Daniel Lee

Jul 20, 20238 min read

Fundamental Look At Mapletree Industrial Trust [Is It Worth Investing In?]

Best Viewed On Desktop (As of July 2023)

In this article, we'll be conducting a fundamental analysis of MapleTree Industrial Trust REIT and its suitability to achieve the following investment objective: To deliver a stable dividend yield of 5% to 6% per year while having a high degree of capital preservation ability.

This article will be split into 7 sections:

Summary of the Analysis
2023 Annual Report Findings/Comments
Personal Opinion
Scenario Analysis: Price Target & Expected Return
First filter: Income & Distribution Statements & Valuation Ratios
Second filter: Balance Sheet Health
Third filter: Underlying Property & Tenants

For those looking for a quick analysis, you can just focus on sections 1, 2 and 3 - summary of the analysis, most recent annual report findings/comments and personal opinion.

For those who are new to the counter and would prefer to have a deeper look into the financials, you can explore the findings in the other sections.

1. Summary of Analysis

Personal Opinion on:

Business Model: Mapletree Industrial Trust ("MIT") is a well-managed commercial REIT (increasingly focused on data centres) with a resilient occupancy rate and weighted average lease of expiry mainly due to the quality of their properties. The managers do seem to exhibit consistency and competency in managing property expenses and borrowing costs.

General Outlook: Given the current economic headwinds - higher interest rate environment, slowing global economic growth and challenges surrounding the United States commercial properties - I believe that at best, MIT would be able to maintain its top-line revenue but bottom-line profit will be affected as a result of higher operating and borrowing cost.

In the worst-case scenario, the occupancy rate may experience a slight decrease as tenants face economic challenges while the valuation of MIT properties will be valued downwards thereby resulting in operating losses (as a result of fair value changes).

Valuation & Expected Return: Based on historical performance, fundamentals and prevailing dividend yield, I believe MIT is currently trading at fair value. At the current price of $2.24, long-term investors (>10 years) can expect to receive a compounded annual capital return of -0.6% to 2% and a 5.5% to 6.5% annual dividend yield.

What My Actions Will Be: I invested in MIT in June and would be adding more positions in the future (need to save up more capital and perhaps average down if short-term headwinds exert further downward price pressure) as I feel that the valuation and nature of the properties fit the investment objective of having a stable distribution yield while preserving the capital.

What to watch out for:

Future capitalization rate behaviour to ensure that it stays within an acceptable range and the short-term decline experienced thus far does not stretch into the long term

What I like about the REIT:

The tenant profile is adequately diversified with no single trade sector accounting for more than 18% of the portfolio’s Gross Rental Income
The weighted average lease expiry is at a comfortable level (4 Years)
The remaining lease for underlying properties is decent (Freehold in the United States, 30-40 years in Singapore)
Property and borrowing expenses are managed very well and have been consistent over the years

What I don’t like about the REIT:

The interest coverage ratio has been on a decline over the years
The cap rate has been on a steady decline since the group pivoted their direction

2. 2023 Annual Report Findings/Comments

Financial changes

1) Healthy year-on-year growth rate for gross revenue (+12.3%) & net property income (+9.7%). The improvement in performance was mainly due to a full-year contribution from the portfolio of 29 data centres in the USA acquired in July 2021.

2) Distritubition per year declined by 1.7% at the back of:

Higher borrowing cost
Dilution impact: +2.37% growth in units in issue

3) Key Financial Ratios:

The aggregate leverage ratio decreased from 38.4% (2022) to 37.4% (2023)
The weighted average tenor of debt decreased from 3.81y (2022) to 3.7y (2023)
Borrowing costs increased from 2.5% (2022) to 3.1% (2023)
Adjusted Interest Cover Ratio decreased from 5.7x (2022) to 4.6x (2023)

4) Tenant Profile

Weighted average lease expiry decreased from 4.1y (2022) to 3.96y (2023)
No changes between the split of multi-tenant and single-user buildings
The retention rate of Singapore’s portfolio improved from 82.5% (2022) to 86.3% (2023)

Strategy for future growth:

Yield accretive acquisition and asset enhancement development
Opportunistic divestment of non-core assets (capital recycling)
Explore opportunities in key data centre markets in Asia and Europe

The source of growth in 2023 will largely be from the completion of the redevelopment of Mapletree Hi-Tech Park @Kallang Way which was completed on 23 March 2023 and currently only have an occupancy rate of 44.1% (by NLA)

The source of growth beyond 2023, at the moment, will be derived from the recent acquisition of a data centre in Osaka, Japan.

Headwinds

1) Third largest (Accounted for 3.2% of gross income) tenant announced bankruptcy (Global Co-location Provider). Moving forward, given the macro headwinds and slowdown in the global economy, the risk of more future bankruptcy or non-repayment from other tenants has increased.

That said, I do not see this as a concern as

MIT tenants are well-diversified across industries
MIT tenants mostly are MNCs that are generally resilient and stable (63% of gross income)
MIT has low dependence on any single tenant

2) High-interest rate environment will result in higher costs, thereby negatively impacting distribution (as we've seen from 2023 performance) and also significantly lowering the number of potential yield accretive acquisitions available.

Unfortunately, this is a market risk that all REITs will have to face but in the case of MIT’s position, the management is looking to maintain an average interest rate hedge ratio of between 70% to 80% to provide stability in future DPU.

On the topic of yield accretive acquisition, the management will be exploring investment opportunities in countries with an attractive yield spread between property capitalization and transaction cost - which was also the reason behind the recent acquisition in Japan.

Tailwinds

1) Healthy growth rate for global demand for data centres coupled with potential delay in the construction timeline of new data centres creates a strong case for occupancy resiliency for MIT’s data centre properties.

3. Personal Opinion

Given the historical valuation, group performances and dividend yield, I would consider Mapletree Industrial Trust to be trading at a fair valuation (especially now that it is trading around the long-term average).

Moving forward, at the current price of $2.24, long-term investors (>10 years) can expect a:

1) Capital return: -0.6% to 2% per year

Undervalue: $2.05 and below
Fair Value: $2.30 to $2.35
Overvalue: $2.60 and above

2) Dividend return: 5.5% to 6.5% a year

While I am confident in the group’s ability to deliver stable dividends over the years, investors will have to deal with the uncertainty revolving around the capital return as the plausible main driver of capital returns in the future can only be found in valuations revision from where we are at today 17.21 back to its long term average of around 17.91.

4. Scenario Analysis

Cells within the blue box represent the most realistic scenario that has the highest probability of materialising. To read the table, the horizontals represent a change in the distribution income over time while the verticals represent changes in the investor's willingness to pay.

Boxes highlighted in red represents a loss while boxes highlighted in green represent a gain based on the current price level.

Projected Target Price

Projected Target Return

5. First Filter

For this, we will be examining key metrics revolving around the financial statements, namely:

Income Statement - to examine the performance of the group as a whole
Distribution Statement - to examine the behaviour of the total distribution over time
Valuation metrics - examine the “expensiveness” of the stock relative to its intrinsic value

The purpose of the first filter is to remove companies that are either:

Not profitable - which reflects either poor management or quality of assets
Inconsistent distribution - Pays out dividends from capital instead of rental revenue
Too expensive - in terms of valuation (as viewed from the lens of distributions)

Income Statement

Findings:

From the gross income perspective, the group has posted super healthy growth levels over the years as a result of their strategic acquisition and pivot into data centres.
From the property expense perspective, the management has displayed proficiency and consistency in managing expenses at around 24% of gross income
From the net income growth perspective, the management has managed to achieve higher levels of bottom-line growth as a result of the slower growth in expenses.

Overall, the behaviour from the income statement displayed signs of stability in the bottom line revenue which fits the investment objective for a dividend investment.

Distribution Statement

Overall, the distribution per unit has remained relatively stable over the years. Moving forward, I expect the distribution per unit to come back down slightly as a result of a higher cost of borrowing which we are already experiencing from the recent financial year 2023 performances.

Valuation Ratios

While the business model and performance of Mapletree Industrial Trust have been stable over the years, the valuation and dividend yield has not been that attractive, especially during 2020 to 2022 where the dividend yield has been pushed below 5% as a result of rich valuations.

At the current price range of around $2.24 to $2.30, the valuation of Mapletree Industrial Trust would make sense for our consideration given the prevailing distribution yield. That said, investors who are not in a rush might benefit from adopting a wait-and-see approach as the probability of further downward price pressures as a result of short-term headwinds is rather high.

Regardless, at the current valuation, the dividend yield is quite attractive to justify starting a position.

6. Second Filter

Now that we’ve established that the REIT is worth considering, let us examine the health of the business - namely balance sheet health and financing details.

Balance Sheet

Overall, Mapletree Industrial Trust’s balance sheet is very healthy and the management had in fact taken active steps to reduce their gearing ratio which is the necessary step to take in a high-interest rate environment.

Financing Details

Given that a good chunk of the borrowing is expiring between 2025 and 2026, we can expect the all-in financing cost to increase slightly in the next 2 years (largely due to the recent data acquisition in Japan) and not be too negatively impacted by the higher cost of borrowing in 2023 and 2024.

That said, ceteris paribus, we can expect the distribution amount per share to continue to decline as a result of higher financing costs which will eat into the net profits.

6. Third Filter

The last consideration that we will be examining would be the nature of the underlying properties and their tenants.

Underlying Properties

Findings:

As compared to other local industrial REITs, MIT’s strategic focus lies in the area of data centres and Hi-Tech buildings which are suitable to meet the growing demand in the underlying countries that the properties reside in.
Local properties have decently long remaining leases to expiry which reduces the impact of lease decay. Foreign properties are freehold by default and hence not exposed to the impact of lease decay.
MIT is expanding their data centre into Japan with a post-acquisition exposure of 5.5%. The properties will have a remaining lease of 70 years and a super-long WALE of 20 years. Overall, the acquisition does seem to make sense, though the timing of such an acquisition is expected to raise the group’s overall cost of borrowing.

Tenant Profile

Findings:

Tenants are evenly distributed across the different industries which reduces the impact of concentration risk.
Weighted average lease expiry had remained consistent over the years despite the ups and down in the economy

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