Mapletree Industrial Trust To Acquire Data Centres

Mapletree Industrial Trust Data Centres

Mapletree Industrial Trust has a portfolio that comprises of 87 industrial properties in Singapore and 27 data centres in North America (through the joint ventures with Mapletree Investments Pte Ltd).

In my previous post, I mentioned that some analysts considered Mapletree Industrial Trust as an alternative data center play even though data centre only makes up 31.6% of the portfolio value.

Today, Mapletree Industrial Trust has announced their proposed acquisition of the remaining 60% interest in the 14 data centres located in the United States of America.

With the acquisition, this will increase their data centre exposure from 31.6% to 39.0% in terms of Assets Under Management (“AUM”).

Mapletree Industrial Trust Portfolio Breakdown Post Acquisition Data Centre

What are the benefits of the proposed acquisition?

I believe investors will be keen to understand the rationale or benefits of the proposed acquisition. Below are the rationale and benefits listed in their presentation slides. I have highlighted the points that I felt important in green.

#1 Increases MIT’s Exposure to the Resilient Data Centres Segment

I agree with Mapletree Industrial Trust that the COVID-19 crisis has provided a favourable tailwinds for the data centres segment. Cloud providers have reported strong demand for data centre space during the pandemic.

The global revenue for cloud computing is expected to grow at a compounded annual growth rate (“CAGR”) of 14% from 2018 to 2024F. An accelerated growth may be expected as a result of the pandemic.

Data centres were identified as essential infrastructure in North America during the pandemic and had remained open during the lockdown period.

#2 Enhances Income Stability of the Enlarged Portfolio

81.6% of the Mapletree Redwood Data Centre Trust’s portfolio comprises of powered shell data centres. If you do not know what are powered shell data centres, they are facilities with exterior construction completed, available power and connectivity, but with the interior left as raw space to be finished by the customer.

All the tenants are on triple net lease structures whereby all maintenance, tax and insurance charges are borne by the tenants. 97.8% of the Mapletree Redwood Data Centre Trust’s portfolio has annual rental escalations of 2.0% and above, providing stable and growing cash flows.

The acquisition will augment Mapletree Industrial Trust’s tenant base with higher exposure to resilient data centre tenants. As you can see below under Post-Acquisition, it also diversifies Mapletree Industrial Trust’s tenant base and reduces exposure to any single tenant from 8.0% to 7.2%.

Mapletree Industrial Trust Data Centres Tenant Base

#3 DPU and NAV Accretive to Unitholders

Post acquisition, the distribution per unit (“DPU”) is expected to increase 3.4% from 12.24 cents to 12.66 cents.

Net Asset Value (“NAV”) is expected to increase from S$1.62 to S$1.68.

Mapletree Industrial Trust DPU and NAV Pro forma

#4 Strong Support from the Sponsor

As at 31 March 2020, the Sponsor owns and manages S$60.5 billion worth of properties across Asia Pacific, Europe, the United Kingdom and the U.S., of which S$12.5 billion of properties are located in North America.

Mapletree Industrial Trust will continue to leverage on the Sponsor’s local market experience to manage the Mapletree Redwood Data Centre Trust’s portfolio.

Right of first refusal was granted to Mapletree Industrial Trust over future sale of 50.0% interest in Mapletree Rosewood Data Centre Trust (“MRODCT”).

Acquisition to be fully funded by equity

The acquisition will be fully funded by equity with excess proceeds to be used for debt repayment, future acquisitions and/or general corporate and/or working capital purposes.

This will be done via a private placement to raise gross proceeds of no less than approximately S$350.0 million.

Funding Requirements
Purchase ConsiderationUS$210.9 million (approximately S$299.5 million)
Transaction CostUS$2.2 million (approximately S$3.1 million)
Acquisition FeeUS$4.9 million (approximately S$7.0 million)
Total Acquisition OutlayUS$218.0 million (approximately S$309.6 million)

Pro Forma Dividend Yield

Based on the current share price of S$2.84 and pro forma distribution per unit of 12.66 cents, this translates to an estimated dividend yield of 4.46%.

I wish I had bought into Mapletree Industrial Trust during the stock market crash.

Mapletree Industrial Trust Share Price 22 Jun 2020

Mapletree Industrial Trust 4QFY19/20 DPU Declined Due to Capital Retention For COVID-19

Mapletree Industrial Trust 4QFY19/20 DPU Declined Due to Capital Retention For COVID-19

Mapletree Industrial Trust had released their 4QFY19/20 financial results on 27th April 2020. The manager had declared a Distribution Per Unit (“DPU”) of 2.85 cents. This was a decline of 7.5% as compared to 4QFY18/19 despite releasing a good set of financial results. The reason for the decline was also due to the retention of capital for COVID-19 pandemic. Without the retention of capital, the DPU for this quarter is estimated to be 3.15 cents which is an increase of 2.3% as compared to 4QFY18/19.

This quarter, Gross Revenue grew by 3.0% to S$101.8 million and Net Property Income grew by 3.2% to S$78.3 million. Distributable amount increased 15.4% to S$69.2 million. In view of the uncertainty from the COVID-19 pandemic, tax-exempt income (distributions relating to joint ventures) of S$6.6 million has been withheld in 4QFY19/20 for greater flexibility in cash management.

I am expecting more distributable income to be withheld in next few quarters as Mapletree Industrial Trust had committed to support tenants with a COVID-19 Assistance and Relief Programme of up to S$13.7 million.

Below are the 4QFY19/20 financial results.

4QFY19/20 Financial Results

4QFY19/20
(S$’000)
4QFY18/19
(S$’000)
YoY(%)
Gross Revenue101,80198,8223.0%
Net Property Income78,25675,8503.2%
Distributable Amount 69,15359,93615.4%
Distribution Per Unit (“DPU”) (cents) (Before Capital Retention)3.153.082.3%
Distribution Per Unit (“DPU”) (cents)(After Capital Retention)2.853.08(7.5)%

FY19/20 Full Year Financial Results

Without the retention of estimated 0.30 cents in 4QFY19/20, annualized Distribution Per Unit (“DPU”) would have been 12.54 cents which is an increase of 3.13% as compared to a year ago.

FY19/20
(S$’000)
FY18/19
(S$’000)
YoY(%)
Gross Revenue405,858376,1017.9%
Net Property Income318,069287,77010.5%
Distributable Amount 265,337231,75914.5%
Distribution Per Unit (“DPU”) (cents) (Before Capital Retention)12.5412.163.13%
Distribution Per Unit (“DPU”) (cents)(After Capital Retention)12.2412.160.7%

Occupancy

Overall portfolio occupancy stood at 91.5%. I didn’t quite like the occupancy take up rate for flatted factories, business park buildings and light industrial buildings. I wonder how many percentage are single tenant versus multi-tenant?

Mapletree Industrial Trust 4QFY19/20 DPU Declined Due to Capital Retention For COVID-19

Below are the top 10 tenants by gross rental income.

Mapletree Industrial Trust 4QFY19/20 DPU Declined Due to Capital Retention For COVID-19

As you can see above, HP is the largest tenant contributing 8% of Mapletree Industrial Trust Portfolio’s Gross Rental Income. Based on past case studies, this poses a risk should the tenant decides to shift out of its properties. (Read more: Hewlett Packard Vacates Alexandra Technopark)

Debt

As of 31st March 2020, gearing ratio stood at 37.6% with no loans to refinance in FY20/21. For short term investment, this is a good thing as there is no debt to worry about. For longer term, we will have to monitor the COVID-19 pandemic situation.

Mapletree Industrial Trust 4QFY19/20 DPU Declined Due to Capital Retention For COVID-19

Current Dividend Yield

Based on the current price of S$2.47 and FY19/20 full year DPU of 12.24 cents, this translate to a current dividend yield of 4.96%.

For an industrial REIT, I am expecting a dividend yield of 6% or more.

If you managed to catch Mapletree Industrial Trust at the low of S$1.91 during last month stock market crash, you will be getting a dividend yield of 6.41% which I think this should be the reasonable yield for an industrial REIT.

Mapletree Industrial Trust 4QFY19/20 DPU Declined Due to Capital Retention For COVID-19

Summary

While I read about some analyst mentioning Mapletree Industrial Trust is an alternative data center play, data center only makes up 31.6% of the portfolio value. I will prefer Keppel DC REIT provided we enter at the right price.

Mapletree Industrial Trust 4QFY19/20 DPU Declined Due to Capital Retention For COVID-19

I am expecting the share price of Mapletree Industrial Trust to come down as the manager had said that they have committed to support tenants with a COVID-19 Assistance and Relief Programme of up to S$13.7 million. This will eat into their distributable income.

As long the dividend yield is right above 6%, it will make sense to buy into Mapletree Industrial Trust.