Mapletree Industrial Trust - DBS Research 2021-05-03: Capturing The Digital Dream


Mapletree Industrial Trust - Capturing The Digital Dream

  • Robust quarter concluded with another record DPU.
  • Occupancy rates resilient while reversions could base out by 1H21.
  • Potential distribution of gains from sale of 26A Ayer Rajah.

Mapletree Industrial Trust's FY21 results ahead of expectations

  • Mapletree Industrial Trust (SGX:ME8U)’s (MINT) gross revenue and net property income (NPI) for FY21 increased by ~10% to S$447.2m and S$351.0m respectively. The increase was mainly driven by the consolidation of 14 data centres in the US (previously accounted for as associates) and 7 Tai Seng Drive. This offsets the rent reliefs offered to tenants year-to-date (c.S$13m, below estimates) and the loss of income from the redevelopment of Kolam Ayer 2 project.
  • This drove a ~11% rise in distributable income to S$295.3m, while Mapletree Industrial Trust's DPU rose 2.5% to 12.55 cents, ahead of our estimates.

Financial metrics stable; valuations remain stable.

  • Mapletree Industrial Trust's gearing inched up slightly to 40.3% (vs 37.3% a quarter ago). All in cost of debt remained stable at 2.8% (vs 2.9% a quarter ago) with interest coverage ratio at 6.4x (12-month trailing ratio).
  • The reported dip in valuations of 1.2% for its Singapore portfolio was largely due to impact of shortening land tenures and lower rents assumed by third-party valuers. Cap rates remained stable ranging from 6.0-7.25%.
  • For the US portfolio saw higher values on average.
  • NAV increased slightly to S$1.66 per unit and at the last close, Mapletree Industrial Trust was trading at a P/NAV of 1.70x.

Our thoughts and recommendation

Rebates came in below estimates; potential gains to boost distributions further.

  • Overall arrears ratios have declined slightly to 1.2% (1.4% as of Dec’20), indicating improving overall tenant strength and credit. The manager has dished out rental reliefs to the tune of ~S$13.0m (S$9m as of 9MFY21) which is settling below previous estimates of S$14-15m. This is lower than the S$20m guided at the onset of COVID-19 back in Mar’20, implying that the manager has managed to maintain good financial and risk assessment of its portfolio.
  • The manager has retained a further S$6.7m in distributions and coupled with potential gains of ~S$18m from the divestment of 26A Ayer Rajah Crescent, there may be potential gains to the tune of 1 cents that may be paid to unitholders over the next couple of quarters.

Portfolio occupancies ticked up; negative rental reversions to base out.

  • Mapletree Industrial Trust's occupancy rates across its various sub-segments improved marginally with portfolio occupancy rates increasing marginally to 93.7% (vs 93.1% in 3QFY21).
  • The business parks saw a slight dip to 84.2% due to the exit of an IT tenant at The Signature (Changi Business Park). This weakness is more than offset by the close to 3-ppt improvement in occupancy rate at its stack-up/ramp-up property (96.7% vs 92.9%).
  • Retention rates remain high at 85.7%. Looking ahead, we see some humps to navigate through but should see increasing demand from end-tenants given the turnaround in the Singapore economy.
  • We do note that Razer, which occupies about ~60k sqft of space in its flatted factory cluster, has signed a short-term lease extension ending Sep’21 and will likely move to its own built-to-suit facility after that. Reversionary trends remain marginally negative at ~3.0% as the manager continues to focus on occupancies to fill up vacant space, which is a proven strategy to keep portfolio cashflows stable.

Step-up growth in the next two financial years.

  • The manager has recently started construction on the redevelopment of the Kolam Ayer cluster, starting with two industrial properties (one building already pre-committed to a biomedical tenant) at a revised all-in cost estimate of S$300m. This is higher given cost/labour pressures brought about by the COVID-19 pandemic. The manager might convert one of the remaining industrial properties into a data centre. Completion of the project remains in 2H22, and will be a medium boost to earnings.
  • In FY22, overall distribution growth of 3.5% is driven mainly from the recent completion of its data centre assets.

Implications to Mapletree Industrial Trust's share price

Derek TAN DBS Group Research | Dale LAI DBS Research | https://www.dbsvickers.com/ 2021-05-03
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