Mapletree Industrial Trust (SGX: ME8U), or MIT, is an industrial REIT that owns a portfolio comprising 87 industrial properties in Singapore and 14 data centres in the US (through a 40% joint venture interest with Mapletree Investments Pte Ltd). The total value of the REIT’s assets under management was S$4.8 billion as of 31 March 2019.
Yesterday, MIT announced that it intends to embark on its largest redevelopment project to date, with plans to redevelop the Kolam Ayer 2 Cluster from a flatted factory cluster into a high-tech industrial precinct. The project will cost around S$263 million, will begin in the second half of 2020, and be completed by the second half of 2022. The proposed redevelopment will be fully funded by debt, which will increase MIT’s aggregate leverage ratio from 33.8% (as of 31 March 2019) to 36% upon completion.
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Here are four key reasons I believe this redevelopment project will boost MIT’s future distribution per unit (DPU) and therefore allow unitholders to access a stream of growing income.
1. Increase in plot ratio
The redevelopment will increase the plot ratio from the current 1.5 to 2.5 and will add an additional gross floor area (GFA) of around 359,000 square feet to the existing cluster. Thus, MIT’s portfolio will enjoy a boost in GFA while keeping the land area constant, resulting in growth in rental income as there will be more space to be leased out. This increase in rental income will flow down to net property income and eventually increase the amount available for distribution (as there is no equity fundraising from this project).
2. Secured a strong anchor tenant
MIT has already secured an anchor tenant even before the redevelopment commences. The tenant is a global medical devices company headquartered in Germany, and the new seven-story development will serve as the company’s new central hub in Asia-Pacific. This new tenant will account for about 24.4% of the enlarged GFA upon completion, and the tenant is committed to fully lease this facility for 15 years with annual rental escalations. It will also have an option to renew for two additional five-year terms.
Securing this anchor tenant will boost DPU and provide more certainty and stability to MIT’s portfolio for the Kolam Ayer redevelopment.
3. Repositioning of cluster
The Kolam Ayer cluster currently contains two flatted factories and an amenity centre. The redevelopment will reposition the cluster for new high-tech buildings and will open up more opportunities for large, reputable clients to lease space there. This increases the attractiveness of the cluster to new potential clients who can afford to pay competitive market rates. The prospect of attracting these new clients should boost DPU as higher rental rates can then be charged.
4. Strong potential positive rental reversion
The new leases signed with large, reputable clients normally include rental escalation clauses pegged to inflation, which will provide strong positive rental reversion for the properties within this cluster. The present scenario may offer little opportunity for upward reversions as the cluster is old and the tenants may not be able to afford rental increases.
Steady and consistent increases in rental rates will flow through to cash available for distribution and increase the REIT’s DPU.
The Foolish takeaway
Unitholders have a lot to like about this redevelopment project, as it signals MIT’s intention to “upscale” this cluster and make it more attractive for tenants. This project also adds to MIT’s track record of redevelopment and BTS projects and unitholders can look forward to more such projects in the future that help to unlock the value within the company’s portfolio.
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The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. The Motley Fool Singapore has recommended shares of Mapletree Industrial Trust. Motley Fool Singapore contributor Royston Yang does not own shares in any of the companies mentioned.