Mapletree Industrial Trust - DBS Research 2021-07-28: Riding The Digital Wave

MAPLETREE INDUSTRIAL TRUST (SGX:ME8U)

Mapletree Industrial Trust - Riding The Digital Wave

Operational results remain robust, anchored by contributions from the data center portfolio.
Resilient occupancy rates; rental reversions showing signs of bottoming out in 2HFY22.
Capacity to further grow in the datacenter space through strategic acquisitions.
BUY, target price lifted to S$3.35 and estimates raised to incorporate recent acquisitions.

Gross revenue and net property income (NPI) for Mapletree Industrial Trust (SGX:ME8U) for 1QFY22 increased by ~29.2% and ~33.1% respectively to S$128.1m and S$104.7m respectively. The increase was mainly driven by the consolidation of 14 data centers in the USA (previously accounted as associates). This offset the rent reliefs offered to tenants and the loss of income.
Property expenses rose by a smaller 14.1% on the back of additional expenses incurred from the 14 data centres in the USA which was partially offset by lower property taxes of the Singapore portfolio, resulting in an improvement in overall NPI margins to ~81.8% (79.4% in 1QFY21).
This drove ~19% rise in Mapletree Industrial Trust's distributable income to S$84.0m and after accounting for coupons to perpetual holders, distributable income to unitholders rose by ~17.2%, translating to a DPU rise of 3.35 cents (+16.7% y-o-y).

Mapletree Industrial Trust's gearing declined to 31% as of June 2021 from 40.3% a quarter ago but is expected to be transitionary and projected to increase to ~39% on our estimates in the coming quarter on the back of the completion of the acquisition of 29 data centers in the USA for US$1.3bn (S$1.8bn).
Even with the higher expected gearing, we remain comfortable that Mapletree Industrial Trust’s balance sheet remains well capitalised with diversified funding sources and no concentration in refinancing.

Occupancy rates for Mapletree Industrial Trust’s Singapore portfolio increased to 93.4% to 92.9%, largely from a slight uptick across its various industrial sub-segments. The business parks saw a slight dip to 83.6% but was more than compensated by the increase in occupancy rates at Flatted Factories (~91.0%, +0.1 percentage points q-o-q) and Stack-up/ramp-ups (96.9%, +0.2 percentage points q-o-q).
Retention rates remained high at 81.8%. Looking ahead, we note that occupancy numbers could be see some volatility given that Razer, which occupies about ~60k sqft of space in its flatted factory cluster, has signed a short term lease extension ending Sept’21. Reversionary trends while marginally negative are showing signs of basing out.
We understand that the manager has not disbursed any rental rebates in 1QFY22 but we do expect selected assistance to its retail focused tenants at 18 Tai Seng, as per the mandatory 2-week rental assistance to qualifying retail tenants. This rental assistance is estimated to be < 3% of its overall revenues.

The completion of the acquisition of the 29 data centers in the USA (US$1.3bn) in July’ 2021 and the higher than previously estimated acquisition of Virginia DC (US$220m vs est. US$207m) will anchor a robust growth in DPUs from 2QFY21 onwards. In the medium term, the manager is expected to complete the redevelopment of the Kolam Ayer cluster at an all-in cost estimate of S$300m. The first 2 industrial buildings are estimated to complete in 2H22 while the 3rd building will complete in 1H23, anchoring medium term growth in revenues and distributions. We estimate these initiatives to drive distributions by an estimated 7% CAGR over the coming 2 years.
Our estimates are updated to account for the recent acquisitions and equity fund raising exercise that was recently completed. Our target price is raised to S$3.35.

We continue to believe that investors should stay the course with Mapletree Industrial Trust as the manager seeks to continuously pivot the portfolio towards more data center focused properties which now contribute ~50% of its AUM. This supports its valuation (1.6x P/NAV), and forward yields of 4.9% to 5.1% are attractive.
See

Derek TAN DBS Group Research | Dale LAI DBS Research | https://www.dbsvickers.com/ 2021-07-28

SGX Stock Analyst Report BUY MAINTAIN BUY 3.350 UP 3.250