Mapletree Industrial Trust is no dividend slug. The stock has compounded its distribution per unit (DPU) steadily over the last 14 years.
Yet, this Singapore REIT has been down in the dumps lately for obvious reasons:
- Its latest financial results weren’t good.
- Gross revenues, net property income and DPU fell.
On top of that, Mapletree Industrial Trust recently divested three of its Singapore industrial properties, which partly contributed to its lower income.
And Mapletree Industrial Trust shares have been down.
Diligence members know I own Mapletree Industrial Trust shares. But I want to write my thoughts on this Singapore REIT on my blog as well.
With its recent sell-off, Mapletree Industrial Trust shares now trade at ~6.4% dividend yield.
Is this worth a buy or a value trap?
In case you missed my recent posts: |
Why Mapletree Industrial Trust shares are down – two big headwinds
Mapletree Industrial Trust has two big headwinds. Let’s start with the bigger headwind first – its US data centres.
The thing is, these older, lower-power facilities aren’t exactly suitable for current AI workloads.
The simple reason is these data centres have limited power capacity and the fitting and ceiling might not have a high limit.
For instance, older data centres that are built for 5-15 kW rack densities may not be suitable for AI workloads, which now require 50-100 kW per rack. This becomes a problem.
Tenants that demand more power, more cooling and more dense rack capacity may be less inclined to take up space in these older data centres.
This could force tenants looking to run high-powered AI clusters to move elsewhere.
What’s more, these older data centres are typically used for traditional enterprise IT, storage and backup.
So, I won’t be surprised if Mapletree Industrial Trust would sell off some of these data centres, and start looking for new data centres elsewhere.
So far, Mapletree Industrial Trust’s US data centre occupancy rate has dropped from 90% to 87%.
As mentioned, with the fall in occupancy, management has already backfilled 23% of its empty leases.
Recall 70% of its US data centres are in North Virginia – a highly competitive market. Thus, locking in new tenants may take time.
Furthermore, there are expected to be more data centre supply that could put pressure on Mapletree Industrial Trust’s tenant hunt.
Here’s the other thing: Mapletree Industrial Trust still has refinancing coming up. Even though the Fed has lowered interest rates, rates remain high compared to the past decade.
If interest rates don’t continue easing, borrowing costs could stay elevated, which naturally puts pressure on DPU.
Now, the biggest culprit of losing money permanently in REITs comes from overpaying for assets.
The way I see Mapletree Industrial Trust is this: yes, big headwinds in both its upcoming refinancing and US data centre vacancies.
Yet, at current prices, I still see a margin of safety. Let me explain.
Is Mr. Market overreacting to Mapletree Industrial Trust?
Mr. Market seems to be pricing as though Mapletree Industrial Trust were its “pre-2017” version – a “pure-play” Singapore industrial landlord with traditional assets including hi-tech buildings, logistics warehouses and facilities.
Back then, its valuations were trading at an average 1.2x.
But from 2017 Mapletree Industrial Trust started ramping up data centres, which pushed valuations higher.
This is normal, considering data centres command higher valuations due to stronger demands.
Keppel DC REITis an example:
Even if Mapletree Industrial Trust older data centres don’t enjoy the same AI-driven growth.
I find the misunderstanding of data centres overplayed – especially when Mapletree Industrial Trust trades at just 1.2x P/B ratio, like it was pre-2017.
Put it this way, we can’t entirely ignore the fact Mapletree Industrial Trust’s data centres have little or no growth.
Mapletree Industrial Trust growing dividends still backed by quality assets
Like I’ve said, Mapletree Industrial Trust is no dividend slug. Its distributions over the years are secured by steady rental income.
In fact, Mapletree Industrial Trust’s latest average rental revision rate grew 6.2%. Not too bad. Not too bad.
To me, the risk of permanent loss of capital at this stage appears low.
In fact, Mr. Market seems to price Mapletree Industrial Trust as though it had a full portfolio of old industrial assets – just like before 2017.
So… Is Mapletree Industrial Trust a buy at 6.4% dividend yield?
Now, would I buy Mapletree Industrial Trust when it’s trading at its peak during 2020? Nope.
The more important question is – Would I consider Mapletree Industrial Trust a strong growth stock?
Not in any way.
But at current prices where a blue-chip Singapore REIT trades at 6.4% dividend yield, I don’t believe I’m taking extraordinary risk here.
Its Singapore industrial assets still account for half its total assets. And it’s been doing well:
At current ~6.4% yield, overall occupancy rate in its US data centres is already at 89%. I admit, US data centres could be tricky to backfill at this point.
But I also believe there’s still demand from retail, financial institutions that need these older data centres.
In other words, at this point, there could be some DPU pressure, but longer term I’d see today’s data centres situation a transition.
My final thoughts
There will still be some time for Mapletree Industrial Trust to lock in new leases for its existing data centres.
This has also led to Mapletree Industrial Trust’s shares performance lagging behind. But the situation doesn’t look as bleak as it seems.
Instead, I see this sell-off as largely overplayed. Mapletree Industrial Trust’s dividends are backed by steady rental income, and a healthy balance sheet.
At current share price, Mapletree Industrial Trust trades like its pre-2017 version – a “pure-play” traditional industrial landlord.
These have provided a steady recurring income for unitholders. And I believe valuations have returned to levels that’s worth a second look.
Sometimes, investing can be simple.
Willie Keng, CFA
Founder, Dividend Titan
