Expansion In Japan Supported By Asset Cycling In Singapore
MINT has successfully expanded to Japan’s data centre market. It plans to recycle assets in Singapore through divestment of business park and light industrial buildings to finance the enlargement of scale in Japan. MINT is close to securing a replacement tenant for its data centre at Brentwood, Tennessee when AT&T’s lease expires in Nov 23. MINT provides FY24 distribution yield of 6.1% (DCREIT: 7.3% and KDCREIT: 4.9%). Maintain BUY. Target price: S$2.76.
WHAT’S NEW
• Strategic diversification to Japan’s data centre market. Mapletree Industrial Trust (MINT) is acquiring an effective interest of 98.5% in a newly-built data centre in Osaka, Japan for ¥52.0b (S$507.9m). The multi-storey data centre is in close proximity to the prime central business district in downtown Osaka. Japan will account for 5.5% of its portfolio valuation after the acquisition. The data centre provides NPI yield of 4%. The acquisition is estimated to be accretive to pro forma FY23 DPU by 2.1% and is expected to be completed in 3Q23.
• The fully-fitted data centre is fully leased to an established data centre operator with a weighted average lease to expiry (WALE) of 20 years. MINT’s portfolio WALE weighted by gross rental income is expected to increase from 3.9 years to 4.5 years. The property has NLA of 136,900sf and a 70-year land lease commencing from 1 Oct 20.
• On the lookout for acquisition of data centres. Data centres in Japan provide positive yield spread with cap rates of 3-4%. MINT has the right of first refusal from the sponsor Mapletree Investments to acquire the remaining 50% stake in their second data centre, JV Mapletree Rosewood Data Centre Trust (MRODCT), which owns 13 data centres in the US. It is also keen to acquire high-tech, R&D and life science properties.
• Asset recycling. MINT is exploring the feasibility of recycling assets in Singapore to finance its expansion for data centres in Japan:
a) Three business park properties at International Business Park (The Strategy and The Synergy) and Changi Business Park (The Signature). Valuation for the three business park properties is S$543m in aggregate as of Mar 23.
b) Three light industrial buildings valued at S$53m in aggregate as of Mar 23.
• Backfilling data centre at Brentwood, Tennessee. AT&T currently occupies three data centres located at Pewaukee, Brentwood and San Diego. The three data centres have NLA of 1.0m sf, representing 14% of total NLA for MINT’s US data centre portfolio (excluding its second data centre JV with sponsor Mapletree Investments). MINT is in advanced negotiations with a potential replacement tenant for its data centre at Brentwood, Tennessee with NLA of 347,515sf (expiry: Nov 23). The new tenant intends to sign a long-term lease for the entire data centre with rental escalation.
• Optimising cost of borrowings with debt in Japanese yen. Aggregate leverage increased 0.8ppt qoq to 38.2%. MINT issued two series of notes, ¥6.5b of 1.686% fixed rate notes due 2035 (tenure: 12 years) and ¥10.0b of 1.85% fixed rate notes due 2038 (tenure: 15 years), to fund the acquisition of a data centre in Osaka, Japan (equity: 40%, debt: 60%). Average all-in funding cost was unchanged at 3.5% in 1QFY24. Management expects the funding in Japanese yen to cut all-in funding cost by 20-30bp.
STOCK IMPACT
• Increasing geographical diversification while adding depth to data centres. We like MINT’s ongoing expansion to acquire data centres in Japan coupled with asset recycling in Singapore, which brings MINT closer to being a pure play on data centres. Tapping on funding in JPY will also reduce its cost of debt.
EARNINGS REVISION/RISK
• We maintain our existing DPU forecast.
VALUATION/RECOMMENDATION
• Maintain BUY. Our target price of S$2.76 is based on DDM (cost of equity: 7.25%, terminal growth: 2.2%).
SHARE PRICE CATALYST
• Growth from 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.