• Upgrade Target Price to S$2.75, BUY maintained.
• MAPLETREE INDUSTRIAL TRUST (SGX:ME8U) could derive up to 50% of assets from data centres (up from 32% currently).
• Ongoing conversion of its flatted factory portfolio into high-specification properties to drive NAV upside.
• An emerging data-centre play with strategic moves into the US data-centre space.

What’s New

Acquisition of a high-quality portfolio from Digital Realty

• MAPLETREE INDUSTRIAL TRUST (SGX:ME8U) announced the formation of a 50%-50% joint venture (MRODCT) with sponsor, Mapletree Investments to acquire a portfolio of 13 data centres. This is broken down into:
  • 10 powered shell data centres for US$557.3m and
  • co-investment (80%-20% joint venture) with Digital Realty (DLR) in three existing hyper-scale data centres for US$810.6m
• The transaction value for both transactions is estimated to be US$1.4bn (S$1.9bn).

Why We Like It

A portfolio built for the future

• The target portfolio has a high concentration in high-quality hyperscale data centres which supports the global trend towards outsourcing of IT facilities and services while the adoption of cloud services has resulted in the growth of these hyperscale data centres.
• According to 451 Research LLC, as of 1Q19, demand for such hyperscale data centres is expected to grow at a 16.1% CAGR from 2017-2023F, while demand for insource and outsourced data centres is expected to grow by 4.9% over 2017-2023F.
• An estimated 70% of the contribution of MRODCT (6 assets out of 13 properties) are located in North Virginia, which is one of the largest data-centre markets globally.

A shift towards higher-specification industrial properties (including data centres)

• The acquisition of the target portfolio will increase Mapletree Industrial Trust’s exposure to high-specification properties from 43.5% to 52.9%, while its exposure to overseas data centres increases from 9.1% to 24.3% while Mapletree Industrial Trust’s overall exposure to data centres (SG and overseas) will increase to 31.5%; followed by Business parks (10.1%).
• The concerted effort in shifting its focus away from its more general specification flatted factories in Singapore (through acquisition and planned redevelopments) is a positive strategy, in our view. This will drive higher returns to unitholders as the freehold nature of its overseas properties offer a more sustainable NAV profile in the long term. This implies that the current P/NAV multiple of close to 1.5x can be maintained over time.
• Twelve of the 13 properties sit on freehold land comprising 94.1% of the target portfolio asset base.

Strong income visibility supported by a pedigree tenant base

• The portfolio is 100% occupied with a weighted average lease expiry (WALE) of 9.1 years, with expiries beyond 10 years.
• 91.5% of the target portfolio’s gross rental income (GRI) come from triple-net leases, implying minimal cost incurred for the JV
• 92.2% of the target portfolio’s gross rental income (GRI) have escalations of > 2.0%.
• The acquisition of the target portfolio brings to Mapletree Industrial Trust a pedigree tenant base which includes three of the 10 largest technology giants in the US, contributing 51.7% of the portfolio GRI.

Estimated initial blended yield of 6.1%

• Based on estimates and announcements from DLR, the blended yield is 6.1%, broken down into powered shell portfolio being acquired at a cap rate of 6.6%, while the hyperscale data centres will be acquired at a cap rate of 6.0%.
• Even after accounting for withholding taxes (c.7%- 10% of NPI), the acquisition cap rates of 5.5% compares favourably to the implied yield of 5.2% that Mapletree Industrial Trust currently trades at, which is value-accretive to unitholders.

DPU Accretion of Up to 3.5%; Target Price Raised to S$2.75

• Mapletree Industrial Trust has announced the raising of S$400m in new equity which will be utilised to part fund the proposed acquisitions. The new units were issued at S$2.265 a piece, which is at a 1.5% discount to the preceding day’s adjusted VWAP.
• Based on our estimates, DPU is projected to rise by 6.0% y-o-y in FY21 (full-year contribution) from the target portfolio vs our estimates of 3.0% y-o-y.
• After incorporating the contributions from these properties from 4QFY20, our Target Price is raised to S$2.75.

Source: DBS Research - 25 Sep 2019