SINGAPORE (July 2): With data centres increasingly emerging as crucial infrastructure in a digital economy, Mapletree Industrial Trust (MIT) is shaping up to be an increasingly lucrative data centre play with the acquisition of a 60% stake in 14 US data centres. With this likely to be a key earning driver in 2HFY21, DBS’s Derek Tan and Dale Lai have issued a “buy” call with a target price of $2.90 and a 12% upside.
This portfolio of data centres was jointly acquired by MIT (40%) and its sponsor Mapletree Investments back in 2017 during their first foray into the data centre space. The purchase consideration for the stake is for US$210.9 million ($299.5 million) for a property value of US$494 million. This is in line with the latest valuation from Cushman and Wakefield and a 0.7% discount to the latest independent valuation by Newmark Knight Frank Valuation & Advisory LLC as at 31 May 2020.
MIT’s equity fund raising (EFR) for the acquisition has met with a strong response -- it has raised $410 million from a recent private placement exercise to existing and new shareholders, exceeding its initial target of $350 million. Placement price came in at $2.80 per unit, a figure at the top-end of the indicative deal range and a 1.6% discount relative to adjusted VWAP. Excess funds not used to acquire the data centres will be used to strengthen the REIT’s gearing ratio.
“Increased datacentre exposure is positive for MIT as earnings resilience will improve significantly. The acquisition of the portfolio will further pivot MIT’s exposure towards high-tech specification (High specs) assets, including data centres which are deemed to be positive for the Trust,” remark Tan and Lai.
The move will see stronger earning resilience from MIT since rapid economic digitalisation has seen data storage grow ever more important for firms.
With the management seeking to diversify its income and anchor itself in the data centre space, upgrading MIT’s current 31.6% (7.2% in Singapore, 24.4% in the US) exposure to data centres to 39% (6.5% in Singapore, 32.5% in the US) aligns well with this goal. The analysts even see this as being a re-rating catalyst as it could help the REIT close the gap with other data centre-driven competitors on the SGX like KDC REIT.
“We see a concerted effort to upgrade its portfolio to better-specification properties (data centres, high-specification industrial properties, business parks), which will help MIT to maintain its premium P/NAV multiples to the market,” comment Tan and Lai. Concerns about the weakness of MIT’s factory portfolio will soon pass with time, they say, with the acquisition of data centres and other property classes diluting the REIT’s exposure to these areas. While the industrial sector was expected to bottom out in 1H2020 due to a large supply of new industrial properties, downside risks from Covid-19 will likely see a rent downturn in 2021.
Within the portfolio itself, 81.6% of the data centres in this portfolio are majority-powered shell data centres with triple net lease structures and tenant-born outgoings. The portfolio’s lease expiry is well-staggered with a lease expiry of around 20% over the next three years, with occupancy remaining stable and revenues driven up 2.4% due to rental escalations. Freehold properties as a percentage of the enlarged portfolio’s land area have risen from 37.9% to 51.8%.
The analysts further observe, “MIT has consistently delivered portfolio occupancy rates averaging around 90%, which have been steady across market cycles. This is mainly due to its diversified asset portfolio and a wide base of tenants in different industries. There is therefore no industry-specific concentration risk, meaning that performance is likely to remain stable across market cycles.”
With a 36% gearing ratio, MIT’s balance sheet is strong and far below the MAS limit of 50%. The analysts observe that this creates much headroom for reinvestment, implying that it is likely that management will look to pursue dividend investment to increase MIT’s gearing. MIT’s debt profile is well-staggered -- most debt is due for repayment only from FY21 -- and the fact that 70% of its borrowings are on fixed interest rates, it is well-insulated against rate increases.
MIT is looking to redevelop several of its property holdings going forward, potentially enhancing the REIT’s net asset value (NAV). Its biggest will be the redevelopment of Kolam Ayer Cluster into a high-specification industrial property. “These developments would be value accretive to MIT, allowing it to extract unutilised plot ratios and additional gross floor area (GFA) for lease,” say Tan and Lai.
The DBS analysts expect a modest rental uplift of 0-3% going forward; potentially better-than-expected rental reversions and future acquisitions could potentially boost earnings and share prices. FY21 DPU is expected to be adjusted down by 2% while FY22 will see a 7% increase in FY22 with gearing remaining within the optimal 39% level. Estimated earnings prices in recent acquisitions to be complete in September 2020, new share issuance in June 2020 and rental relief of around $20 million in FY21.
Nevertheless Tan and Lai have identified potential interest hate hikes -- unlikely under the present economic circumstances -- and a deterioration in operating output as key risks to earnings. They also see a potential dip in operational performance. The manager, they say, has offered a rental relief package to tenants (up to 1 month for industrial SMEs and 2 months for retail) that could come up to $20 million. This has been priced into FY21 earnings and is mitigated by contributions from its new US data centres, lifting earnings estimates by about 3%.
As at 2.30pm, MIT is trading 0.03 points up at $2.93. Dividend yield stands at 3.41% with a price-to-earnings (P/E) ratio of 16.87.