• Mapletree Industrial Trust to acquire remaining 60% of 14 data centres in the US.
• Purchase to be funded via a private placement exercise, deal is expected to be DPU and NAV accretive, in our view.
• Downgrade to HOLD with a higher DDM-based Target Price of S$2.81.

Buys Remaining 60% in 14 US Data Centres

• Mapletree Industrial Trust (SGX:ME8U) announced that it has entered into an agreement to acquire the remaining 60% in 14 US data centres (DC) from its sponsor at a total purchase consideration of US$218m (S$309.6m). This is based on an agreed property value of US$494m (S$701.5m), on a 60% basis, unchanged from its Mar 2020 valuation.
• Post-acquisition, Mapletree Industrial Trust will hold 100% in these properties. The transaction is subject to unitholders’ approval in an EGM and if approved, management expects the deal to be completed by end-3QCY20F.

The Deal Will Increase Its Exposure to the Data Centre Segment

• The purchase will further increase Mapletree Industrial Trust’s exposure to the more resilient DC segment, from 31.6% of assets under management (AUM) currently to 39%, thus enabling Mapletree Industrial Trust to future-proof its portfolio for a more digital economy, in our view. It also expands Mapletree Industrial Trust’s footprint in the US, which is the world’s largest DC market, according to research firm 451 Research LLC.
• Post-acquisition, > 70% of Mapletree Industrial Trust’s overseas DCs will be located in the top 15 DC markets in North America. In addition, Mapletree Industrial Trust’s income stability is enhanced with only 17.1%/15.4% of the enlarged portfolio gross rental income expiring in FY3/21F and FY3/22F vs. the current 17.7% and 17%, respectively.

Acquisition to be Funded Through a Private Placement Exercise

• The deal is to be fully funded by equity, through a private placement of no less than S$350m, subject to an upsize option to raise additional gross proceeds of no less than S$50m. The excess proceeds will be deployed towards debt repayment, future acquisitions or for working capital purposes.
• In terms of financial impact, based on an initial NPI yield of 6.8%, management expects the deal to be accretive to DPU and NAV.
• According to management’s pro-forma estimates, on a full-year basis, the acquisition is anticipated to raise FY3/20 DPU by 3.4% and increase FY3/20 book NAV by 3.7%. Post-acquisition aggregate leverage will rise to 38.7%.

Downgrade to HOLD on Valuations

• We have revised our FY21-23F DPU estimates by 0.8-2.9% to factor in 5 months on contributions in FY21F, assuming the transaction is completed by end-3QCY20F and taking into account 128.112m new units issued to raise S$350m of gross proceeds. Accordingly, our DDM-based Target Price is revised to S$2.81.
• While we like this accretive acquisition, Mapletree Industrial Trust's share price has appreciated by 15% since end-Apr and the stock is currently trading at 4.3% FY21F DPU yield, above its +1 s.d. 7-year yield band. Hence, we lower our recommendation to HOLD from Add on valuations.
• Downside risk: Longer-than-expected economic recovery that could drag on rental and occupancy outlook for its flatted factory properties.
• Upside risk: Faster-than-projected recovery from the COVID-19 pandemic that could boost economic activity and more accretive new acquisitions.

Source: CGS-CIMB Research - 23 Jun 2020