Navigating near term bends
- 1QFY24 DPU of 3.39 Scts (-2.6% y-o-y, flat q-o-q) in line
- Overall operational metrics remain robust; eye on expiry of a major tenant (AT&T) in the USA
- Financial metrics stable with minimal debt expiries in FY24F
Estimates tweaked by -1% to -3%, TP revised to S$2.60, BUY
(+) 1QFY24 results in line; DPU of 3.39 Scts (-2.9% y-o-y, flat q-o-q) in line with forecast.
MINT’s 1QFY24 gross revenues and net property income of S$170.6m (+1.7% y-o-y, -0.3 q-o-q) and S$130.8m (+0.7% y-o-y, +1.5% q-o-q), came in line with expectations. This was mainly driven by the organic improvement of its Singapore property portfolio with higher rentals and occupancy achieved for most industrial clusters in Singapore. Overall margins were stable was a slight uptick q-o-q to 76.7%, largely due to higher operational expenses incurred last quarter. Overall margins were steady on a y-o-y basis. Interest costs increased due to higher all-in cost of debt due to rising base rates (3.5% in Jun’23, flat q-o-q). As a result, distributable income dipped by 2.5% y-o-y, translating to a DPU of 3.39 Scts, -2.9% y-o-y but flat q-o-q. We note that 1QFY24 DPU was partially boosted by divestment gains on 26A Ayer Rajah and tax-exempt income withheld which is not expected to be recurring in the coming quarters.
(+) Slightly higher gearing levels; stable overall cost of debt.
MINT’s overall financial metrics remain strong. While we note that gearing inched higher to 38.2% (vs c.37.4% a quarter ago), it is still comfortable at <40%. Average debt tenure is stable at 3.7 years with manageable expiries at <15% of overall debt expiring in the next 2 financial years. Interest coverage ratios also remain comfortable at 4.3x (vs. 4.5x a quarter ago) with a high fixed debt ratio of c.78%. We note that overall interest rates have remained flat q-o-q to 3.5% and within estimates but are expected to trend lower from the introduction of Japanese yen loans to fund its recent acquisitions in Japan. We estimate that overall interest rates could drop marginally which will help to compensate for any potential increase in cost for its USD debt (c.71% of overall debt currency profile).
Our thoughts:
(+/-) Operating metrics shine; occupancy and reversionary trends surprise on the upside.
Overall operating results continue to shine, with overall portfolio occupancy rates seeing a slight drop to 93.3% but still close to multi-year highs. The q-o-q fall were from its business park portfolio (c. 83.5% vs 87.5% previously) and the datacenters which saw occupancy rates drop to 93.1%
vs 94.3% a quarter ago. Occupancy at its high specification properties also fell from 87.5% to 85.2% due to due to Inclusion of 165 Kallang Way (achieved TOP, “Kolam Ayer cluster previously”) which has yet to be physically occupied yet.
Portfolio rental reversions were mixed with overall at a strong c.5%, which mainly came from its flatted factory, Hi-Specs and stack-up/ramp-up properties.
(-) Keeping a close watch on expiry of key tenant in FY24/25F.
In the immediate term, attention will likely turn towards the phased expiry of lease of AT&T in the coming 2 years. This lease contributes c.5.3% of gross rental income as of June-23. We understand that AT&T currently occupies three datacenters and will most likely return the space to MINT in 3QFY24 and 3QFY25 respectively. While faced with slight earnings downside risk in the immediate term, we seek comfort that the Manager is actively looking to re-let the space and is in advanced negotiations with other tenants to take up expiring spaces or could look to divest or reposition the property for other uses. In our estimates, we have moderated our earnings forecasts marginally in FY24F and FY25F to account for the potential vacant spaces that could be a near term earnings drag for MINT. The potential transitory loss of income could be compensated by (i) incremental income from the lease progress of Hi-Tech Park @ Kallang Way and (ii) contribution from its Japan datacenter portfolio.
Our recommendation:
With revised earnings, our TP is adjusted to S$2.60 and we maintain our BUY call on MINT. We like MINT for its attractive yields of c.6.0%. While investors will likely focus on near term risk factors from the expiry of the AT&T lease, we believe this has been well flagged out and priced in. Based on our estimates, at zero income contribution from AT&T, MINT’s headline yield is expected to be c.5.1% to 5.3%, slightly above its 5-year historical mean. MINT currently trades at a 1.2x P/NAV with a forward yield of 5.7%, which we believe is attractive.
