1QFY23: Weathering Headwinds From Higher Inflation And Interest Rates
1QFY23 DPU grew 4.2% yoy, driven by the acquisition of 29 US data centres. MINT achieved higher portfolio occupancy and positive rent reversion. MINT is a resilient industrial REIT due to asset type and geographical diversification. Our existing DPU forecast is unchanged as we have already factored in the higher cost of debt and electricity tariffs. MINT provides FY23 distribution yield of 5.1%, which is in line with peers (DCREIT: 5.1%; KDCREIT: 5.1%). Maintain BUY. Target price: S$3.36.
RESULTS
• Mapletree Industrial Trust (MINT) reported DPU of 3.49 S cents for 1QFY23, up 4.2% yoy. The results were in line with our expectations.
• Growth from acquisition of US data centres. Revenue and NPI grew 31% and 24% yoy respectively in 1QFY23, driven by the acquisition of 29 data centres in the US, which was completed on 22 Jul 21. NPI margin held up at 77.4% despite negative impact from higher electricity tariffs since Jun 22.
• Portfolio occupancy improved 1.3ppt qoq to 95.3% in 1QFY23. Occupancy for Business Park Buildings increased 2.4ppt qoq to 85.7%, driven by The Strategy at International Business Park. Occupancy for Light Industrial Buildings increased significantly by 14.1ppt qoq to 92.6% due to divestment of 19 Changi South Street 1. Occupancy for data centres in North America increased 0.7ppt qoq to 94.0%.
• Third consecutive quarter of positive rent reversion. MINT achieved broad-based positive rent reversion of 2.0%, 6.4% and 2.2% respectively for renewed leases for Hi-Tech Buildings (renewals at 18 Tai Seng Street), Business Park Buildings (renewals at The Strategy) and Flatted Factories (improved demand post easing of COVID-19-related restrictions) in Singapore in 1QFY23. Gross rental rate for the Singapore portfolio was maintained at S$2.13psf/month. Retention rate was healthy at 86.2%.
• Completed two divestments during the quarter. MINT completed the divestment of 19 Changi South Street 1 in Singapore, a 2-storey light industrial building with a 4-storey extension block, for S$13m and 19675 West Ten Mile Road, Southfield, Michigan in the US, a four-storey data centre, for US$10m. MINT recognised divestment gains of S$3.8m for 1QFY23. Total proceeds of about S$26m would be utilised to fund working capital requirements or reduce existing debts.
• Conservative capital management. Aggregate leverage is stable at 38.4% in 1QFY23. Average cost of debts increased slightly by 0.1ppt qoq to 2.5%. Management has hedged 72.3% of its total debt on fixed rates with weighted average hedge tenor at 4.2 years. Interest coverage ratio was healthy at 6.0x. Its weighted average tenor of debt is 3.7 years and only 13.2% of its total borrowings are due for refinancing in FY23.
STOCK IMPACT
• Sticking to diversification strategy by expanding into new arenas. MINT is committed to its goal of allocating two-thirds of AUM to data centres. Data centres have expanded by 12.9ppt to account for 54.1% of AUM in FY22. Having reached a sizeable scale of 57 data centres in the US, MINT will look at opportunities to unlock value through: a) asset enhancement to upgrade the data centres, b) redevelopment to cater for new usage such as life sciences, and c) divestment and asset recycling.
• Striving for sustainable growth in FY23. MINT benefits from full-year contribution from its acquisition of 29 US data centres in FY23. It plans to release tax-exempt income of S$6.6m withheld in 4QFY20 to unitholders during FY23. Nevertheless, management sees headwinds from higher property operating expenses and interest expenses, which are expected to affect distributions negatively.
• Negative impact from higher cost of electricity. Triple net leases accounted for all leases for data centres in Singapore and 90.2% of leases for data centres in North America (increase in cost of electricity less dramatic due to diversified sources of energy). Thus, higher cost of electricity does not have material impact on MINT’s portfolio of data centres. MINT’s multi-tenant buildings in Singapore are affected by higher cost of electricity. Management estimated that operating expenses would increase by S$10m-12m if the cost of electricity increases by 2-3x from the current S$0.15/kWh to S$0.40-0.45/kWh. Management has raised service charges by 10% in Jul 22, which could partially mitigate the inflationary impact from higher cost of electricity.
• Fundamentals for data centres remain positive. Data centres have diversified sources of demand with future growth driven by emerging technologies, such as 5G, AI and social media, including virtual reality communities and the metaverse. Inventory bottlenecks are likely to trigger rental rate increases as demand grows in power-constrained markets, such as Silicon Valley and Northern Virginia. Growth of enterprise data will create large data stores. Leased data centres provide a secure infrastructure to store these data at a low cost. According to 451 Research, revenue for the North America leased data centre market is forecast to expand at CAGR of 7% from 2020 to 2026 to reach US$24b.
EARNINGS REVISION/RISK
• We maintain our existing DPU forecast as we have already factored in the higher cost of debt and cost of electricity.
VALUATION/RECOMMENDATION
• Maintain BUY. Our target price of S$3.36 based on DDM (cost of equity: 6.75%, terminal growth: 2.8%).
SHARE PRICE CATALYST
• Growth of data centres located in Singapore and North America.
• Acquisition of the remaining 50% stake in portfolio of 13 data centres (second JV) from sponsor Mapletree Investments.
