Maybank Securities analyst Li Jialin has upgraded her call to “buy” from “hold” on Mapletree Industrial Trust ME8U (MINT) with a higher target price of $2.60 from $2.15.
This follows MINT’s announcement on Sept 30 of the REIT’s proposed acquisition of a mixed-use industrial facility in Tokyo in Japan for JPY14.5 billion ($127.8 million).
In her Oct 2 report, Li notes that the freehold asset has redevelopment potential when the existing lease rolls off. The analyst favours the potential upside from the redevelopment potential and a net property income (NPI) yield of 4%, which offers downside protection. Noting topline contribution, Li increases her revenue and distribution per unit (DPU) forecasts on MINT by 0.2% to 0.5% for FY2025 to the end of FY2026.
Li recognises that MINT’s management is open to value creation and a slightly more opportunistic risk-return profile. “Supported by falling interest rates, its sponsor and divestment pipeline, we expect more acquisitions with a stable income stream and growth potential,” Li adds.
According to Li, the master-lease tenant, an unidentified Japanese conglomerate, uses the asset primarily as a training facility with an ancillary data centre and on-site accommodation taking up 28% and 24% of gross floor area (GFA), respectively. The tenant also has an option to renew the current lease.
Li states that the redevelopment scenario assumes that the tenant will not renew the lease in five years and a data centre will be built in 2033 or 2034. Management has guided for 30 to 40 megawatt (MW) of potential IT load and a 5.5% to 6% yield-on-cost for a powered shell data centre, Li says.
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Li notes that the site, which is located within a data-centre cluster in west Tokyo, accounts for approximately 40% of total IT supply in Greater Tokyo. Furthermore, Li adds that the current land zoning for the site allows for data centre development.
According to the announcement released by MINT, the total acquisition outlay of $133.6 million is financed by JPY-denominated loans. Li notes that post-acquisition, pro forma gearing will increase from 39.1% to 39.8% as of June 2024.
Li states that MINT has resumed their distribution reinvestment plan (DRP) in 1QFY2024, and the proceeds could reduce gearing progressively.
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“In our view, it’s more likely MINT could execute its divestment pipeline of $200 million to $400 million in the next 12 months, given a more favourable transaction market,” Li says.
Li notes that MINT’s portfolio reconstitution has been gaining momentum, and in 1Q2024, management reinforced its commitment to increase data centre assets under management (AUM).
While the strategic pivot and sponsor pipeline supported an upward re-rating, Li is of the opinion that the crucial positive triggers are lower interest rates and a more positive transaction market. In the medium term, Li expects faster portfolio reconstitution, supported by MINT’s growth strategy of coupling stable assets with growth potential.
“We are likely to see deals with more interesting risk-return profiles going forward,” Li says.
As at 3.44pm, units in MINT are trading at 2 cents lower or 0.79% down at $2.51.
