UOB Kay Hian slashes MINT's TP to $2.79 as it weighs the risk of its US tenants' non-renewal

“Tenants AT&T and Atos could vacate from MINT’s four US data centres when their leases expire over the next two years. AT&T currently occupies three data centres located at Pewaukee, Brentwood and San Diego. Atos occupies one data centre located at Arlington,” Koh writes.

“The four data centres have [a collective] net lettable area (NLA) of 1.1 million sqft, representing 15.3% of total NLA for MINT’s data centre portfolio (excluding its second data centre joint venture with sponsor Mapletree Investments),” he adds.

The lease for Atos in Arlington expires in March 2023. AT&T’s leases at Brentwood and San Diego expire in November 2023 and December 2024 respectively, with Koh noting that they are “fairly large”.

“Our sensitivity analysis indicates that FY2026 distribution per unit (DPU) and our target price could drop by up to 8.9% and 8.6% respectively,” Koh continues.

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In his base case scenario, which assumes that the REIT will backfill half of the vacant data centre space, Koh has estimated a DPU of 14.0 cents for FY2026 and a target price of $2.79.

In his worst-case scenario, where none of the vacant space is backfilled, Koh’s DPU forecast for FY2026 is lowered to 13.3 cents with a further-reduced target price of $2.67.

To him, the potential damage could already be priced in with MINT’s FY2023 distribution yield at 5.8%.

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“Management has cautioned investors concerning uncertainties relating to lease renewal by AT&T in the past. Thus, we expect the non-renewal of leases for the four US data centres could already be in the price,” he says.

As MINT leases these four data centres on a “core and shell” basis, Koh sees limited downside as the passing rent is low at around US$2 ($2.69) per sq ft (psf) per month.

“Management is open to conversion to alternative usage, such as laboratories for life science and cleanroom for manufacturing, which would unfortunately entail downtime,” he writes.

In Singapore, MINT’s portfolio continues to outperform. The occupancy rate for its Singapore portfolio inched up by 0.1 percentage points to 96.9% in the 3QFY2023 driven by flatted factories in Singapore.

MINT also achieved positive rental reversion for its hi-tech buildings (+8.8%) and flatted factories (+9.4%), notes Koh.

In addition, the REIT has secured Biotronik as its anchor tenant at 165 Kallang Way, a seven-storey built-to-suit facility.

“Biotronik has leased the built-to-suit facility on a 15+5+5 year term with annual rental escalations,” says Koh.

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Biotronik is a multi-national cardiovascular biomedical research and technology company headquartered in Berlin, Germany. It provides equipment for diagnosis, treatment, and therapy support for cardiac rhythm management, electrophysiology and vascular intervention.

It developed the first German-made implantable pacemaker in 1963.

MINT is also continuing to lease out its properties at 161 and 163 Kallang Way, which are expected to obtain their temporary occupation permits (TOPs) in 1H2023. 165 Kallang Way has achieved its TOP on Nov 10, 2022.

“MINT has pre-leased two floors of 163 Kallang Way. In total, 39% of 161, 163 and 165 Kallang Way (previously known as Kolam Ayer 2 Cluster) is pre-committed. MINT has achieved attractive signing rents at high-$3 psf/month,” writes Koh.

Based on these updates, Koh has cut his DPU forecast for FY2026 by 4.4% with the assumption that 161, 163 & 165 Kallang Way achieve a collective occupancy of 70% by 4QFY2024 and that the REIT will manage to backfill half the vacant data centre space at the same prevailing rent.

As at 11.55am, units in MINT are trading 2 cents lower or 0.85% down at $2.33.