Mapletree Industrial Trust: Further Re-Rating Is Possible On Increased Exposure To Data Centers

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Mapletree Industrial Trust: Further Re-Rating Is Possible On Increased…

Elevator Pitch

I like Singapore-listed industrial REIT Mapletree Industrial Trust (OTCPK:MAPIF) [MINT:SP] for optimizing its asset mix with the recent acquisition of new data centers and utilizing redevelopment projects as an alternative growth pathway apart from organic growth and M&A.

The unit price of Mapletree Industrial Trust has increased by close to 31% year-to-date (excluding dividends). The REIT currently trades at 1.64 times P/B and offers a forward FY2020 (YE March) distribution yield of 5.0%. It has the second-highest P/B ratio and the third-lowest distribution yield among peers.

Considering that data center REIT Keppel DC REIT [AJBU:SP] is arguably one of the most expensive Singapore-listed REITs trading at 1.86 times P/B and a forward distribution yield of 3.9%. The gap in valuations between Mapletree Industrial Trust and Keppel DC REIT could be potentially narrowed if Mapletree Industrial Trust further increases its exposure to data centers.

But further acquisitions could be constrained by the REIT’s reduced debt headroom with an adjusted gearing of 39% and above incorporating the effects of the recent proposed acquisition and the new redevelopment project at Kolam Ayer 2.

I think that the positives have been priced in for Mapletree Industrial Trust at current valuations. Mapletree Industrial Trust is already the most expensive industrial REIT on a P/B basis, Keppel DC REIT deserves a premium because it is a pure play on data center assets. The timing of Mapletree Industrial Trust’s future potential data center acquisitions is uncertain, so I will not consider the REIT as an investment candidate for now.

REIT Description

Mapletree Industrial Trust has a portfolio of 87 industrial properties in Singapore and 14 data centers in the U.S. (40% equity stake held through the joint venture with parent and sponsor Mapletree Investments Pte Ltd.) with total assets under management of approximately S$4.8 billion as of June 30, 2019.

Mapletree Industrial Trust’s Portfolio Composition As Of June 30, 2019







Source: Mapletree Industrial Trust September 2019 Investor Presentation

Location of Mapletree Industrial’s Singapore And U.S. Properties As of June 30, 2019







Source: Mapletree Industrial Trust September 2019 Investor Presentation

Optimizing Asset Mix With Recent Proposed Data Center Acquisition

In my earlier article on industrial REIT Sabana Shari’ah Compliant Industrial Real Estate Investment Trust (OTCPK:SBBSF) [SSREIT:SP], or Sabana REIT, published on September 30, 2019, I have written about Singapore’s weak GDP growth of +0.1% in 2Q2019 had adversely impacted the country’s industrial property sector. the transacted prices of leasehold factory and warehouse units have been trending downwards in recent quarters, while the vacancy rate at Singapore’s International Business Park was high at 30.2% in 2Q2019.

As of end-June 2019, 82.3% of Mapletree Industrial Trust’s portfolio value is derived from industrial properties in Singapore whose occupancy rates and rental rates are expected to be negatively impacted by slowing economic growth. Specifically, 34.5% of the REIT’s portfolio value comes from flatted factories and light industrial buildings which are even more vulnerable compared to hi-tech buildings, business park buildings and stack-up/ramp-up buildings which account for 47.8% of portfolio value. This is because flatted factories and light industrial buildings are typically standard facilities used for light manufacturing which command lower rental rates vis-a-vis hi-tech buildings and business park buildings that are customized for technology-based and R&D-intensive business activities.

Mapletree Industrial Trust announced on September 16, 2019, that it has entered into a 50:50 joint venture with its parent and sponsor Mapletree Investments Pte Ltd. to acquire 10 Powered Base Building data centers from Digital Realty (DLR) at a purchase consideration of approximately $557.3 million. Mapletree Industrial Trust, Mapletree Investments Pte Ltd. and Digital Realty also entered into another 40:40:20 joint venture to co-invest in three Digital Realty Turn-Key Flex hyper-scale data centers for a purchase consideration of approximately $810.6 million. The acquisition is expected to be accretive to distribution per unit by +3.5% and was funded by the issuance of 76.6 million new units at the issue price of S$2.265 per new unit on September 26, 2019. The acquisition of the 10 Powered Base Building data centers and three Digital Realty Turn-Key Flex hyper-scale data centers are expected to be completed in late-2019 and early-2020 respectively.

This is part of Mapletree Industrial Trust’s proactive move to diversify away from the cyclical industrial property asset class and increase exposure data center assets which are riding on a secular growth trend. The REIT’s exposure to data centers increases from 17.7% of portfolio value to 31.5% with the proposed transaction, while its exposure to industrial properties as a whole and flatted factories & light industrial buildings decrease to 68.5% and 28.8% of assets under management respectively.

Change In Mapletree Industrial Trust’s Portfolio Composition With Proposed Acquisition




Source: Mapletree Industrial Trust Presentation Slides In Relation To Proposed Acquisition

Demand for data centers has been growing in recent years as more companies adopt cloud services and outsource non-core IT facilities and services. The global cloud computing market is expected to grow at a CAGR of 16.7% between 2017 and 2023, according to analysis by 451 Research LLC. In contrast, the increase in supply of new data centers is forecasted to be at a much slower 4.9% CAGR over the same period, implying favorable demand-supply dynamics. I also wrote about Singapore-listed data center REIT Keppel DC REIT and the growth potential of data centers earlier in an article published on June 18, 2019.

Looking ahead, Mapletree Industrial Trust still has opportunities to further increase its exposure to data centers in the mid-to-long term. It has a Rights Of First Refusal, or ROFR, to acquire the remaining 60% interest in the initial portfolio of 14 data centers in the U.S. that it co-invested with its sponsor Mapletree Investments Pte Ltd. in October 2017. Similarly, Mapletree Industrial Trust has the ROFR to acquire its sponsor’s 50% stake in the recent proposed joint venture to acquire 10 powered base building data centers.

However, Mapletree Industrial Trust’s gearing is expected to increase to above 39%, taking into account the recent proposed acquisition and a new redevelopment project discussed in the next section. This suggests that the REIT’s gearing is coming closer to the statutory gearing limit of 45% for Singapore REIT, which implies lesser debt headroom to support future acquisitions.

Redevelopment As An Alternative Growth Pathway

Singapore-listed REITs typically grow via either organic means such as asset enhancement initiatives or proactive lease/tenant optimization, or mergers and acquisitions. Most of them usually do not engage in property development activities, as they might not have the relevant expertise and new property development is not allowed to exceed a quarter of asset value under existing regulations. Mapletree Industrial Trust stands out with a history of relying on property development activities to generate incremental growth. Its past build-to-suit projects include Mapletree Sunview Drive 1 in July 2018, 1 and 1A Depot Close in June 2017, 26A Ayer Rajah Crescent in January 2015, and K&S corporate headquarters in October 2013.

In July 2019, Mapletree Industrial announced the biggest redevelopment project since its listing in October 2010, which involves the redevelopment of the 506,720 sq ft Kolam Ayer 2 Flatted Factory Cluster (which includes two flatted factories and an amenity center) into a new high-tech building (which includes a seven-story build-to-suit facility for anchor tenant) with a GFA of 865,600 sq ft for a total cost of S$263 million. This redevelopment will start in 2H2020 and is targeted for completion in 2H2022. Approximately 24.4% of the new high-tech building’s Gross Floor Area, or GFA, or 211,000 sq ft has already been pre-committed to the anchor tenant which is a global medical device company headquartered in Germany. The anchor tenant will sign an initial 15-year lease for the build-to-suit facility with options for subsequent five-year renewals and annual rental escalations built into the lease.

Mapletree Industrial will derive growth from the 70% increase in GFA and higher rental rates charged for high tech-buildings relative to flatted factories.

Furthermore, Mapletree Industrial Trust swaps its exposure to flatted factories (standard facilities with lower rental rates and more vulnerable to economic weakness) for hi-tech buildings (command high rental rates because facilities are customized for technology-based and R&D-intensive business activities) with the redevelopment exercise, which helps to further optimize the REIT’s portfolio and asset mix to be more resilient.

Valuation

Mapletree Industrial Trust trades at 1.64 times P/B based on its net asset value per unit of S$1.52 as of end-June 2019 and its unit price of S$2.50 as of October 10, 2019. This represents a significant 29% premium to the REIT’s historical five-year mean P/B ratio of approximately 1.27 times.

The REIT offers a trailing 4.9% distribution yield and a forward FY2020 (YE March) distribution yield of 5.0%.

As per the peer comparison table below, Mapletree Industrial Trust has the second highest-P/B ratio and the third-lowest distribution yield among peers.

Singapore-listed Industrial REIT Peer Comparison

P/B Forward Distribution Yield
Ascendas REIT (OTC:ACDSF) [AREIT:SP] 1.51 5.2%
AIMS AMP Capital Industrial REIT [AAREIT:SP] 1.10 7.0%
Cache Logistics Trust [CACHE:SP] 1.13 8.2%
ESR-REIT [EREIT:SP] 1.15 7.5%
Keppel DC REIT 1.86 3.9%
Mapletree Logistics Trust (OTC:MAPGF) [MLT:SP] 1.40 4.9%
Sabana REIT 0.82 5.8%
Soilbuild Business Space REIT [SBREIT:SP] 0.87 9.0%

Source: Author

Note that Keppel DC REIT is included in the peer comparison table above despite the fact that it is a data center REIT and not an industrial REIT, because Mapletree Industrial REIT has been increasing its exposure to the data center asset class with recent acquisitions.

Variant View

The key risk factors for Mapletree Industrial Trust are lower-than-expected demand for industrial space in Singapore due to a slowdown in trade and economic activity, overpaying for future acquisitions, and higher-than-expected interest rates which increase the REIT’s financing costs and lower its valuation due to a corresponding increase in capitalization rates.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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