• Mapletree Industrial Trust's operational results showed resilience as DPU rose despite the more subdued growth environment.
• Recent acquisitions will anchor near-term growth in distributions.
• Rising share of data centres in the portfolio points to longer-term growth.
• BUY call maintained.

What’s New

DPU inches higher despite the cautious growth environment.

• Despite the more subdued macro backdrop, MAPLETREE INDUSTRIAL TRUST (SGX:ME8U)’s operational performance showed no signs of a slowdown with 1HFY20 revenues and net property income rising by 9.7% and 12.8% to S$201.4m and S$157.9m respectively.
• The stronger operational numbers were driven by acquisitions of 18 Tai Seng, 7 Tai Seng and Mapletree Sunview 1. The higher growth in net property income mainly came from the manager keeping costs tighter (+0.3% y-o-y) given lower maintenance expenses, offsetting the higher property taxes for 18 Tai Seng and marketing expenses. As a result, distributable income rose by 11.6% to S$126.7m, more than offset the 7.6% rise in borrowing costs to S$21.6m (taken to fund acquisitions) and 1.9% dip in share in associate income to S$8.7m.
• DPU rose by a smaller 3.7% to 6.23 Scts, forming 51% of our estimates. See Mapletree Industrial Trust Dividend History.

Operating metrics remain resilient.

• Mapletree Industrial Trust's portfolio occupancy rates remained stable at 90.2% with retention rate high at 80% for the quarter.
• Mapletree Industrial Trust’s flatted factories saw an uptick in occupancy to 88.1% (c.87.9% in 1QFY20) while that for Business Parks rose to 81.9% (vs 79.3% in 1QFY20). The manager continues to back-fill vacancies at its Synergy in International Business Park but the quarter-end occupancy rates had inched higher to 85%, which is positive as this level provides the manager with more bargaining power to negotiate rentals going forward.
• We note some transitional vacancies at the stack-up/ramp-up properties (90.4% in 2QFY20 vs 92.4% in 1QFY20) where the manager has filled part of the vacated space. Hence, they should see an improvement in subsequent quarters.
• The 10-ppt dip in occupancy rates at its Light Industrial property (81.0% from 91.3% in 1QFY20) came as one of its properties saw a master-lease expiry but the impact on the overall portfolio is marginal as the sub-asset class forms < 2.0% of total exposure.

Rental reversionary trends still mixed.

• We do see some improvement q-o-q as most segments are experiencing smaller declines, especially in the flatted factory space (at < -3.0%) and stack-up/ramp-up buildings while its high-specification properties saw positive rental reversions. The business park properties saw a slight dip in rental reversions as the manager adopted an occupancy-focused strategy to keep tenants.
• The outlook for rental reversions remains mixed at this juncture as the manager looks to balance the ongoing tenant shifts at Kolam Ayer 2 cluster going into 1H20, while also keeping occupancy resilient.

Robust outlook driven by acquisitions and continued asset rejuvenation.

• Looking ahead, we remain excited about the outlook for Mapletree Industrial Trust, driven by ongoing asset rejuvenation from the development of Kolam Ayer 2 cluster (at a cost of S$263m, completing in 2H22) and completion of its proposed acquisition of 13 data centres in the US with its Sponsor.
• The recent completion of the development of 7 Tai Seng will anchor near-term earnings growth.

Source: DBS Research - 23 Oct 2019