UOB Kay Hian slashes MINT' s TP to $2.79 as it weighs the risk of its US tenants' non-renewal

The reduced target price comes as Koh sees the risk of non-renewal for four US data centres within MINT&rsquo s portfolio.

&ldquo Tenants AT& T and Atos could vacate from MINT&rsquo s four US data centres when their leases expire over the next two years. AT& T currently occupies three data centres located at Pewaukee, Brentwood and San Diego. Atos occupies one data centre located at Arlington,&rdquo Koh writes.

&ldquo The four data centres have [a collective] net lettable area (NLA) of 1.1 million sqft, representing 15.3% of total NLA for MINT&rsquo s data centre portfolio (excluding its second data centre joint venture with sponsor Mapletree Investments),&rdquo he adds.

The lease for Atos in Arlington expires in March 2023. AT& T&rsquo s leases at Brentwood and San Diego expire in November 2023 and December 2024 respectively, with Koh noting that they are &ldquo fairly large&rdquo .

&ldquo Our sensitivity analysis indicates that FY2026 distribution per unit (DPU) and our target price could drop by up to 8.9% and 8.6% respectively,&rdquo Koh continues.

 

In his base case scenario, which assumes that the REIT will backfill half of the vacant data centre space, Koh has estimated a DPU of 14.0 cents for FY2026 and a target price of $2.79.

In his worst-case scenario, where none of the vacant space is backfilled, Koh&rsquo s DPU forecast for FY2026 is lowered to 13.3 cents with a further-reduced target price of $2.67.

To him, the potential damage could already be priced in with MINT&rsquo s FY2023 distribution yield at 5.8%.

 

&ldquo Management has cautioned investors concerning uncertainties relating to lease renewal by AT& T in the past. Thus, we expect the non-renewal of leases for the four US data centres could already be in the price,&rdquo he says.

As MINT leases these four data centres on a &ldquo core and shell&rdquo basis, Koh sees limited downside as the passing rent is low at around US$2 ($2.69) per sq ft (psf) per month.

&ldquo Management is open to conversion to alternative usage, such as laboratories for life science and cleanroom for manufacturing, which would unfortunately entail downtime,&rdquo he writes.

In Singapore, MINT&rsquo s portfolio continues to outperform. The occupancy rate for its Singapore portfolio inched up by 0.1 percentage points to 96.9% in the 3QFY2023 driven by flatted factories in Singapore.

MINT also achieved positive rental reversion for its hi-tech buildings (+8.8%) and flatted factories (+9.4%), notes Koh.

In addition, the REIT has secured Biotronik as its anchor tenant at 165 Kallang Way, a seven-storey built-to-suit facility.

&ldquo Biotronik has leased the built-to-suit facility on a 15+5+5 year term with annual rental escalations,&rdquo says Koh.

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Biotronik is a multi-national cardiovascular biomedical research and technology company headquartered in Berlin, Germany. It provides equipment for diagnosis, treatment, and therapy support for cardiac rhythm management, electrophysiology and vascular intervention.

It developed the first German-made implantable pacemaker in 1963.

MINT is also continuing to lease out its properties at 161 and 163 Kallang Way, which are expected to obtain their temporary occupation permits (TOPs) in 1H2023. 165 Kallang Way has achieved its TOP on Nov 10, 2022.

&ldquo MINT has pre-leased two floors of 163 Kallang Way. In total, 39% of 161, 163 and 165 Kallang Way (previously known as Kolam Ayer 2 Cluster) is pre-committed. MINT has achieved attractive signing rents at high-$3 psf/month,&rdquo writes Koh.

Based on these updates, Koh has cut his DPU forecast for FY2026 by 4.4% with the assumption that 161, 163 & 165 Kallang Way achieve a collective occupancy of 70% by 4QFY2024 and that the REIT will manage to backfill half the vacant data centre space at the same prevailing rent.

As at 11.55am, units in MINT are trading 2 cents lower or 0.85% down at $2.33.

The increases were mainly attributed to contributions from new leases across various clusters in MIT& rsquo s Singapore portfolio.

The amount available for distribution, however, declined 1.3 per cent year on year to S$88.4 million, from S$89.5 million previously.

There is no explanations of why the ' amt available for distribution' declined though the ' gross revenue' and ' npi' increased. I have some theories, but it would be good if an article elaborates more of the critical points of an article.

 

MAPLETREE Industrial Trust&rsquo s : ME8U +0.84% (MIT) distribution per unit (DPU) dropped by 2.9 per cent to 3.39 Singapore cents for its third quarter of FY2022/2023 ended Dec 31, 2022, from 3.49 Singapore cents in the corresponding year-ago period.

 

On a quarter-on-quarter basis, the DPU fell 0.9 per cent, according to a Thursday (Jan 26) bourse filing.

 

&ldquo While MIT&rsquo s operating metrics remained strong, we encountered headwinds from higher operating expenses and borrowing costs,&rdquo said Tham Kuo Wei, chief executive officer of its manager.

 

He added that MIT has, following the November 2022 completion of the first block of its Kallang Way high-tech industrial redevelopment project, &ldquo reached another milestone in (its) portfolio rejuvenation and rebalancing efforts&rdquo .

 

Gross revenue for the trust was up 5 per cent to S$170.4 million for the half-year period, from S$162.4 million in Q3 of FY2021/2022.

 

Net property income (NPI) grew 4.9 per cent on the year to S$128.8 million for the quarter, from S$122.7 million.

 

The increases were mainly attributed to contributions from new leases across various clusters in MIT&rsquo s Singapore portfolio.

 

The amount available for distribution, however, declined 1.3 per cent year on year to S$88.4 million, from S$89.5 million previously.

 

Unitholders can expect to receive their quarterly DPU for Q3 on Mar 14, 2023. The distribution reinvestment plan will apply.

 

Average overall portfolio occupancy for Q3 FY2022/2023 increased to 95.7 per cent, from 95.6 per cent in the preceding quarter, said MIT&rsquo s manager.

 

It added that the average occupancy rate for its Singapore portfolio improved to 96.9 per cent, from 96.8 per cent in the second quarter, as higher occupancies were registered across most property segments.

 

The average occupancy rate for the North American portfolio remained the same at 93.1 per cent in Q3.

 

Positive rental revisions were achieved across most property segments in Singapore.

 

On its seven-storey purpose-built Kallang Way development, the manager said that the remaining blocks are slated for completion in the first half of 2023. To date, about 39 per cent of the redevelopment at 161, 163 and 165 Kallang Way&rsquo s net lettable area have been committed, it added.

Even without acquisition growth, Singapore-listed Reits merit serious consideration if organic growth drivers deliver.

PRICES of real estate investment trusts (Reits) have been battered by rising interest rates. And the acquisition growth engine has slowed substantially for many acquisitive trusts. But prospects are not all bleak for Singapore&rsquo s Reits. 

 

In 2021, Mapletree Industrial Trust : ME8U +0.46% (MIT) significantly scaled up its data centre presence with a US$1.32 billion portfolio acquisition of 29 data centres in the United States. To help fund this acquisition, the trust completed an S$823.3 million equity fund-raising exercise.

 

MIT is posting decent results: for the six months ended Sep 30, 2022, net property income and distribution per unit (DPU) rose 15.6 per cent and 0.4 per cent, respectively, from a year ago. Yet MIT, like many other Reits and business trusts, has been much less acquisitive recently.

 

Rising interest rates probably help explain why many Reits are slowing down on acquisition growth. Compared to the start of 2022, the three-month compounded Singapore Overnight Rate Average rose by around 290 basis points to 3.1 per cent per annum as at value date Dec 22, 2022.

 

The acquisition growth driver for Reits works well when borrowing costs are low and yield-driven investors have few choices. Making DPU accretive acquisitions is much easier if debt costs under 2 per cent per annum, versus over 4 per cent per annum.

 

Moreover, Reits are subject to borrowing limits. As such, Reits which make big acquisitions or go on acquisition sprees will likely need to raise equity. With higher interest rates, raising equity is challenging as investors are spoilt for choice.

 

For example, investors can currently get decent returns from risk-free Singapore dollar-denominated instruments such as fixed deposits, Singapore Savings Bonds and treasury bills. In the last six-month treasury bill issuance of 2022, the cut-off yield was at 4.28 per cent when auction closed on Dec 21.

 

Sponsor support

 

Daiwa House Logistics Trust : DHLU 0% (DHLT), which made its trading debut in late 2021, recently completed its maiden acquisition that is expected to be DPU accretive. This deal shows the pain that a Reit&rsquo s sponsor may need to bear in order to make acquisitions work in the current climate.

 

On Dec 8, DHLT completed buying two freehold logistics facilities &ndash DPL Iwakuni 1 & 2 and D Project Matsuyama S &ndash and a freehold land parcel, D Project Iruma S Land, from its sponsor, Daiwa House Industry Co Ltd (DHICL), for a total consideration of 4.68 billion yen (S$47.7 million). The properties were bought at an 11.8 per cent discount to their aggregate appraised value as at end-June. 

 

Financing was largely via borrowings and subscription of units by the sponsor. The subscription issue price was the higher of S$0.77 per unit &ndash the adjusted net asset value (NAV) per unit as at end-June &ndash or the 10-day volume-weighted average price. New units were issued to the sponsor on Dec 8 at S$0.77 per unit, 19 per cent above DHLT&rsquo s closing price that day.

 

Will other sponsors emulate DHICL by selling assets at discounted prices and taking up equity at a premium to the trading price, to enable listed trusts to bulk up via acquisitions?

 

Sponsors who cut good deals for their Reits to buy assets receive some payback when Reit managers &ndash typically owned by the sponsors &ndash see their management fees grow as a trust&rsquo s asset size increases. Nevertheless, with rising interest rates, expect many Reit managers to focus on refinancing debt instead of raising more debt or equity to buy assets.

 

Organic growth drivers

 

Still, higher interest rates do not mean Reits lose their relevance for investors, especially as trading prices have fallen substantially. Some Reits can bank on organic growth in 2023 and beyond.

 

Firstly, property asset classes such as warehouses and data centres ride on the tailwinds of strong structural drivers. The growth of e-commerce and supply chain diversification, which have been amplified by the Covid-19 pandemic, drive demand for warehouses. The war in Ukraine and heightened geopolitical tensions have upped the need for supply chain security and near-shoring of manufacturing bases.

 

Secondly, property asset classes such as hospitality assets will benefit from the relaxation of Covid restrictions in many places in recent months. More people are back to travelling for business and leisure, possibly with bigger budgets amid a flight to quality. With the relaxation of Covid restrictions, malls are also seeing better patronage.

 

Thirdly, many Reits own Singapore assets. Singapore&rsquo s strong management of the pandemic and its safe haven status in a chaotic world are boosting the Republic&rsquo s position as a business hub, which helps drive demand for office space. With Singapore&rsquo s stability driving robust demand for properties, property valuations are well-supported and the negative impact of higher interest rates is mitigated.

 

Fourthly, rising inflation, which is driving higher interest rates, may help some Reits that have lease agreements where rental rates adjust in line with inflation. In certain cases, higher utility costs are also borne by tenants, thus helping to insulate landlords from higher inflation.

 

In just over 20 years, Singapore&rsquo s Reit sector has grown substantially &ndash Reits now account for seven of the 30 constituents of Singapore&rsquo s benchmark Straits Times Index. Facing higher interest rates, Reits have to fight hard with other instruments for the attention of yield-driven investors. 

 

The slowing of the acquisition growth engine weakens the investment case for Reits. Still, Singapore Reits merit serious consideration by investors as they are well regulated and tax efficient, with high levels of governance and transparency. Numerous trusts have strong sponsors and good track records.

 

One can enjoy a spread of about 240-310 basis points to the five-year government bond yield of around 2.8 per cent from investing in large cap Reits &ndash CapitaLand Integrated Commercial Trust : C38U 0% and CapitaLand Ascendas Reit, : A17U +0.37% respectively &ndash based on annualising the first-half DPU and unit prices as at Dec 23, 2022. And DPU and NAV will grow, provided organic growth drivers chug along.

MAPLETREE Industrial Trust : ME8U +4.63% posted a 3.2 per cent loss in distribution per unit (DPU) to 3.36 Singapore cents in the second quarter of its financial year (FY) ended on Sep 30, from 3.47 cents a year ago, said its manager via a bourse filing on Wednesday (Oct 26).

 

On a quarter-on-quarter basis, the DPU also fell from 3.49 cents in the previous quarter.

 

The total DPU of 6.85 cents for the first half of its FY, however, is a slight 0.4 per cent increase from the 6.82 cents over the same period last year.

 

Net property income rose 8.3 per cent to S$130.3 million in Q2, from S$120.3 million a year ago.

 

Gross revenue grew 12.8 per cent to S$175.5 million from S$155.6 million over the same period.

 

The amount available for distribution to unitholders for the quarter increased by 0.7 per cent year-on-year to S$89 million.

 

Contribution from the acquisition of 29 data centres in the United States, partially offset by higher property operating expenses and borrowing costs., drove this quarter&rsquo s performance.

 

Tham Kuo Wei, chief executive officer of Mapletree&rsquo s manager, said that its financial performance has been affected by headwinds from higher property operating expenses and borrowing costs.

 

&ldquo Such cost pressures arising from rising energy prices and interest rates amid a deteriorating macroeconomic environment are expected to continue for the coming quarters... Our focus remains on prudent cost management while exploring opportunities to improve the portfolio quality and operating performance,&rdquo he added.

 

The release of the S$6.6 million of tax-exempt income, which were withheld in the fourth quarter of FY2019/2020, will be released from next quarter to mitigate rising operating and borrowing costs.   This amount came out of distributions declared by joint ventures.

 

The occupancy of the overall portfolio increased to 95.6 per cent from 95.3 per cent in the previous quarter. Total assets under management is at S$8.9 billion, split almost evenly between Singapore (48.7 per cent) and North America (51.3 per cent).

 

As at Sep 30, the weighted average lease expiry across the entire portfolio is 4 years.

 

Mapletree reported positive rental revisions across key property segments in Singapore, including hi-tech buildings, business park buildings, as well as flatted factories.

 

With a total outstanding debt of close to S$3 billion, that works out to an aggregate leverage ratio of 37.8 per cent, a decrease from 38.4 per cent from the previous quarter.

 

This was a result of the redemption of S$45 million worth of 10-year medium term notes, which have a fixed interest rate of 3.65% per annum, with cash that matured on Sept 7 this year.

 

More than 74 per cent of the Group&rsquo s gross borrowings had been hedged through interest rate swaps and fixed rate borrowings, which will reduce the impact of interest rate fluctuations on distributions. 

 

Mapletree&rsquo s manager also raised proceeds of S$40.2 million from the distribution reinvestment plan for the previous quarter, which represented a take-up rate of 42.9 per cent.

 

The plan will continue to be applied for this quarter&rsquo s distribution to finance progressive funding needs of the redevelopment project at Kallang Way.

 

Mapletree also said in its filing that the global economy is experiencing challenges across multiple fronts that weigh heavily on the outlook. This includes higher inflation, tighter financial conditions, Russia&rsquo s invasion of Ukraine, as well as the lingering effects of the Covid-19 pandemic.

 

Global growth is expected to slow, and numerous risks, such as geopolitical fragmentation, inflation, and debt distress induced by tighter financial conditions, could cause growth forecast to decline even further.

 

&ldquo Against the backdrop of an uncertain global outlook, the increasing concern of an oncoming recession has dampened business confidence. At the same time, increasing property operating expenses and borrowing costs continue to exert pressure on distributions. The manager will adopt cost-mitigating measures while focusing on tenant retention to maintain a stable portfolio occupancy,&rdquo read the filing.