Mapletree Industrial Trust - UOB Kay Hian 2022-10-28: 2QFY23 Weathering Headwinds From Higher Inflation & Interest Rates


Mapletree Industrial Trust - 2QFY23 Weathering Headwinds From Higher Inflation & Interest Rates

  • Gross rental rate for Mapletree Industrial Trust’s Singapore portfolio edged higher by 0.9% q-o-q to S$2.13psf/month in 2QFY23 despite uncertainties in the macro environment. Occupancy for the Singapore portfolio improved 0.8ppt q-o-q to 96.8%.
  • Our existing DPU forecast is unchanged as we have already factored in the higher cost of debt and electricity tariff. Mapletree Industrial Trust provides FY23 distribution yield of 6.0%, which is in line with peers’ (Digital Core REIT: 6.8% and Keppel DC REIT: 6.5%).
  • Maintain BUY. Target price: S$3.12.

Mapletree Industrial Trust (MINT)'s 2QFY23 Results

  • Mapletree Industrial Trust (SGX:ME8U) reported DPU of 3.36 cents for 2QFY23 (-3.2% y-o-y), which is in line with our expectations.
  • Growth from acquisition of US data centres. Gross revenue and NPI grew 12.8% and 8.3% y-o-y for 2QFY23 driven by the contribution from the acquisition of 29 data centres in the US completed on 22 Jul 21, partially offset by higher property operating expenses (higher expenses on utilities).
  • Portfolio occupancy improved 0.3ppt q-o-q to new high of 95.6% in 2QFY23. Average occupancy for the Singapore portfolio improved 0.8ppt q-o-q to 96.8% driven by business park buildings (+0.6ppt q-o-q 86.3%), flatted factories (+1.2ppt q-o-q 96.7%) and stack-up/ramp-up buildings (+0.6ppt q-o-q 98.3%). Average occupancy for the North American portfolio fell 0.9ppt q-o-q to 93.1% due to non-renewal by sole tenant at 2 Christie Heights, Leonia. Discussion with a prospective tenant is underway to backfill the vacant space.
  • Fourth consecutive quarter of positive reversion. Mapletree Industrial Trust achieved broad-based positive rental reversion for renewed leases across hi-tech buildings (+3.2%), business park buildings (+1.0%), flatted factories (+2.2%) and stack-up/ramp-up buildings (+3.6%) in Singapore. Gross rental rate for the Singapore portfolio edged marginally higher by 0.9% q-o-q to S$2.13psf/month in 2QFY23. Retention rate was healthy at 86.5%.
  • Conservative capital management. Aggregate leverage ratio decreased from 38.4% to 37.8% due to the redemption of the S$45m 3.65% 10-year medium-term notes with cash. Weighted average tenor of debt is 3.5 years. 74.2% of Mapletree Industrial Trust’s borrowings are hedged through interest rate swaps and fixed rate borrowings. Cost of debts has increased 0.4ppt q-o-q to 2.9%. Management estimated that a 50bp increase in base rates would reduce distributable income by S$0.7m per quarter and DPU by 0.8%.
  • Using DRP to fund redevelopment of Kolam Ayer 2. Mapletree Industrial Trust has raised proceeds of S$40.2m from its distribution reinvestment plan (DRP) for 1QFY23, which represented a healthy take-up rate of 42.9%. The DRP will be applied for 2QFY23 to finance the redevelopment project at 161, 163 & 165 Kallang Way (Kolam Ayer 2 Cluster).

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:
    1. asset enhancement to upgrade the data centres,
    2. redevelopment to cater for new usage such as life sciences, and
    3. 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. Mapletree Industrial Trust plans to release the tax-exempt income of S$6.6m over the next three quarters (S$2.2m per quarter) to mitigate the impact of rising operating and borrowing costs.
  • Redeveloping the Kolam Ayer 2 Cluster. Completion of Kolam Ayer 2 Cluster with GFA to 865,600sf is expected in 2H22 (163 & 165 Kallang Way) and 1H23 (161 Kallang Way). Mapletree Industrial Trust 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. The new tenant will start contributing in 1QFY24. It is also in advance negotiation with a prospective tenant, which could increase pre-commitment to 32%.

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, a higher cost of electricity does not a 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 the higher cost of electricity.

Mapletree Industrial Trust – Earnings forecast revision and recommendation

Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-10-28
SGX Stock Analyst Report BUY MAINTAIN BUY 3.120 SAME 3.120