SINGAPORE (Sept 25): DBS Group Research is keeping its “buy” call on Mapletree Industrial Trust (MINT) and raising its target price by 10% to $2.75, as the REIT emerges as an alternative data centre play.
“We see MINT fast becoming an alternative data-centre play with recent strategic acquisitions into the US data-centre space together with its sponsor,” says lead analyst Derek Tan in a Wednesday report.
MINT on Sept 16 announced that it had formed a joint venture with sponsor Mapletree Investments to acquire a US$1.4 billion ($1.9 billion) data centre portfolio in North America.
The portfolio comprises 10 data centres from seller Digital Realty, as well as an 80% stake in three existing Digital Realty hyper-scale data centres.
MINT’s share of the total acquisition cost comes up to approximately $965.0 million.
See: Mapletree Industrial Trust and Mapletree Investments to acquire US$1.4 bil data centre portfolio in North America
MINT then closed an upsized private placement to raise a total of $400 million to fund the new acquisition, with the manager indicating that the remainder of the total acquisition cost would be funded by debt.
According to market watchers, the acquisition reflects the REIT’s concerted effort in shifting its focus away from more general specification flatted factories in Singapore, to higher-specification industrial projects.
See: Mapletree Industrial Trust raises $400 mil in private placement to help fund new acquisition
“Over time, with a pipeline of data centres from the sponsor, we estimate that close to 82% of its portfolio will be derived from high specification/business parks and data-centre properties (up from 71% currently),” Tan says.
Specifically, the analyst notes that MINT could derive up to 50% of assets from data centres, up from 32% currently.
He adds that demand for hyperscale data centres is expected to grow at a 16.1% CAGR from 2017-2023F.
According to Tan, the shift towards higher-specification industrial properties, including data centres, will drive higher returns to unitholders.
“The freehold nature of its overseas properties offer a more sustainable net asset value (NAV) profile in the long term,” Tan says. “This implies that the current P/NAV multiple of close to 1.5x can be maintained over time.”
He adds that the target portfolio will also provide “strong income visibility supported by a pedigree tenant base”.
In addition to the well-timed acquisitions, Tan notes that MINT is also engaging in portfolio upgrades through development initiatives.
For instance, he says the redevelopment of Kolam Ayer flatted factory cluster into a high specification building is likely to drive medium-term growth in terms of distributions and NAV, while the Kaki Bukit cluster presents opportunities for the REIT to extract gross floor area (GFA) from its portfolio.
“The constant upgrade and refresh of the portfolio, in our view, will enable MINT to be more resistant to business cycle fluctuations,” says Tan, adding that the REIT’s diversified asset portfolio and wide tenant base across different industries translate into a minimal industry-specific concentration risk.
In the near future, DBS remains bullish on MINT’s ability to thrive amid the deterioration in economic outlook. And this will only be bolstered by the industrial sector that is expected to bottom out by end-2019 or early-2020.
In particular, the brokerage favours the REIT for its resilience, and the incremental steps the management is taking towards diversification, which in turn limits earnings volatility for investors.
As at 12pm, units in Mapletree Industrial Trust are trading 3 cents lower, or down 1.2%, at $2.46.
According to DBS valuations, this translates into a price-to-earnings (PE) ratio of 21.1 times and a distribution yield of 4.9% for FY20F.
