Mapletree Industrial Trust – A Resilient Portfolio Anchored on Data Centres

by: Tam Ging Wien

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Mapletree Industrial Trust (MIT) announced that it will be hosting its Extraordinary General Meeting (EOGM) on the 27-Aug-2020 (Thu) to obtain shareholder approval for the proposed acquisition of the remaining 60.0% interest in 14 data centres located in the U.S. The total acquisition outlay including the transaction cost and acquisition fees add-up to approximately S$310.0mil.

This comes after making the proposal in June 2020 and raising net proceeds of about S$410mil in a very successful private placement exercise which as was 8.2x covered with an upside option at an issue price of $2.80 – the top end of its issue price range of $2.732 to $2.80. MIT will issue about 146.4mil new units.

Approximately S$310.0mil raised in the private placement exercise will be used to fund the acquisition of the 14 data centres and pay fees and expenses incurred in the private placement exercise. The remaining S$100.0mil will be used to partially repay MIT’s debt, fund future acquisitions and/or for general corporate and/or working capital purposes.

A Sturdy Portfolio Anchored on High-Tech Buildings and Data Centres

Upon completion of this acquisition, MIT is expected to expand its exposure to the data centre segment from 31.6% to 39.0% based on the book value of the assets. This will further solidify its portfolio from 55.0% to 59.9% exposure to the resilient hi-tech buildings.

Source: Mapletree Industrial Trust's Acquisition Proposal

Increased Portfolio Resilience with Higher Proportion of Data Centres

These data centres are primarily leased on core-and-shell basis with triple-net leases and minimal expenditure commitments.

Core-and-shell structures refers to building structures that are pre-qualified for data centre use and constructed with only the bare bones necessary for data center development. These could include independent power source, backup power sources, fibre optic and networking trunk, and infrastructure for mechanical, electrical, and plumbing. The interior fittings of the data centre such as the cooling systems, environmental controls (e.g. temperature, humidity, air circulation…etc), uninterruptible power system (UPS) hardware, fire safety equipment, power distribution, security systems, networking equipment, rack space and containment, monitoring management systems, and other essentials fittings are left to the tenant.

Triple-net leases refer to lease agreements where the tenant bears the cost of maintenance, tax, and insurance charges on-top of paying rental for the space. This has the benefit of reduce management overheads and long lease durations attached with annual rental escalations which enhances stability, visibility, and predictability of MIT’s future income stream.

Since the start of the COVID-19 pandemic, there has been observable shift in global trends such as:

  • Increase employer adoption of work-from-home arrangements
  • Accelerated shift to adopting contactless digital payments
  • Shifting consumer behaviour towards online retail and eCommerce
  • Increase consumption of online entertainment content (e.g. video, music streaming services)
  • Emerging trend of IoT adoption

Data centres were also identified as essential infrastructure in most major nations during the pandemic and had remained operational during the lockdown period.

These trends increase reliance on data centre usage providing tailwinds for their growth and resilience as a real estate sector.

Acquisition Immediately DPU and NAV per Unit Accretive Even After Upsized Option Exercised

Based on the proposed method of financing and the pro forma financial effects of the Proposed Acquisition on DPU and NAV per Unit for MIT for FY19/20, the Proposed Acquisition is expected to be 3.4% DPU and 3.7% NAV per Unit accretive to Unitholders.

This was however based on an assumption that MIT will issue 126.5mil new Units issued at an illustrative price of S$2.766 per unit. At the time of writing, we are aware that there will be 146.4mil new units issued at $2.80 per unit and this would result in a lower DPU accretion of 2.7% but a higher NAV per Unit accretion of 4.3%.

Source: Mapletree Industrial Trust's Acquisition Proposal

Future Data Centre Acquisitions Likely in the Pipeline

MIT has made 2 significant data centre acquisitions in the past:

  • Mapletree Redwood Data Centre (“MRDCT”) Portfolio – completed in Dec-2017
    • A 40% JV in a portfolio of comprising 14 data centres located across the United States with a net lettable area of approximately 2.3mil sqft
  • Mapletree Rosewood Data Centre (“MRODCT”) Portfolio – completed in Jan-2020
    • A 50% JV in a portfolio consists of 13 data centres in North America, with 12 across six states in the United States and one in Canada with a net lettable area of approximately 2.1mil sqft

The remaining 60% JV of the MRDCT Portfolio acquired back in Dec-2017 is the basis of the current rights-of-first-refusal (ROFR) 60% asset acquisition. Similarly, the remaining 50% JV of the MRODCT Portfolio is also MIT’s ROFR asset. This implies that another data centre acquisition could come shortly.

This does not discount further collaborations or leverage that MIT could foster through its sponsor Mapletree Investments to acquire other non-ROFR assets.

Increased Exposure to USD Income Source, Protected by Partial Hedges

While the benefits of investing in U.S. based data centres, it also means that MIT unitholders are exposed to the fluctuations between the USD and the base trading and dividend payout currency SGD. Obviously with the increasing exposure to U.S. based data centres with income sources in USD, the foreign exchange risk increases for SGD based investors.

Should the USD increase against the SGD, it would benefit unitholders and if it weakens, unitholders may see a decline in income. Fortunately, MIT does partial hedging of its USD source income. Specifically, for 2QFY20/21, ~59% of net USD income stream are hedged to SGD.

We think that in the long term, the benefits of the data centre portfolio outweighs the foreign exchange risk exposure to the USD for MIT unitholders.

23% Profit Locked In from Sale of Data Centre

Just this week on Friday (14-Aug-2020), MIT announced the sale of 26A Ayer Rajah Crescent. The asset is a seven-storey build-to-suit  data centre with a total gross floor area of about 384,802 square feet. The Property was developed by MIT and fully leased to for Equinix Inc. with an option to purchase it. It obtained its Temporary Occupation Permit on 27-Jan-2015.

The Sale Price of S$125.0mil at per the latest valuation an represents a
23.3% premium over the development cost of S$101.4mil.

Going forward, the proceeds of the sale will likely be used to finance future acquisitions which we think will continue to power MIT's growth going forward.

Retail Investors Unable to Participate in the Placement

While the benefits of the acquisition are clear to us, it’s unfortunate that retail investors like ourselves will not get a chance to participate in MIT’s private placement.

Hopefully in the future, they the management of MIT would consider doing an equity fund raising that combines both an Private Placement and an Preferential Offering similar to what Mapletree Commercial Trust (MCT) did in October 2019 when raising funds for the acquisition of Mapletree Business City II (MBCII). ProButterfly had previously written about this acquisition in our article entitled Mapletree Commercial Trust – MBC II Acquisition and the Preferential Offering.

We will take a consolation that while we could not participate in the private placement, the DPU is still accretive which contribute to future dividend growth for retail investors.

Concluding Remarks

Based on what has been proposed, its clear to us that there are numerous benefits of this acquisition both for existing unitholders as well as new investors who had the benefit of participating in the private placement. Benefits include strengthening of MIT’s portfolio with a firm anchorage in the resilience data centre sector. The acquisition has been structured to be DPU accretive which benefits existing unitholders who did not get a chance to participate in the private placement.

This acquisition definitely gets our “Yes” vote for the EOGM!

Positioning to Ride the Recovery

Opportunities and Risk Post-COVID-19 Pandemic in the various S-REIT Sectors

The COVID-19 crisis has brought about an unprecedented economic shock to many sectors, and yet it has also generated opportunities in others.

The tech sector has been a major beneficiary and along with that, S-REITs exposed to the Data Centre sector such as Keppel DC REIT and Mapletree Industrial Trust gained phenomenally.

But are the investment opportunities in REITs now gone? Personally, we do not think so. There are still many REITs below their pre-COVID-19 levels poise to recover strongly in the coming quarters – and now it is the best time to prepare to capture the post-COVID recovery.

Join us as we discuss the opportunities and risk in the S-REIT space sector-by-sector as we try to uncover recovery opportunities for FY2021 and beyond. Real estate sectors that we will be covering include the Retail, Hospitality, Offices, Healthcare, Industrial and Data Centres.

Our speaker Tam Ging Wien will be sharing his knowledge and experience including:

  • Part 1: A Survey of the REITs Landscape Around The World
  • Part 2: Key Metrics in Identifying Strong REITs
  • Part 3: Real Estate Sector Review Amidst the COVID Crisis
  • Part 4: Screening for Opportunities
  • Part 5: Q&A

Some key highlights that will be covered includes:

  • Real estate sector-by-sector review on COVID-19 impact and recovery opportunities. Sectors covered include the Retail, Hospitality, Offices, Healthcare, Industrial and Data Centres.
  • Opinion on which sector will continue to stay resilient and which are poised to recover quickly post-pandemic
  • The right metric to use when screening for high quality REITs
  • Case studies of REITs which are considered high quality
  • Step-by-step demo of how to screen for high quality REITs on your own

During the sharing session, various Singapore-listed REIT examples will be used.

There will also be a Q&A so that members of the investing community may engage in open dialog and discussions in order to deepen their understanding of REITs. Do prepare your writing materials for note taking.

Please note that the duration of the on-site seminar is 7pm to 9:45pm Singapore Time (GMT +8).

The details of the event are as follows:

  • Seminar: Positioning To Ride The Recovery
  • Date: 5th May 2021 (Wed)
  • Time: 7:00pm to 9:45pm
  • Venue: RNN Conference Centre - Kyoto Training Room (Level 4), 137 Cecil Street, Cecil Building #04-01, Singapore 069537
  • Fees: S$10.00
  • Sign-up Link:

To learn more about REITs, we recommend the article: What are REITs?


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