Mapletree Industrial Trust - OCBC Investment 2021-06-23: Deepening Its Data Centre Presence

MAPLETREE INDUSTRIAL TRUST (SGX:ME8U)

Mapletree Industrial Trust - Deepening Its Data Centre Presence

Mapletree Industrial Trust proposed acquisition to boost data centre exposure.
Improved earnings visibility given long WALE and annual rental escalations.
Lower fair value estimate of Mapletree Industrial Trust to S$3.41 due to slight ESG discount applied.

Mapletree Industrial Trust (SGX:ME8U) recently proposed to acquire a portfolio of 29 data centres in the US from a third party for a purchase consideration of US$1.32b (~S$1.78b). This is expected to translate to an initial NPI yield of ~5.1%. Post-acquisition completion, the data centre segment (Singapore and North America) is expected to form 54% of Mapletree Industrial Trust’s AUM, versus 41% previously, and is in-line with management’s target to scale up its data centre exposure to up to two-thirds of its portfolio.
Mapletree Industrial Trust has a diversified funding source, as illustrated by its maiden issuance of perpetual securities (S$300m at an initial rate of distribution of 3.15% per annum) and equity fund raising exercise (gross proceeds of ~S$823.3m from a private placement and preferential offering).
Coupled with additional debt financing, Mapletree Industrial Trust’s pro forma aggregate leverage is expected to increase to 40.3%.

We believe Mapletree Industrial Trust’s aforementioned acquisition would provide it with enhanced earnings visibility, as the portfolio has a long WALE of 7.9 years by gross rental income (as at 1 Jun 2021). In addition, 89.4% of the leases have contractual annual rental escalations ranging from 1.5% to 3.0%.
Although the portfolio occupancy was only 87.8% (as at 1 Jun 2021), this was largely due to one asset (250 William Street NW) which had a recent office lease termination. Excluding this property, the portfolio occupancy would have been 98.4%. Mapletree Industrial Trust is in the process of backfilling the vacant space, and there is also the potential over the medium term to convert some of the commercial space into data centre space given the property’s existing network connectivity and power availability.
Given that the portfolio assets are relatively old, maintenance capex of ~US$4-5m per year is expected to be incurred.

After factoring in this proposed acquisition (completion expected in 3QCY21) and the completion of another data centre acquisition in Virginia, US, we lower our FY22F DPU forecast for Mapletree Industrial Trust by 1.6% due to a timing gap between the issuance of new units and perpetual securities and contribution from the portfolio. However, we raise our FY23F projection by 4.2%.
We also apply a slight ESG discount (see below for more information) and this raises our cost of equity assumption. Correspondingly, our fair value estimate for Mapletree Industrial Trust decreases from S$3.51 to S$3.41.
See

In terms of ESG performance, there are concerns on an increase in Mapletree Industrial Trust’s recurring related party transactions with its controlling shareholder, which could undermine the interests of minority shareholders. Furthermore, Mapletree Industrial Trust’s classified board structure and lack of provisions such as proxy access or majority voting, may limit minority investors’ ability to influence company decisions.
Although the number of transactions with its sponsor has increased, we believe there are mitigating factors to protect minority unitholders’ interests, such as having the properties to be acquired being valued by an independent valuer.
Furthermore, Mapletree Industrial Trust has historically been able to acquire properties from its sponsor at a discount to the independent valuation and make it DPU and NAV accretive to unitholders.

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2021-06-23

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