Biggest BTS project to date

MINT has just announced its largest BTS project to date. With an estimated NPI yield of 9%, we believe that this project will greatly improve its long-term outlook. We lower our FY15-16 DPS by 2-3% as a result of higher interest payment and slight dip in earnings but maintain our Add rating, with a higher DDM-based (discount rate: 8.1%) Tp of S$1.64, after incorporating the benefits brought about from this project.

What Happened

MINT announced that it will be developing its largest build-to-suit (BTS) project to date, a S$250m project at its existing Telok Blangah Cluster for Hewlett-Packard (HP) Singapore. The property currently comprises two 7-storey flatted factories and a canteen, with GFA of 437,300 sf and a land lease of 60 years (from Jul 08). The project is expected to be developed in two phases, yielding a total GFA of 824,500 sf. HP has committed to leasing the BTS facility fully, with a c.2% annual rental escalation for 10.5 years (six months of rent-free period) and an option to renew for two 5-year terms. MINT will offer preferential packages and incentives to its current tenants to encourage them to move into its other properties.

What We Think

We view the proposed BTS project positively as MINT’s GFA will be raised by more than 89%, assuming a maximum allowable plot ratio of 2.5x. This property accounted for 1.9% of MINT’s 9MFY14 gross revenue. Upon completion, it is expected to account for 9%, representing a considerable boost. Including land cost, incentive packages and building costs, we expect this project to provide an attractive NPI yield of more than 9%. On the other hand, loss of income is expected to be marginal (estimated at 0.6% of gross revenue) as MINT has offered attractive packages and incentives to encourage its current tenants to move into its other properties. With Phases 1-2 of the project scheduled for completion in 2H16 and 1H17 respectively, partial income contributions are expected in FY17, with full contributions in FY18. Upon completion, MINT’s gearing is expected to rise by 4.7% to 42%, assuming the project is fully funded by progressively-paid debt.

What You Should Do

Although near term DPU is expected to dip slightly as a result of loss in income and higher interest payment, this is outweigh by the positivity brought about by the project. Maintain Add rating with a higher target price of S$1.64.

An impressive quarter

MIT’s 3QFY3/14 revenue rose by 9.3% yoy and DPU rose by 8.2% yoy. 9MFY14 DPU was slightly better than expected at 77% of our FY14 forecast due to strong rental reversion and rising occupancy. With further room to grow through rental reversions, BTS projects and AEI, we raise FY14-16 DPU by 2% and we upgrade our rating on MIT to Add from Hold, with a slightly higher DDM-based (discount rate: 8.1%) target price of S$1.52.

Impressive growth

Mapletree Industrial Trust (MIT) has recently reported 3QFY14 revenue of S$75.6m (+9.3% yoy) and DPU of 2.51 Scts (+8.2% yoy), mainly driven by higher rental revenue (ranging between 9.7% and 27.2%) across all property segments and rising occupancy at the flatted factories. The average portfolio occupancy for the quarter was reported at 92.5%, slightly lower than the 93.9% in 2QFY14 due to the increase in leasable area with help from the completion of the K&S Corporate Headquarters in 2QFY14.

More room to grow

Looking ahead, with 26.5% of leases up for renewal in FY15, mainly concentrated in the flatted factories, we expect MIT to achieve positive rental reversion despite the upcoming large supply of industrial space, as these leases are estimated to be c.23% below the average spot rent. In addition, with the built-to-suit (BTS) Equinix project expected to be completed in 2HCY14, coupled with the near-to-completion AEI at Toa Payoh North 1, we expect MIT to continue to grow c.4% in FY15.

Upgrade to Add on bright prospects

Although the amount of debt due to be renewed is relatively high in FY15 (c.30% of total debt), given management’s prudent approach, we remain confident that MIT will most likely take advantage of the current cheap lending environment and refinance these debts prior to their expiry. On the back of slightly better-than-forecast results, coupled with further room to grow both organically and inorganically, we tweak up our earnings estimates by 2% for FY14-16. Currently MIT is trading at 12.6% FY15 NPI yield (vs sector average of 10.7%). On this basis, we upgrade to Add with a higher DDM-based target price of S$1.52.

Good but not great

Positive rental reversion and asset enhancements have mitigated the drop in occupancy at The Signature. Although headline yields continue to be attractive, we maintain our Neutral stance, pending future backfilling at the Signature and meaningful growth catalysts.

2QFY14 results were largely in line with consensus and our estimates. DPU for the quarter accounted for 27% of our FY14 forecast, with 1H14 DPU meeting 54%. We bump up FY14-16 DPUs in anticipation of better rental reversion, but maintain our Neutral rating with a higher DDM-based (discount rate: 8.1%) target price of S$1.48.

Positive rental reversion continues

2QFY14 DPU was up 9.7% yoy, mainly attributed to higher rental rates secured across all property segments and higher occupancies in flatted factories and stack-up/ ramp-up buildings. Compared to a quarter ago, revenue dipped by 2.3%, mainly due to the exit of Credit Suisse from The Signature. However, this was mitigated by better margins, which in turn led to DPU being higher by 1.6%. Rental reversions remained fairly strong – flatted factories at +27%, business parks at +12%, stack-up/ramp-up at +27% and high-tech buildings at +25%, but portfolio occupancy dipped slightly to 93.9% (1QFY14: 95.5%).

Factors limiting foreign acquisitions

With its pure-local mandate expiring this month, MINT can look at expanding overseas. Among the various markets, Iskandar is a natural choice for the REIT. However, various factors such as the lack of skilled labour, relatively low yields and the absence of an established local rental market may lead to difficulties in acquiring yield-accretive projects in the near term.

Maintain Neutral

Additional contribution from the recently completed BTS development for Kulicke & Soffa, and AEI projects will mitigate the temporary dip at The Signature. We keep our Neutral rating on MINT (currently trading at 1.2x P/BV), pending clarity on backfilling at The Signature and meaningful new growth catalysts.

Eyes on The Signature

We expect positive rental reversions at MINT’s flatted factories to mitigate downside at The Signature. Though headline yields are decent in the current climate of compressed yields, we maintain a Neutral rating pending clarity on backfilling and further growth catalysts.

4Q/FY13 DPUs were slightly above street and our expectations, forming 26/102% of our FY13 forecast. The variance was due to higher short-term business park rents. We raise DPU estimates and our DDM-based target price (discount rate: 7.3%) factoring in stronger rental assumptions and its recent BTS development.

All eyes on The Signature

We expect positive rental reversions on MINT’s flatted factory assets and asset enhancements to mitigate vacancy with its departing business-park tenants. 4QFY13 DPU was up 7% yoy, thanks to higher rents on a six-month lease extension by Credit Suisse at The Signature and positive rental reversions, offset partially by higher maintenance operating expense within its flatted factories. Qoq, DPU was up 2%.

The portfolio remains healthy pending the departure of major tenants at The Signature. Portfolio occupancy was at 95.4% (3Q: 95.2%), while rental reversions appeared stronger: flatted factories (+30%), business parks (+13%) and stack-up/ ramp-ups (+36%). This year, all eyes will be on The Signature, from which major tenants such as Credit Suisse and Lucas Films are departing. While there has been no formal lease take-ups, management is in advanced negotiations with several prospects.

Lower asset leverage

Asset leverage has been lowered to 35%, thanks to revaluation gains of 5% on the back of higher NPI and occupancy as cap rates remained stable. This should leave it sufficient debt headroom to fund its past AEIs and recently-announced data-centre BTS development.

Maintain Neutral

We expect positive rental reversions at MINT’s flatted factories to help mitigate downside at The Signature. Headline yields are decent in the current climate, but we maintain Neutral pending clarity on backfilling and further growth catalysts.

Winning a sweet deal

• ‘Built-to-suit’ project with quality earnings
  
• Good returns with accretion to distributions
  
• HOLD, TPS$ 1.46
  

Built-to-suit project for Equinix Singapore.Mapletree Industrial Trust (MINT) announced an agreement to develop a ‘built-to-suit’ facility for Equinix Singapore, a 7 storey, high specification property located in One-North (land allocated by JTC) which will primarily be used as a data centre. On completion, Equinix will sign a long term lease of 20 years with step-ups and further renewal options. Equinix have an option to enhance and add

additional infrastructure at two floors of this proposed faclity where additional rent will be payable.

Good returns and accretion to distributions.We like this deal as (i) the long lease provides good income visibility for this proposed investment, with annual step-ups providing longer term organic growth (ii) high returns on cost of 7.75% (on estimated rent of S$2.0 psf pm ) for this property, which will be accretive to distributions and (iii) quality earnings backed by a blue chip tenant – Equinix Sinapore is a subsidiary of

NASDAQ-listed Equinix Inc. a global interconnection and data centre company.

Maintain HOLD, TP S$1.46.TP is adjusted to S$1.46 after this latest deal has been factored in. DPU estimates adjusted down by c1% in FY14F to reflect income vacuum during development, but expect a hike of c3% after. HOLD call is maintained, premised on a lack of upside.