Mapletree Industrial Trust - UOB Kay Hian 2022-05-09: 4QFY22 Tactical Pause For Renewal And Rejuvenation


Mapletree Industrial Trust - 4QFY22 Tactical Pause For Renewal And Rejuvenation

  • Mapletree Industrial Trust's 4QFY22 DPU grew 5.8% y-o-y, driven by the acquisition of 29 data centres in North America. Outlook is positive as growth in power-constrained markets, such as Silicon Valley and Northern Virginia, is likely to spill over to other markets within the US.
  • Mapletree Industrial Trust is likely to pursue the acquisition of the remaining 50% stake in the second data centre JV with Mapletree Investments in FY24.
  • Mapletree Industrial Trust provides attractive FY23 distribution yield of 5.4% (KDCREIT: 5.0%). Maintain BUY. Target price: S$3.65.

Mapletree Industrial Trust's 4QFY22 Results

  • Mapletree Industrial Trust (SGX:ME8U) reported DPU of 3.49 cents (+5.8% y-o-y) for 4QFY22, which is in line with our expectations.
  • Accelerated growth from acquisitions of data centres in North America. Gross revenue and NPI grew 35.5% and 35.3% y-o-y respectively in 4QFY22 driven by the acquisition of 29 US data centres completed on 22 Jul 21.
  • Occupancies improved in Singapore. Portfolio occupancy edged higher by 0.4ppt q-o-q to 94% in 4QFY22. Occupancy for its Singapore portfolio improved by 0.7ppt q-o-q to 94.4%, driven by Business Park Buildings (+0.3ppt q-o-q to 83.3%) and Flatted Factories (+1.6ppt q-o-q to 93.6%). Occupancy for data centres was stable at 93.9%.
  • Second consecutive quarter of positive rent reversion. Management estimates positive rental reversion at 1.1% in 4QFY22. Leases were renewed at slightly higher rental rates for Hi-tech Buildings at S$2.49psf/month (+2%) and Flatted Factories at S$1.72psf/month (+0.6%). Retention rate was heathy at 83.9%. Gross rental rate for its Singapore portfolio was stable at S$2.13psf/month.
  • Data centres gain prominence. Mapletree Industrial Trust recognised gain in fair value of its investment properties of S$87m driven by data centres in North America due to compression of capitalisation rate. Thus, data centres has grown and accounted for 54.1% of its AUM. NAV per unit increased 12% y-o-y to S$1.86.
  • Completed divestment of 19 Changi South Street 1. Mapletree Industrial Trust has completed the divestment of 19 Changi South Street 1, a two-storey light industrial building with a foyur-storey extension block, for S$13m on 21 Apr 22. The property has 30-year land lease commencing from 16 Nov 96 with an option to extend for another 30 years. The sale price is higher than valuation of S$11.9m and purchase price of S$12.4m.

Strong balance sheet.

  • Aggregate leverage eased marginally by 1.5ppt q-o-q to 38.4% in 4QFY22 due to the revaluation gains. Interest coverage ratio remains healthy at 5.7x. Its weighted average tenor of debt is 3.8 years and only 13.3% of its total borrowings are due for refinancing in FY23. 70.5% of its total borrowings are hedged to fixed interest rates. Management estimated that every 50bp increase in average all-in cost of debt has a negative impact on DPU of 0.13 cents.

Uncertainties from higher inflation.

  • Management sees headwinds from rising energy prices and supply chain disruptions causing higher and more broad-based inflation. Inflation could ease in 2H22 as developed countries respond with tightened monetary policy and supply chain disruptions ease.

Positive outlook for data centres.

  • According to CBRE, average asking rental rates in primary data centre markets in North America dipped 0.4% in 2021, while rental rates in secondary markets dipped 2.0%. Inventory bottlenecks are likely to trigger rental rate increases as demand grows in power-constrained markets, such as Silicon Valley and Northern Virginia.

Pursuing more growth through acquisitions of data centres.

  • Mapletree Industrial Trust has the right of first refusal from the sponsor Mapletree Investments to acquire the remaining 50% stake in their second data centre JV Mapletree Rosewood Data Centre Trust (MRODCT), which owns 13 data centres in the US. Mapletree Industrial Trust is likely to pursue the acquisition in FY24 given the anticipated volatilities in financial markets in FY23.

Negative impact from higher cost of electricity.

  • Triple net leases accounted for all leases for data centres in Singapore and 90% of leases for data centres in North America (increase in cost of electricity less dramatic due to diversified sources of energy). Thus, higher cost of electricity does not have material impact on Mapletree Industrial Trust’s portfolio of data centres. Mapletree Industrial Trust’s multi-tenant buildings in Singapore are affected by higher cost of electricity. Management estimated that operating expenses would increase by S$10m-12m if the cost of electricity increases by 2-3x from the current S$0.15 per kWh to S$0.40-0.45 per kWh.

Redeveloping the Kolam Ayer 2 Cluster.

  • Mapletree Industrial Trust commenced construction for the redevelopment of the Kolam Ayer 2 Flatted Factory into a high-tech industrial precinct in Nov 20, which will raise its plot ratio to 2.5x (previously: 1.5x) and increase its GFA to 865,600sf (+71%). It has secured pre-commitment from an anchor tenant (global medical device company headquartered in Germany) for the built-to-suit facility on a 15+5+5 year term, which accounts for 24.4% of the enlarged GFA.
  • Completion of the 163 & 165 Kallang Way and 161 Kallang Way redevelopments are expected in 2H22 and 1H23 respectively. Construction costs have increased 14% to S$300m due to the COVID-19 pandemic but management remains confident in achieving yield on costs of > 7%.

Healthy take-up for DRP.

  • Take-up for Mapletree Industrial Trust’s dividend reinvestment plan (DRP) was healthy at 42.5% for 3QFY22 distribution. The DRP applies to 4QFY22 DPU of 3.49 cents. The issue price for new units is set at 1% discount to the 10-day volume-weighted average traded unit price on the record date. The DRP will help Mapletree Industrial Trust to gradually lower its aggregate leverage and also finance progressive payments for development projects.

Mapletree Industrial Trust - Earnings forecast and recommendation

Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-05-09
SGX Stock Analyst Report BUY MAINTAIN BUY 3.65 DOWN 3.720