Mapletree Industrial Trust - UOB Kay Hian 2022-07-27: 1QFY23 Weathering Headwinds From Higher Inflation & Interest Rates


Mapletree Industrial Trust - 1QFY23 Weathering Headwinds From Higher Inflation & Interest Rates

  • Mapletree Industrial Trust (SGX:ME8U)'s 1QFY23 DPU grew 4.2% y-o-y, driven by the acquisition of 29 US data centres. Mapletree Industrial Trust achieved higher portfolio occupancy and positive rent reversion.
  • Mapletree Industrial Trust is a resilient industrial REIT due to asset type and geographical diversification. Our existing DPU forecast is unchanged as we have already factored in the higher cost of debt and electricity tariffs.
  • Mapletree Industrial Trust provides FY23 distribution yield of 5.1%, which is in line with peers (DCREIT: 5.1%; KDCREIT: 5.1%). Maintain BUY. Target price: S$3.36.

Mapletree Industrial Trust's 1QFY23 Results

  • Mapletree Industrial Trust reported DPU of 3.49 cents for 1QFY23, up 4.2% y-o-y. The results were in line with our expectations.
  • Growth from acquisition of US data centres. Revenue and NPI grew 31% and 24% y-o-y respectively in 1QFY23, driven by the acquisition of 29 data centres in the US, which was completed on 22 Jul 21. NPI margin held up at 77.4% despite negative impact from higher electricity tariffs since Jun 22.
  • Portfolio occupancy improved 1.3ppt q-o-q to 95.3% in 1QFY23. Occupancy for Business Park Buildings increased 2.4ppt q-o-q to 85.7%, driven by The Strategy at International Business Park. Occupancy for Light Industrial Buildings increased significantly by 14.1ppt q-o-q to 92.6% due to divestment of 19 Changi South Street 1. Occupancy for data centres in North America increased 0.7ppt q-o-q to 94.0%.
  • Third consecutive quarter of positive rent reversion. Mapletree Industrial Trust achieved broad-based positive rent reversion of 2.0%, 6.4% and 2.2% respectively for renewed leases for Hi-Tech Buildings (renewals at 18 Tai Seng Street), Business Park Buildings (renewals at The Strategy) and Flatted Factories (improved demand post easing of COVID-19-related restrictions) in Singapore in 1QFY23. Gross rental rate for the Singapore portfolio was maintained at S$2.13psf/month. Retention rate was healthy at 86.2%.
  • Completed two divestments during the quarter. Mapletree Industrial Trust completed the divestment of 19 Changi South Street 1 in Singapore, a 2-storey light industrial building with a 4-storey extension block, for S$13m and 19675 West Ten Mile Road, Southfield, Michigan in the US, a four-storey data centre, for US$10m. Mapletree Industrial Trust recognised divestment gains of S$3.8m for eds of about S$26m would be utilised to fund working capital requirements or reduce existing debts.
  • Conservative capital management. Aggregate leverage is stable at 38.4% in 1QFY23. Average cost of debts increased slightly by 0.1ppt q-o-q to 2.5%. Management has hedged 72.3% of its total debt on fixed rates with weighted average hedge tenor at 4.2 years. Interest coverage ratio was healthy at 6.0x. Its weighted average tenor of debt is 3.7 years and only 13.2% of its total borrowings are due for refinancing in FY23.

Sticking to diversification strategy by expanding into new arenas.

  • Mapletree Industrial Trust is committed to its goal of allocating two-thirds of AUM to data centres. Data centres have expanded by 12.9ppt to account for 54.1% of AUM in FY22. Having reached a sizeable scale of 57 data centres in the US, Mapletree Industrial Trust will look at opportunities to unlock value through:
    • asset enhancement to upgrade the data centres,
    • redevelopment to cater for new usage such as life sciences, and
    • divestment and asset recycling.
  • Striving for sustainable growth in FY23. Mapletree Industrial Trust benefits from full-year contribution from its acquisition of 29 US data centres in FY23. It plans to release tax-exempt income of S$6.6m withheld in 4QFY20 to unitholders during FY23. Nevertheless, management sees headwinds from higher property operating expenses and interest expenses, which are expected to affect distributions negatively.
  • Negative impact from higher cost of electricity. Triple net leases accounted for all leases for data centres in Singapore and 90.2% 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/kWh to S$0.40-0.45/kWh. Management has raised service charges by 10% in Jul 22, which could partially mitigate the inflationary impact from higher cost of electricity.
  • Fundamentals for data centres remain positive. Data centres have diversified sources of demand with future growth driven by emerging technologies, such as 5G, AI and social media, including virtual reality communities and the metaverse. Inventory bottlenecks are likely to trigger rental rate increases as demand grows in power-constrained markets, such as Silicon Valley and Northern Virginia. Growth of enterprise data will create large data stores. Leased data centres provide a secure infrastructure to store these data at a low cost. According to 451 Research, revenue for the North America leased data centre market is forecast to expand at CAGR of 7% from 2020 to 2026 to reach US$24b.

Mapletree Industrial Trust - Earnings forecast revision and recommendation

Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-07-27
SGX Stock Analyst Report BUY MAINTAIN BUY 3.360 SAME 3.360