I’m starting to get excited again over Mapletree Industrial Trust (MIT).
Okay last time, I told you I wouldn’t buy industrial REITs. And in fact, Diligence members would know I sold off my Ascendas REIT and Mapletree Industrial Trust shares earlier this year – both industrial REITs weren’t supposed to be trading at such low dividend yield.
Why I sold off MIT shares last time
The thing is, at one point, when MIT shares traded at S$3.24, its dividend yield was only a pitiful 3.8%. I mean, that’s ridiculous.
If you remembered, many industrial properties in Singapore sit on land with only a 30 years lease. This means after the land leases runs out, JTC claims back the land, along with the property.
This also means MIT has to raise capital (from rights issues) again, in order to replace or extend the life of these properties.
That’s why, I believe MIT – along with other industrial REITs – should trade at a much higher dividend yield. This compensates money needed to replace these older, industrial assets with short land leases.
That’s also why, I believe industrial properties are different from retail and commercial properties.
Well today, the story has changed, which I’ll get into in a bit.
So far, MIT shares have fallen 32% from its peak in July 2020 — trading close to its NAV, or book value.
Let’s quickly get up to speed about MIT.
Mapletree Industrial Trust — a dividend pumper?
The thing is, MIT is designed to be a robust dividend payer.
If I’d describe MIT with one word – it’s evolution.
At a market cap of S$6 billion, the second largest Singapore industrial REIT (no prize for guessing the biggest) grew from just 70 “pure-play” industrial properties in 2010 to 141 properties today – with half of their assets owning US data centers. That’s pretty impressive growth.
What’s more, these high-quality properties are leased to solid, top tenants like HP, AT&T and Bank of America. With more than 2,000 tenants, MIT has diversified its rental income across their properties over the years.
Put it this way, that’s what drove MIT to steadily grow their dividends year after year.
Over the last ten years, MIT has been generous with their ample dividends, even during crisis — DPU grew from just 3.45 cents in 2010, to 13.8 cents over the last 12 months.
What’s more, I found MIT’s sponsor — Mapletree Investments — actually quite strong. You don’t really hear too much about MIT’s “under-the-radar” sponsor, but Mapletree Investments have quietly helped pump MIT up with decent, quality assets over the past decade.
In fact, Mapletree investments still has S$79 billion of assets across the world, including S$22.5 billion of US assets, which I suspect are data centres.
This could further boost MIT’s asset growth in the long run. While Mapletree Investments don’t disclose much about themselves, I think they have done a pretty good job of growing MIT.
Why has MIT shares tanked so much?
There are three reasons.
First, and what a bearish REIT investor would say – rising interest rates are crushing Singapore REITs. I agree.
In its third quarter business update, MIT’s borrowing costs have climbed to 2.9%, up from 2.4%, which was partly the reason why their DPU fell in their latest quarter results – down from S$3.47 cents to S$3.36 cents. This was despite MIT’s rental revenue and net property income grew pretty strongly by 12.8% and 9.3% respectively.
In a way, Mr. Market was probably spooked by an aggressive rising rate environment – and investors are more worried about ever rising interest costs hurting MIT.
But, would that really be the case?
According to MIT, management calculated if interest rates go up by another 2%, MIT’s DPU will fall by a mere 3.1% (see last row below).
That’s not a lot.
This is because MIT’s gearing is not huge — only 37.8%, which is still manageable.
At this point, I don’t think MIT should be scared of rising rates.
Other than a high interest coverage, MIT has also pushed back its refinancing at a much later date, which protects them from the full-blown effect of high interest rates.
Second, MIT is now seen as a data centre powerhouse.
With bad news about tech lay-offs, a tech sector slowdown, tech shares sell-off, this has obviously triggered Mr. Market to also get rid of shares relating to tech, including data centres.
Well, I don’t agree.
Data centres form the backbone of the entire tech sector. Even as tech companies slashed headcounts, they still need data storage, especially when more and more things like streaming, artificial intelligence, cloud storage are ever expanding globally.
It just doesn’t make sense tech companies will want to reduce data storage at this point.
Third, which I find the most logical conclusion, is Mr. Market is finally realizing how industrial REITs in Singapore should trade.
Once upon a time in 2015, MIT used to trade at 7% dividend yield. Like I’ve said earlier, MIT still owns older, industrial assets with short land leases.
That means MIT should trade at least 6%+ yield level, rather than an absurdly 3.8% yield (back in 2020).
The reason why I would bet my money on MIT today
We can disagree here.
But what surprised me was MIT management’s being smart about their strategy. Not every REIT manager thinks like them, especially when the objective of ANY Singapore REIT is to grow, grow and grow.
So what I read was management has said they are unlikely to pursue acquisitions at this point such as its right of first refusal on the data centre.
And according to MIT’s CEO, Tham Kuo Wei: “My sense is that, at least for the next six to nine months, (there is a) fairly low likelihood for us to explore this in view of the market situation,”
It’s hard to tell whether they will eventually buy a new asset. But what I liked was their prudence in this rising rate environment – why pay for a property today, especially financed by much higher borrowing costs?
And he goes on to say: “For this asset type, capitalization rates remain fairly tight. So, unless you get a very huge friendship discount that is out of line with the market it will not be easy for us to execute a transaction to do an acquisition…”
I like the fact the CEO acknowledged industrial property valuations are expensive.
And yes, no point growing for the sake of growing.
When we assess people who look after our capital, we prefer our managers to be prudent. I mean, if I put financial numbers aside, I’d bet my money on MIT just from the way management thinks about their REIT strategy.
Final thoughts — MIT shares showing value
MIT’s shares are finally showing value.
I don’t think DPU will grow much at this point because of a slowdown in acquisitions and the higher interest rates affecting MIT’s higher borrowing costs.
I think MIT scan withstand the shocks of higher interest rates due to their manageable leverage.
What I know for sure, MIT cannot be trading at in the 4% to 5% yield range, or even the low yield of 3.8%.
What’s important is at least, the market is finally appreciating MIT to be trading at a more fair valuation, which at this point I’m getting real excited about.
Sometimes, investing can be simple.
Willie Keng, CFA
Founder, Dividend Titan