2Q21 in Line, Growth From US Data Centres

• Mapletree Industrial Trust (SGX:ME8U)’s 2Q21 DPU, down 1.0% y-o-y, rose 8.0% q-o-q with its (overseas) tax-exempt income fully-distributed on the back of a more stable outlook.
• While Singapore occupancy improved, reversion was at -3.3% y-o-y, with rent recovery likely only from 2H 2021. We see rental relief rising further in 2H21 to support its SME tenancies, provided for by its SGD20.0m tenant assistance package.
• The results were in line (with consensus and MKE); we maintain our forecasts and DDM-based target price (COE: 5.6%, LTG: 2.0%).
• We continue to favour Mapletree Industrial Trust's positive growth fundamentals and more resilient portfolio, with DPU visibility strengthened by its rising hi-tech asset investments and overseas diversification. BUY.

SG Occupancy Up, Tenant Retention High

• Revenue rose 1.5% y-o-y and 4.3% q-o-q while NPI increased by 2.0% y-o-y and 3.8% q-o-q with the consolidation of its 14 US data centres (previously 40% equity accounted), which were partly offset by rental relief and income loss from redevelopment of the Koyam Ayer 2 (KA2) Cluster.
• Mapletree Industrial Trust's portfolio occupancy improved from 91.1% to 92.3%; they rose or were stable at all segments except for data centres (99.2% to 98.7%) and stack-up/ramp-up buildings (93.7% to 93.5%). Excluding KA2, flatted factories occupancy was lower (88.8% to 88.4%) with demand weak for multi-tenanted space.

Rent Reversions Weak, Further Relief in 2H21

• Gross rents fell 2.4% q-o-q to SGD2.03 psfpm (vs -1.4% q-o-q in 1Q21) as all segments except for its data centres recorded lower rents on the back of rental rebates.
• Mapletree Industrial Trust's flatted factories saw a -2.3% rental reversion, and management expects negative reversions (at -5.0%) to persist till at least 2H 2021 given the high 54% of Singapore SME tenancies, which remain pressured by Covid headwinds. SGD7.1m in rental relief has been extended, with SGD12.9m expected to be recognised in 2H21.

Data Centre Contributions to Rise Further

• Mapletree Industrial Trust's portfolio has been strengthened by its hi-tech and data centre deals. The latter’s contribution should rise further from 38.5% to 41.0% of AUM with the acquisition of its 28th US asset in Virginia for USD200.6-262.1m. Post-deal in 1Q20, the new tenant adds 2.7% to its gross rental income as the fifth largest.
• Mapletree Industrial Trust's balance sheet remains strong at 38.1% leverage (from 38.8%), with SGD1.4-2.2b in debt headroom to fund further deals.

Source: Maybank Kim Eng Research - 28 Oct 2020