Another Strong Quarter, BUY

• Mapletree Industrial Trust (SGX:ME8U) delivered a strong 3Q22, as DPU rose 6.6% y-o-y/0.8% q-o-q, driven by contributions from the recent US portfolio acquisition and 8011 Villa Park Drive (in Virginia, US). The results were in line with our estimates and the street, and our forecasts remain unchanged.
• We see a near-term catalyst as industrial sector rents look set to bottom-out. Mapletree Industrial Trust boasts stronger fundamentals with improved DPU visibility from its rising data centre tenancies.
• Mapletree Industrial Trust's balance sheet is strong and we see further DPU-accretive deals, as management advances diversification efforts to deepen data centre concentration to 50-67% of AUM.

Lower Occupancy, Larger US AUM

• Mapletree Industrial Trust's portfolio occupancy dipped slightly to 93.6% (from 93.7% in 2Q22), with a full quarter contribution from the 29 data centre portfolio (from Jul 2021), that was 87.4% occupied (versus 87.8% in 2Q22). While US occupancy was lower at 93.9% (from 93.9%), this increased slightly in Singapore to 93.7% (from 93.6%), with improvements for its business parks (from 82.6% to 83.0%) and stack-up/ramp-up buildings (96.4% to 97.6%).
• Demand growth remains uneven, and management has stayed focused on tenant retention.

Stable Rents, Recovery in Sight

• Gross rents in Singapore increased at 0.9% y-o-y and were flat q-o-q at S$2.13 psfpm (versus +4.9% y-o-y/flat q-o-q in 2Q22).
• We note that rental reversions turned positive on an aggregate basis, for the first time since 3Q17, at between 0% to +1.8% (versus +0.5-3.5% in 3Q17). The outlook for Mapletree Industrial Trust’s business parks and light industrial buildings remain challenging with weaker demand fundamentals, and management expects rents to bottom out in 2H22.

Data Centre AUM on the Rise

• Mapletree Industrial Trust's gearing was stable at 39.9% (from 39.6% as at end-Sep 2021), and its balance sheet remains strong with 6.4x interest cover, while a resumption of its dividend reinvestment plan aims to support funding requirements for its development projects.
• Our DDM-based target price for Mapletree Industrial Trust (COE: 5.9%, LTG: 2.0%) stays at S$3.35. BUY.
• With an estimated S$1.4b debt headroom (at 45% limit), we expect deal momentum to pick up into the coming quarters. We see acquisition growth from more sizeable deals (in US and Europe), as Mapletree Industrial Trust aims to deepen its data centre core and further diversify its AUM.

Source: Maybank Kim Eng Research - 26 Jan 2022