REITs

REIT analysis: Is Mapletree Industrial Trust (SGX: ME8U) a good buy?

As a REIT, the performance of Mapletree Industrial Trust (MIT) has been nothing short of stellar. Since its IPO in 2010 at a price of $0.93, MIT has risen by more than 300% to its current price of $2.96 (as of 15 July 2020). Looking at the stock chart below, it also confirms that MIT’s share price has been on a steady upward trend since its IPO.

Given MIT’s strong and consistent performance over the years, does it automatically make it a good buy? With this question in mind, I thus decided to do an analysis of MIT. Here are 10 things I learnt while analyzing the past 5 years of MIT’s annual reports.

Disclaimer: This post should not be used as a recommendation to either buy or sell MIT’s shares. I am merely sharing what I have learnt from analyzing MIT and deciding if it is worth adding to my portfolio. Always consider your own investment horizon and risk appetite when it comes to buying or selling of shares/units. Lastly, I do not currently own any units of MIT and will also not take any responsibility for future gains or losses.

1) Total of 6 revenue segments

MIT’s revenue is derived from 6 types of properties namely, High-Tech Buildings, Data Centres, Flatted Factories, Business Park Buildings, Stack Up/ Ramp Up Buildings and Light Industrial Buildings.

I will not be going into detail what each property type is about but rather just give a brief overview of them.

  • High-Tech Buildings – These are the more chic and modern kind of industrial buildings where most areas are enclosed and air-conditioned. These buildings cater to more technologically advanced industrial activity and R&D.
  • Data Centres – These buildings house the bulk of networking equipment of companies. Think racks and racks of servers, switches and hard drives that cater to the networking needs of various companies.
  • Flatted Factories – The old school kind of industrial buildings with multiple floors, units and openly ventilated corridors. Due to the ventilated nature of such buildings, more intensive machinery industrial activities often occur in these buildings.
  • Business Park Buildings – These buildings are quite similar to high-tech buildings in the way they look and function. The main differences are that such buildings are located in areas deemed as “Business Parks” by the government. This means that Business Park buildings have better access to lifestyle amenities such as Food and Beverage outlets, Fitness Centres etc. This is all meant to cultivate a more vibrant work and life environment.
  • Stack Up/ Ramp Up Buildings – Such buildings comprise of larger factory units than those found in flatted factories. Additionally, stack up/ ramp up buildings often have vehicular access to every level of the building.
  • Light Industrial Buildings – As the name suggests, these buildings are catered for light industrial work. Such buildings also often have a much lower number of tenants as compared to other industrial buildings. This is due to the lesser amount of space available for rent.

2) High-tech buildings and data centres are the main growth segments

From MIT’s FY19/20 annual report, a significant portion of its revenue and assets under management (AUM) consist of high-tech buildings and data centres. As seen below, high-tech buildings and data centres count towards more than 50% of MIT’s AUM. Similarly, for its revenue, high-tech building contributed to around 38.5%.

MIT's AUM
Source: MIT Annual Report 2019/2020
MIT Revenue Segments
Source: MIT Annual Report 2019/2020

It should be noted that 38.5% of revenue from high-tech buildings in FY19/20 does not include revenue from the data centres in North America. This is due to the fact that MIT does not fully own its North America data centres, but rather hold a 40% stake in it. If included, high-tech buildings and data centres would amount to around 47.5% of MIT’s total revenue (inclusive of revenue from data centres in NA).

The growth of MIT’s high-tech buildings and data centres is pretty evident in the past 5 years. As seen below, revenue from high-tech buildings grew at a CAGR of 24.1% from FY15/16 till now. The revenue portion of high-tech buildings also almost doubled from 19.9% in FY2015/2016 to 38.4% in the current FY.

MIT high-tech revenue streams
Source: MIT annual reports

With MIT acquiring the remaining 60% stake in their US data centres, revenue from its data centres segment would continue to grow at an exponential rate. Revenue from high-tech buildings should also continue to grow with MIT’s redevelopment of its other industrial buildings into high-tech buildings.

3) Declining revenue in non high-tech buildings

Although the high-tech buildings segment has been performing extremely well for MIT, the same cannot be said for its other property segments.

MIT other property revenue streams
Source: MIT annual reports

As seen above, revenue growth has been flat or negative for MIT’s other property segments for the past 5 years. The continual revenue decline of MIT’s flatted factories segment is a slight concern as this segment still contributes quite a significant portion of MIT’s total revenue. Declining or flat revenue growth for its other property segments also remains unfavourable for shareholders.

WIth the Covid-19 pandemic, I expect the lacklustre performance of non high-tech buildings to continue in the near future.

4) Good top and bottom-line results

Despite the poor performance in MIT’s non-high-tech buildings segment, its revenue and net profit have been increasing year-on-year for the past 5 years. This is mainly due to the stellar performance of high-tech buildings compensating for the other property segments.

MIT top and bottom line
Source: MIT annual reports

As seen above, coupled with the year-on-year revenue increase, MIT has also been able to keep its operating expenses stable over the past 5 years. This has led to growth in all its bottom-line results such as net property income, net profit and more importantly, distributable amount.

For REITs, net profit is not as important a metric compared to distributable income. This is because net profit includes the appreciation or depreciation in value of properties that the REIT holds, which does not directly affect the amount that is available for distribution to unitholders.

As such, to determine if a REIT is performing well, I would look at distributable amount as it influences the amount of dividends that the REIT is able to give out.

Another aspect to look out for in distributable amount is to consider whether increases in distribution amount is due to acquisitions, rental growth or divestment/selling of properties. The best REITs to hold are those that grow their distributable amount mainly through rental growth and acquisitions, as that is the most sustainable method in the long run.

In the case of MIT, its growth in distributable amount has been largely due to its acquisition of properties (most notably in data centres).

5) Good returns for investors

With the growth in distributable amount, MIT has unsurprisngly provided good returns to its unitholders over the years.

Since MIT’s IPO, its DPU has been increasing every year. For the past 5 years, MIT’s DPU has increased at a CAGR of 2%. Coupled with the steady rise in its share price, MIT has provided great returns, in the form of dividend growth and capital gain, to its unitholders over the years.

In addition, MIT has also grown its book value over the years.

MIT Net assets
Source: MIT annual reports

With the increase in net assets and NAV, MIT’s stock has effectively gotten more valuable. This bodes well for MIT’s unitholders. After all, who would not like to own something which increases in value over time?

6) Healthy balance sheet

In addition to generating positive returns for its unitholders, MIT also has a pretty healthy balance sheet.

MIT debt levels
Source: MIT annual reports

As of FY19/20, MIT has a gearing ratio of 37.6% and interest cover ratio of 6.9 times. For its gearing ratio, it is still way below the current maximum regulatory limit of 50%. This means that MIT can continue to source for accreditive acquisitions to grow its portfolio and provide even more returns to unitholders.

With an interest cover ratio of 6.9 times, MIT can also adequately cover its financing costs should there be a dip in future earnings. This is especially important given that we have yet to see the full economical fallout from the Covid-19 pandemic.

Besides having a healthy gearing ratio and interest cover ratio, MIT also has a well spread out debt maturity profile over the next few years.

MIT debt maturity profile
Source: MIT annual report FY19/20

As seen, none of MIT’s borrowings matures in the coming year. This gives the REIT manager room to manoeuvre in dealing with the current uncertain economic climate.

However, with more than half of MIT’s current debt maturing between FY24/25 and FY25/26, it does bring up some risk there. Nevertheless, a 4-year gap from now till then gives the REIT manager time to better stagger the debt maturity.

The slight blemish in MIT’s otherwise healthy balance sheet is perhaps the rise in average borrowing cost over the years. This is slightly disappointing given that interest rates have decreased in the past and current year. Nevertheless, the borrowing cost still remains lower than the overall capitalisation rate of MIT’s properties.

7) Positive overall rental revision but concerns remain

For the past 5 years, MIT overall passing rental revision has been positive.

MIT average rental passing rate
Source: MIT annual reports

On the surface, one might conclude that MIT has done quite well with positive year-on-year rental revision. However, if we are to take a closer look this may not necessarily be the case.

If we look at the individual property segments, renewed rental rates has actually decreased in FY19/20.

MIT rental revision FY19/20
Source: MIT annual report FY19/20

Except for high-tech buildings, across all the property segments, the passing rental rate has decreased as compared to rental rates before renewal. Furthermore, new leases and leases after renewal are all below current rates across all property segments. Given the current economic climate, this is not surprising. The only question is if this would continue in the future.

To answer that question, we will need to look at past and future trends and make some informed predictions. However, doing so would be out of the scope of this article. To put it short, I predict that rental rates would continue to decline in the near future. This is mainly due to a larger supply of industrial space but a bleaker economic outlook.

8) Occupancy rates on a downward trend

Looking at the overall occupancy rate of MIT’s portfolio, one would realise that it has been decreasing over the years.

MIT occupancy rates
Source: MIT annual reports

Bar its high-tech buildings segment, occupancy rates in MIT’s other property segments has been steadily dropping over the years, despite a slight recovery in FY19/20. Needless to say, this is not ideal for a REIT as vacant units mean lesser property revenue. Moving forth, I expect occupancy rates to continue to decline given the state of the current economy.

Despite MIT’s declining occupancy rate, the weighted average lease expiry (WALE) for its properties has increased.

MIT WALE
Source: MIT annual reports

The increase in overall WALE can be attributed to MIT’s acquisitions of data centres in North America. Nevertheless, MIT’s Singapore portfolio has also seen improvements in its WALE over the past 5 years. With its declining occupancy rates, securing tenants to longer leases would be crucial in ensuring some sort of income stability for MIT.

Thankfully, MIT has a rather well spread out lease expiry profile.

MIT lease expiry
Source: MIT FY19/20 annual report

As seen, not more than 20% of gross rental income could be potentially affected by lease renewals in the coming years. While some might consider 17.7% to be on the high side, this is partially mitigated by lease expiry being spread-out within MIT’s various property segments.

Additionally, as MIT continues to grow its data centres segment, this percentage could even be lowered, which reduces the risk for current and potential investors of MIT.

9) Slight concentration risk

Besides just occupancy risk, there is also some concentration risk regarding MIT’s revenue. This risk can be categorized into namely geography, sector and tenant.

Geographical risk

Except for its stake in data centres in North America, all of MIT’s revenue comes from properties in Singapore.

MIT geography mix

This means that the state of Singapore’s economy has a huge influence on the earnings of MIT. Despite positive growth, Singapore’s GDP growth has actually been decreasing over the years.

Furthermore, due to its small size, Singapore does not have a vibrant domestic market as compared to other developed countries and heavily depends on trade to grow its economy. This means that in the event of a global recession, Singapore’s economy would take a longer time to recover as compared to other developed nations.

Not all is bad news however.

Although Singapore’s GDP growth for 2020 was predicted to be between -7% and -4%, there was growth in the manufacturing and information and communications sector. Thus, this could potentially cushion some of the economical impact of Covid-19 on MIT’s revenue.

Furthermore, having a REIT with majority of its properties in Singapore is not a bad thing as it mitigates foreign currency risk.

Sector risk

Looking at the trade sectors of MIT’s tenants, we can see that a little more than a third comes from the manufacturing sector. Other sectors such as information and communications and wholesale and retail trade also contributed quite a bit to MIT’s rental revenue.

MIT industry sector
Source: MIT annual report FY19/20

As can be seen above, telecommunications and precision engineering are the only two industries that contribute double figures in percentage towards MIT rental revenue. On one hand, this is good news given the digital transformation that Singapore is undergoing in its industry 4.0 masterplan. On the other, it can be risky to have two sub-sectors contributing slightly more than a third of gross rental revenue.

Regardless of which way you lean towards, expect both sectors to continue contributing a significant portion of MIT’s revenue. This is due to MIT’s growth in its high-tech building and data centres property segments.

Tenant risk

With precision engineering and telecommunications being the two sectors that contribute the most rental income for MIT, it is not surprising to see a majority of the top 10 tenants being from these two sectors.

MIT Tenant mix
Source MIT annual report FY19/20

As seen above, MIT’s top 10 tenants contributed to around 29% of gross rental income. HP Singapore Pte Ltd is the most noticeable as it is MIT biggest tenant, accounting for 8% of gross rental income. This obviously poses some risk to MIT in the event that HP default on their rent payment or choose not to renew their lease upon expiry. However, this remains highly unlikely in the near future.

Furthemore, with MIT’s purchase of the remaining stakes in its US data centres, the percentage should most likely shrink thereafter.

10) High current valuation

With its current price of $3.28 (as at 27th July 2020, yes I know I procrastinated a lot in writing this post), MIT has a price-to-book (PB) ratio of 2.02 and a dividend yield of 3.7%. To me, MIT’s current price is just way too high to even consider buying. So, what might be a good entry price then?

In calculating an entry price for a REIT, I like to use both the PB ratio and distribution yield as benchmarks. Do bear in mind that any of my stated entry prices is based upon my own judgement and risk appetite. Thus you can choose to take it with a pinch of salt😅. Once again, I take no responsibility for any future loss or gain should you choose to follow my stated entry price.

With that let’s start with using the PB ratio as a valuation reference.

Valuation using PB ratio

Using PB ratio to value REITs is by far the easiest method to consider if a REIT is overvalued or not. This is achieved by comparing the historical average PB ratio of the REIT to its current PB ratio. To get the historical PB ratio of a REIT, or any stock for that matter, I mainly use the Morningstar website.

MIT historical PB ratio
Source: Morningstar

From above, we can see that the average PB ratio of MIT for the past 5 years stands at 1.36. This was how I deemed that the current PB ratio of 2.02 for MIT was too high. At a PB of 1.36, the ‘fair’ value of MIT would be $2.20.

If I were to buy MIT, my entry price would be at a PB ratio of 1.36 or lower so as not to overpay for the REIT. As a personal rule of thumb, I would go 0.2 lower than the average historical PB ratio. Entering at a lower PB ratio gives me some leeway should my valuation be wrong. This allowance of error is also commonly known as one’s margin of safety.

Considering my own margin of safety, I would purchase MIT when its PB ratio is around 1.16. This thus results in an entry price of roughly $1.88 per unit.

Having covered the PB ratio of valuation, I will touch on the distribution yield method next.

Valuation using distribution yield

Distribution yield refers to the yield of the REIT’s distributable amount based upon a single unit of the REIT. For this valuation method, the distributable amount is used as it represents the REIT’s ‘real’ returns to its unitholders. Personally, I would also deduct any one-off gain from the distributable amount before calculating its yield.

Using data from MIT’s FY19/20 annual report and the current market price of MIT, the distribution yield is around 3.76%. How did I arrive at this value? Well, just divide the distributable amount with the current market capitalisation of MIT and express the value as a percentage.

To determine if the REIT is currently overvalued or not, the market distribtuion yield has to be compared to the REIT’s own distribution yield.

MIT cap rate
Source: MIT annual report FY19/20

Using the current valuation of MIT’s portfolio, the distribution yield would be around 4.5%. This works out to a ‘fair’ value of $2.68 per unit. As such, based on the current market distribution yield of 3.76%, we can deduce that MIT is currently overvalued.

When using the distribution yield to determine a suitable entry price, I would add 1% to the fair yield. Based on a distribution yield of 5.5%, my targeted entry price for MIT would thus be $2.19.

Which price to use?

As observed above, using two different valuation methods resulted in two different entry price. So which is the one that is more appropriate to be used?

To be honest, there is no right answer. Personally, I would treat my stated entry prices as a sort of reference and decide whether to buy again should the stock fall to these prices. In addition, I would also consider the current market conditions before purchasing any stock.

Based on current market conditions, my targeted entry price for MIT would be at $2.

By and large, when it comes to stock valuation, everyone will have different opinions about it. This is due to different methods of calculation to determine what the ‘fair’ value is. Heck even deciding an appropriate margin of safety differs between individuals.

At the end of the day, we just have to stick to a method which has performed consistently well and take it from there.

Concluding thoughts

Overall, I feel that MIT is a good REIT to buy due to its consistent financial results and long term growth prospect. As the economy continues to digitalise, there would be heightened demand for data and more advanced industrial activities, This puts MIT in good stead with its focus on data centres and high-tech buildings.

Although MIT long term future might be bright, there could be potential short term risks. These risks can be mainly attributed to the upcoming lease renewal for MIT’s non-high-tech buildings segments. In the current challenging economic environment, I foresee lesser renewals for the upcoming financial quarters for MIT.

Lastly, with MIT’s high current valuation, I personally feel this might not be the best time to invest in MIT. Potential investors in MIT would be better off having a little patience and wait for the price to fall.

With that said, MIT would remain on my personal watchlist of stocks to buy for now.

Agree or disagree with my analysis? Let me know in the comments!

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9 Comments

  1. Even though we know MIT is overvalued, there is still room for the share price to go up further to $3.50 or $4 to compress the yield more to 3% or even 2%. The data center assets are priced differently due to resiliency and long Wale, lowering the risk of the Reit. Look at the yields of major DC Reits Equinix and Digital Realty. 1 to 2+%

    1. Yes, you might be right that there is more room for the share price to go further.

      However, given the current distributable amount and the fact that MIT has recently withheld dividends, buying at the current price means you are exposing yourself to more risk than necessary.

      Lastly, with a depressed yield of 3 to 4%, investors have to ask whether they are ok with such a yield given that MIT is not yet a full data center REIT and downside risk remains in its industrial property segments.

  2. Hi,

    I am a REIT lover too, and have to say it is quite hard to find such a comprehensive post, please continue to write more REIT post.

    I have shared your post in FB group REIT Investing Community, though this FB group is still in the building stage.

    Btw, I am Vince, blog owner from REIT-TIREMENT.

    1. Hi Vince, thanks for the kind comments! I have also read some of your posts on REITs in Singapore and they were hugely informative. Keep up the good work!?

      Also a big thank you for including my post in the FB group.?

      Lastly, do you think there is any more info I can add to future REIT posts to provide more value to readers?

      1. Thanks for your compliment. The FB group is very small at this moment. If you do not mind, you can join and share your REIT post or topic directly in the future so that we can all learn from u.

        I think you have cover it quite completely, even more than I do, haha. So nothing to complain.

        1. Yup will definitely look to adding more REIT post to the FB group in the future.

          And don’t put me on a pedestal haha, I still have much to learn.

          Regardless, hopefully we can both cultivate a more vibrant investing community in Singapore.?

          1. Thanks, the FB group name is “REIT Investing Community”, let’s build a healthy REIT community together.

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