David Kuo’s Personal Income Portfolio “Cornerstone Stock” No. 2 Mapletree Industrial Trust (SGX: ME8U)

Fact box

Headquarters: Singapore
Website: www.mapletreeindustrialtrust.com
Industry: Industrial REITs
Volatility: Low (5-year beta: 0.46)
Market cap: S$3,695.8
Revenue (TTM): S$363.2
Net property income (TTM): S$277.6
Recent price: S$1.96
Yield: 6.0%

TTM = Trailing 12 months

Dollar amounts in millions except recent price

Data as of 16 May 2018

Recommendation

What The Company Does: Among the first three stocks that will go into David’s Personal Income Portfolio is Mapletree Industrial Trust (SGX: ME8U), a real estate investment trust that owns industrial properties in Singapore as well as data-centres in the US.

In Singapore, it has 85 properties under five different property types: Flatted Factories; Hi-Tech Buildings; Business Park Buildings; Stack-up/Ramp-up Buildings; and Light Industrial Buildings. These properties have a total net lettable area (NLA) of 15.7 million square feet. In the US, the REIT owns a 40% stake in 14 data centres that are located across nine states; the remaining 60% stake is owned by Mapletree Industrial Trust’s sponsor, Mapletree Investments Pte Ltd. The data centres, which have a total NLA of 2.3 million square feet, were acquired by Mapletree Industrial Trust and its sponsor on 20 December 2017.

Source: Mapletree Industrial Trust investor presentation

 

The chart above shows a breakdown of Mapletree Industrial Trust’s current portfolio value by property-type. Most of the REIT’s portfolio value is in Singapore (90.4% to be exact).

Why We Like The Company: We think Mapletree Industrial Trust is likely to deliver stable and growing distributions in the years ahead for a number of important reasons. Here are three:

  • A strong history of growing its distributions since its listing
  • The REIT Manager’s incentives are aligned with unitholders’ interests
  • An attractive portfolio of data centres in the US that will bring in a new income stream

Mapletree Industrial Trust was listed in October 2010, which is in the third-quarter of its fiscal year ended 31 March 2011 (FY10/11). From FY11/12 to FY17/18, the REIT has grown its distribution per unit (DPU) from 8.41 cents to 11.75 cents, which works out to an impressive annual growth rate of 5.7%. The foundation for the REIT’s impressive history of DPU growth has been its rising gross revenue and net property income. The chart below plots Mapletree Industrial Trust’s gross revenue, net property income, and DPU from FY11/12 to FY17/18:

Source: Mapletree Industrial Trust annual reports and earnings presentations

 

We think that the interests of Mapletree Industrial Trust’s unitholders are aligned with those of the REIT’s Manager. A “material component” of the total remuneration of the Manager’s employees comes from variable incentives, which depend on factors that include, among others, the total shareholder return generated by Mapletree Industrial Trust, and certain key financial metrics of the REIT, such as its net property income, DPU, and weighted average lease to expiry (WALE).

A “significant portion” of the variable incentives of those in the senior management team of the REIT’s Manager are also deferred over multi-year periods; parts of the deferred variable incentive may even be adjusted downward depending on the REIT’s future performance. In FY16/17, 76% of the total remuneration of Tham Kuo Wei, the CEO of the REIT’s Manager, was from variable incentives.

As we mentioned earlier, Mapletree Industrial Trust had acquired 14 data centres in the US in 20 December 2017. This portfolio has some attractive characteristics:

  • The land in the portfolio is freehold;
  • Its occupancy rate is high at 97.4% as of 31 March 2018;
  • It has a long WALE of 6.0 years at the end of FY17/18;
  • All the data centres are on triple net lease structures whereby costs such as maintenance, taxes, and insurance, are borne by the tenants.
  • Demand for outsourced data centres worldwide is projected to grow by 9.4% annually from 132 million square feet in 2016 to 189 million square feet in 2020.  

The 14 data centres will form a new income stream for the REIT, since they have yet to really contribute much in FY17/18. They could also be future growth opportunities for Mapletree Industrial Trust, because Mapletree Investments has granted the right of first refusal on its 60% stake in the 14 data centres to the REIT.

The chart below shows Mapletree Industrial Trust’s price-to-book (P/B) ratio since its listing:

Source: S&P Global Market Intelligence

 

Right now, Mapletree Industrial Trust has a P/B ratio of 1.33, which is higher than the REIT’s average PB ratio of 1.25 since its listing. We can also see that the REIT’s current P/B ratio is at the higher end of where it has been in the past. But, we don’t think the current valuation is outrageously high, when we consider the REIT’s high likelihood of being able to deliver stable and growing distributions in the years ahead.

The Risks Involved: One important risk affecting Mapletree Industrial Trust is the oversupply issue in the industrial property market in Singapore. If you look at the chart below, you can see that the net new supply of multi-user factory space in Singapore (the blue bars) has been higher than the net demand (the orange bars) in each year since 2012.

Mapletree Industrial Trust has done an admirable job of increasing the overall rental rate of its portfolio over the past few years (from S$1.45 per square foot per month in the third quarter of FY10/11 to S$2.01 in the fourth quarter of FY17/18), despite the oversupply of factories. But, if there continues to be a huge inflow of new factory space, the REIT’s business could still be hurt.

Concentration risk is another area to note. The REIT has over 2,000 tenants, but the largest tenant – Hewlett Packard (NYSE: HPE) – accounted for 9.9% of its total gross rental income as of 31 March 2018. If Hewlett Packard should walk away, it could hurt Mapletree Industrial Trust, badly.