<Alert!> Mapletree Industrial Trust : Ample defenses against interest rate hikes
- 1FY23 DPU up 4.2%, driven by acquisitions, in line with estimates
- Key positives: i) Occupancy rates improve portfolio-wide to a multi-year high, (ii) rental reversions positive at +2.9%, demonstrating steady organic growth profile, (iii) high hedge ratio and minimal debt expiry substantially shields the REIT against interest rates hikes
- Key negatives / factors to watch: i) Rise in utilities expenses to hit fully from next quarter onwards (factored in already), ii) Major tenancy expiry from FY24 onwards
- We currently have a BUY rating and TP of S$3.05
What has happened.
1QFY23 results shine; DPU of 3.49 Scts (+4.2%) in line with forecasts.
Mapletree Industrial Trust (“MINT”) reported a 31% y-o-y and 24% y-o-y rise in 1QFY23 gross revenues and net property income to S$167.8m and S$129.9m respectively. This is driven mainly from the contribution from acquisition of 29 data-centers in the USA (acquired in July’21). Overall margins dipped to c.77% (from c.82% in 1QFY22) due to dip in margins in the Flatted factories, Business Parks and US data-centers segment. Distributable income rose by 11.4% higher y-o-y, translating to a DPU of 3.49 Scts, +4.2% y-o-y. 1QFY23 DPU came in at 25% of our full year forecasts.
Solid financial metrics; high fixed debt ratio shields REIT from interest rates hikes.
MINT’s overall financial metrics remain strong, with gearing remaining stable at 38.4% and average debt tenure remaining stable at 3.7 years. The REIT has only 13.2% and 5.9% of its overall debt to be refinanced over FY23-24F and with a high fixed-debt hedge ratio of c.72.3%. With no significant replacement risks for the REIT’s interest rate hedges, we remain comfortable that the interest rate increases should be well mitigated for the REIT. As of 30th June’22, close to 79.2% of the REIT’s interest rates are denominated in USD, which provides MINT with a natural hedge given their exposure to the US datacenters which contribute to c.51% of its asset base.
Our thoughts :
(+) DRP and divestments to partially repay debt. The manager have seen good take-up of c.30% in its dividend reinvestment program (“DRP”) and will continue to institute that in 1QFY23 distributions where part of the proceeds will be used to partially finance the progressive redevelopment of 161,163, 165 Kallang Way. Part of the funds, in our view, can also be utilised to pare down some near term loan expiries to further manage the REIT’s interest rate exposure.
(+) Operating metrics shine; occupancy and reversionary trends positive.
Overall operating results continue to strength, with portfolio occupancy rates increasing by 1.5 percentage points to 95.3%. All property segments saw improvements q-o-q, with the business parks segment seeing a good uptick to c.85.7% (vs 83.3% in 4QFY22), due to active leasing efforts and back-filling of vacated space at Strategy Building. The US data-centers also saw an uptick in occupancy rates to 94.5% (Vs 93.9%) mainly due to the improvement in occupancy rates at 180 Peachtree, with expansionary demand from Equinix. Overall portfolio rental reversions stayed positive at an average of c.2.9% for key property segments, implying that portfolio organic growth outlook remains firmly on an uptrend.
(-) Impact of high energy costs partially felt but full impact from 2QFY23.
The spike in utility costs would have a negative impact on margins in 2QFY23 when utility contracts are due for renewal in June’22 (1QFY22). Utility costs as a % of revenues are estimated at c.1% of revenues and is projected to increase by 2x-3x when the contracts come due, to c.S$10m – 12m a year, which we have factored in for FY23.
Our recommendation:
We maintain our BUY call on MINT, TP S$3.05. We believe that expectations of an economic slowdown has brought attention towards the industrial S-REITs in the near term, where we have observed a relative outperformance compared to other subsectors. We believe that income visibility and strong financial metrics, which defends MINT’s DPU against interest rate risks, is a valued trait not priced in fully. MINT currently trades at 1.4x P/NAV with a forward yield of 5.2%, above its mean.