Press Release

Mapletree Industrial Trust Achieves 8.9% Year-on-Year Growth for FY14/15 Distributable Income

• Distributable income for FY14/15 increased 8.9% to S$180.8 million
• Distribution per Unit (“DPU”) for FY14/15 was 10.43 cents, 5.1% higher than last year
• Net Asset Value (“NAV”) per Unit increased 10% to S$1.32 from S$1.20,  due primarily to portfolio revaluation gain of S$197.4 million
• Building  momentum in  the  growth  of  the Hi-Tech Buildings segment with the completion of  the  build-to-suit  (“BTS”)  data centre  for  Equinix  Singapore  (“Equinix”)  and commencement of redevelopment of Telok Blangah Cluster in FY14/15

Presentations

Financials

Completion of Equinix to drive growth

• DPU of 2.65 Scts in line
  
• Development projects completing in 2015
  
• Maintain BUY, TP S$1.66
  

Highlights

DPU of 2.65 Scts in line

• Gross revenues and net property income grew steadily at 3.3% and 5.4% higher y-o-y to S$78.1m and S$58.0m respectively and was mainly due to (i) higher portfolio rent achieved (S$1.83psf) while occupancy rates remained stable at 90.8%, and (ii) contribution from completed development projects. NPI margins improved to 74.2% due to utility savings from lower tariffs and is expected to continue. MINT also increased its hedge ratio to 86% during the quarter.
  

Outlook

Development projects to drive earnings growth; back-filling of Signature space a positive

• Occupancy rates at properties post-asset enhancements at Toa Payoh (98% occupied) and Woodlands (80% occupied) continue to improve. We note that Signature has also backfilled a substantial part of its vacant space (occupancy 63% vs 43% in 2Q15) and will contribute to earnings in the subsequent quarter. Looking ahead, the development project for Equinix is on track to complete by Mar’15 and will contribute fully in FY16.
  

Conservative gearing as MINT undertakes its most extensive development project for HP (TOP in 2017)

• Current gearing is conservative at c.32%; implying that the manager has the capability to take on debt-funded acquisitions when the opportunity arises. Gearing is estimated to inch up slowly to c.38% as the Trust starts on the redevelopment of Telok Blangah project for HP in 1Q15.
  

Rental reversions to moderate but still positive

• We note that average passing rates are near market rental reversion levels and are expected to moderate further to <10%. That said, earnings should remain stable.
  

Valuation

We maintain our BUY call and raise our DCF-based TP to S$1.66. At its current price, MINT offers investors a dividend yield of c6.5-6.7%, an attractive level given its strong credit backing and quality name.

Risks

Rising interest rates

• An increase in refinancing rates will negatively impact distributions. However, MINT looks to minimise the impact by having c.77% of its interest costs fixed with a duration of > c.2 years.
  

Economic risk

• A deterioration in the economic outlook could have a negative impact on industrial rents and occupancies as companies cut back on production and require less space. Industrial rents have a strong historical correlation with GDP growth.

Decent results, but valuations rich

• 3QFY15 DPU up 6.4% YoY\
  
• Positive rental reversions for renewals
  
• Leasing environment challenging
  

3QFY15 results within our expectations

Mapletree Industrial Trust (MIT) reported a decent set of 3QFY15 results which was inline with our expectations. Revenue rose 3.3% YoY to S$78.1m, while DPU growth of 6.4% to 2.67 S cents was underpinned by lower borrowing costs and an improved NPI margin (+1.5 ppt to 74.2%) as a result of lower utilities expenses. For 9MFY15, revenue increased 4.6% to S$234.5m, or 75.3% of our FY15 projection. DPU grew 5.0% to 7.78 S cents and constituted 76.0% of our full-year estimate. Average portfolio occupancy dipped slightly from 91.5% in 2QFY15 to 90.8% in 3QFY15 due to the continued relocation of tenants from the Telok Blangah Cluster (11% occupancy rate). Positive rental reversions of 5.9%, 4.8%, 3.2% and 6.9% were achieved for renewal leases for MIT’s Flatted Factories, Hi-Tech Buildings, Business Park Buildings and StackUp/Ramp-Up Buildings, respectively.

Strong financial position

MIT’s balance sheet remains healthy, with an aggregate leverage ratio of 32.8%, as at 31 Dec 2014 (-0.3 ppt QoQ). Management also increased its interest rate hedge ratio from 77% to 86%, thus putting it in a strong position to weather any possible spikes in interest rates in the foreseeable future.

Maintain HOLD

We are keeping our forecasts intact given this set of in-line results. Looking ahead, we expect the leasing environment to remain challenging due to competitive pressures and the soft macroeconomic landscape. Rental reversions are likely to continue to moderate as the gap between MIT’s passing rents and market rents are narrowing. Maintain HOLD on MIT with an unchanged fair value estimate of S$1.43. MIT’s share price has already risen 6.4% YTD, and the stock is now trading at FY15F P/B ratio of 1.3x, which we deem as rich. This is approximately one standard deviation above its average forward P/B ratio since its IPO.

A bright outlook

Our FY3/14 DPU forecast was almost spot on as MIT raised its 4Q DPU by 7.2% yoy on the back of 4.2% revenue growth. We expect the recently announced S$250m BTS project, the largest BTS project undertaken by MIT to contribute to the next stage of growth. In light of the room for growth, we maintain our Add rating on MIT, with an unchanged DDM-based (discount rate: 8.1%) target price of S$1.64.

Positive rental reversion continues

Mapletree Industrial Trust (MIT) reported a 4QFY14 revenue of S$75.2m (+4.2% yoy) and DPU of 2.51 Scts (+7.2% yoy), mainly driven by rental revenue growth (ranging between 9.4% and 21.6%) for all property segments and rising occupancy of the flatted factories. The average portfolio occupancy eased from 92.5% in 3QFY14 to 91.3% in 4QFY14, partly due to higher leasable space following the completion of AEI at Toa Payoh North 1 Cluster.

Clear outlook

MIT recently announced its largest BTS to date, a S$250m project for Hewlett-Packard (HP) Singapore. On completion in 1H17, the project is expected to boost DPU by c.9.7%, bringing about the next stage of growth for MIT. In the nearer term, with 22.5% of leases up for renewal in FY14-15, mainly concentrated in the flatted factories (c.14.8%), we expect MIT to continue to achieve positive rental reversion as these leases are estimated to be c.20-25% below the average spot rent. In addition, with the built-to-suit (BTS) Equinix project scheduled to be completed in 2HCY14, coupled with the recently completed AEI at Toa Payoh North 1, we expect MIT’s outlook to remain positive. We forecast FY15 DPU to rise by c.1.5% as the bright outlook is partially offset by the higher interest payment for the BTS project.

Maintain Add

With c.29% of total debt due in FY14-15 to be refinanced, we are confident that MIT’s management will continue to take advantage of the current cheap lending environment and refinance these debts before they are due. On the back of further room to grow both organically and inorganically, we maintain our Add rating with an unchanged target price of S$1.64.

What a coup !

• New built-to suit facility contract at S$250m to yield myriad of positives for portfolio
  
• Gearing to edge higher to c. 41% in medium term
  
• Maintain BUY, TP raised to S$1.50
  

New built-to-suit (BTS) facility for HP at S$250m.

MINT announced that it has secured a contract to develop a new BTS facility for Hewlett Packard for a total consideration of S$250m. Upon completion in FY18, HP will sign a long term lease of 10.5 years, with two 5-year extension options, providing strong income visibility for MINT.

Positive in many aspects. The proposed development is estimated to yield 9.0% on total cost and is positive for MINT in many ways. Upon completion in FY18F, MINT will benefit from (i) higher property specifications with the property repositioned as a hi-tech property, (ii) higher revenues through maximising unutilized plot ratio (1.3x to 2.5x) resulting in c. 89% increase in GFA, (iii) stronger income visibility through a longer WALE backed by a strong tenant. To facilitate the relocation of existing tenants, the Manager will offer attractive packages, with the aim to move affected tenants to other clusters within its portfolio.

Financial capacity to undertake development. At c. 9% NPI yield, this development project is expected to be yield enhancing to earnings upon completion. Gearing is estimated to hit c. 41% upon completion. Given the phased investment, we believe there is no urging need to raise new equity.

Maintain BUY. We believe that the positives from this deal will far outweigh the limited impact on earnings in the immediate term. Maintain BUY, TP raised to S$1.50.