SGX:ME8U)

Mapletree Industrial Trust - 1QFY21 “Minting” Growth Through Data Centres

Mapletree Industrial Trust's 1QFY21 DPU of 2.87 S cents was down 7.4% y-o-y but up 0.7% q-o-q. Excluding cash retained of S$7.1m, 1QFY21 DPU would have increased 2.9% y-o-y to 3.19 S cents. 90% of Mapletree Industrial Trust’s tenants have resumed their business operations. Its 32 data centres are deemed essential services and remain fully operational.
Potential acquisition of the remaining 50% stake in 13 data centres in North America (second JV) from sponsor Mapletree Investments is a key catalyst.

Mapletree Industrial Trust (SGX:ME8U) reported a DPU of 2.87 S cents for 1QFY21, down 7.4% y-o-y but slightly above our forecast. It withheld tax exempt income of S$7.1m due to the mandated rental relief. We estimate a payout ratio at 89.9% for 1QFY21. See Mapletree Industrial Trust Announcements.
Excluding cash retained, Mapletree Industrial Trust's 1QFY21 DPU would have increased 2.9% y-o-y to 3.19 S cents.

Mapletree Industrial Trust generated higher revenue from 7 Tai Seng Drive (upgraded into a data centre), The Synergy (backfilling of vacant spaces) and 30A Kallang Place (increased contribution post AEI). Distributable income increased 11.6% y-o-y, driven by the newly-acquired 50% stake in 13 data centres in North America.

Occupancy for Flatted Factories eased 0.8ppt q-o-q to 85.4%. Occupancy for the North American portfolio remained stable at 98.7% (flat q-o-q). The weighted average lease expiry (WALE) remained stable at 4.2 years (flat q-o-q).

Business park buildings saw negative reversion of 1.9%, followed by hi-tech buildings (-1.7%) and flatted factories (-1.2%). The Singapore portfolio saw average passing rents decline 1.4% q-o-q to S$2.08psf pm. The lower average rental rate was due mainly to rental rebates provided under the COVID-19 Assistance and Relief Programme.

Mapletree Industrial Trust has five data centres in Singapore, namely 7 Tai Seng Drive, 19 Tai Seng Drive, 26A Ayer Rajah Crescent, Mapletree Sunview eng 1, and 27 data centres in North America, which were previously classified under hi-tech buildings.

Mapletree Industrial Trust has raised S$410m through a private placement of 146m new units at S$2.80 each in Jun 20. Aggregate leverage was 38.8%, well within the regulatory limit of 50%. It has committed credit facilities of more than S$300m, more than sufficient to refinance debt of S$45m due in FY21.
Mapletree Industrial Trust has reduced its weighted average funding cost from 2.9% to 2.6% during the quarter.

More than 70% of tenants (by gross rental revenue) in Singapore provide essential services, which remained open during the circuit breaker period. 90% of Mapletree Industrial Trust’s tenants have continued or resumed their business operations.
All 27 data centres in North America, deemed essential services by the authorities in the US and Canada, remained open.

Management estimated that rental relief (excluding property tax rebates and cash grants from the government) amounted to about S$20m, comprising the COVID-19 Assistance and Relief Programme of S$13.7m and mandated rental relief for SMEs under the COVID-19 (Temporary Measures) (Amendment) Act 2020 of S$6.3m. We have assumed that Mapletree Industrial Trust withhold tax exempt income of another S$6.3m in 2QFY21.
55% of Mapletree Industrial Trust’s Singapore portfolio by gross rental income (or 45% of overall portfolio) is of SME tenants, defined as companies with annual turnover of less than S$100m or employing less than 200 workers. 105 tenants, accounting for 4.5% of gross rental income, have requested rental deferrals. Collection has improved from 94% to 97% (normalised level: 98%). Arrears of more than one month are at about 1%.

Management cited 451 Research, which expects leased data centre demand (by net utilised sf) to grow at a faster 6% CAGR (vs 5% CAGR supply growth) in North America between 2018 to 2024. Data centres are also deemed as essential services in the US and Canada, and thus remained open during the current COVID-19 pandemic. The underlying long WALE of 7.4 years for Mapletree Industrial Trust’s data centres in North America also adds to income resilience.

During the quarter, Mapletree Industrial Trust commenced redevelopment of the Kolam Ayer 2 Flatted Factory into a high-tech industrial precinct, which will raise its plot ratio to 2.5x (previous: 1.5x), thereby increasing its GFA to 865,600 sf (+71%).
Management has secured pre-commitment from an anchor tenant (global medical device company headquartered in Germany) for 24.4% of the enlarged GFA, which comprises a BTS facility on a 15+5+5 year term with annual rental escalation. 74 of the 108 existing tenants at Kolam Ayer 2 have committed to new leases at alternative Mapletree Industrial Trust clusters. The site has been handed over to the demolition contractor. Mapletree Industrial Trust is currently in the midst of tender for the construction contract. Management expects the redevelopment to complete in 2H22.

We cut our Mapletree Industrial Trust's FY21 DPU forecast by 7% due to the impact from the COVID-19 (Temporary Measures) (Amendment) Act 2020. Our FY22 DPU forecast remains unchanged.
Maintain BUY.
Our target price of S$3.10 is based on DDM (cost of equity: 6.0%, terminal growth: 2.0%).
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.
Mapletree Industrial Trust's share price catalysts:
- Growth from data centres located in Singapore and the US.
- remaining 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/ 2020-07-23

SGX Stock Analyst Report BUY MAINTAIN BUY 3.10 UP 3.080