Citi Research downgrades MINT to ‘neutral’ with lowered TP of $2.22

Citi Research analyst Brandon Lee has downgraded Mapletree Industrial Trust (MINT) to “neutral” from “buy” as he sees “increasingly subdued” acquisition prospects for the REIT due to the rising US debt cost.

MINT’s lack of asset purchases since May 2021 points to a challenging acquisition environment, notes Lee. This is due to negative cap rate spreads, he adds, citing US data centre yields of around 5% compared to the US dollar (USD) effective debt cost of around 5.2% to 5.5%. The expanding cost of equity was also cited as a reason behind the REIT’s lack of acquisitions.

In Lee’s view, MINT’s acquisitions, which have averaged $0.9 billion a year from FY2017 to FY2021, have been a key share price driver for the REIT.

MINT’s FY ends in March

“While the US overnight secured overnight financing rate (SOFR) and three-year swap rate have already expanded by 299 basis points (bps) and 324 bps, respectively year-to-date (YTD) [and] in-line with Fed Funds Rate’s (FFR) movement to 3.04% and 4.19%, the upward trajectory is likely to continue in the short term, which will further dampen acquisition prospects,” Lee writes.

He adds that Citi Research forecasts the US Federal Reserve (US Fed) to hike rates by another 150 basis points in the 4Q2022 to 1Q2023.

“On that note, we see [a] remote near-term chance of MINT acquiring the right of first refusal (ROFR) pipeline of US data centres (valued at [around] $1.1 billion) from its sponsor, with our estimates showing FY2022 pro-forma distribution per unit (DPU) dilution of 1%-2% assuming 70/30 debt/equity funding structure (resulting in gearing of 42% from current 38.4%), 5% net property income (NPI) yield and 5.2-5.5% debt cost,” Lee says.

In addition, the analyst expects MINT’s rent reversions in Singapore to slow as industrial rents tend to be flattish or may fall during economic slowdowns.

“With slowing Singapore GDP growth of 3.3%/2.0% in 2022/2023 (vs. +7.6% in 2021), we forecast factory/hi-tech/business parks (25%/22%/5% of MINT’s NPI) passing rent change of -3%/+2%/flat (with downside risk),” the analyst writes. “This suggests rent reversions could slow after three quarters of low-single-digit growth.”

Further to his report, Lee notes that the REIT may see a benign earnings growth trajectory with a three-year forward DPU compound annual growth rate (CAGR) of 1.5% stemming from the higher US interest cost, with around 79% of MINT’s debt in USD. This, he says, may be mitigated by the earnings upside from the strength in the USD (as US data centres make up 48% of MINT’s NPI) and high DPU yield.

“We think net asset value (NAV)-accretive redevelopments (including potential conversion of aged US data centres to life science assets and/or participation in [MINT’s] sponsor’s Hong Kong data centre project) and asset sales (with [the] return of gains to unitholders) could be share price catalysts, but [the] timing of [the] execution is uncertain,” the analyst says.

On this, Lee has reduced his target price estimate by 30% to $2.22, from $3.15 previously (as at his July 26 report) alongside a higher risk-free rate of 3.5% from 1.95% previously, as well as a higher cap rate of 6.3%, up 110 bps. His new target price implies a total return of 4% and a P/B of 1.2x, which is in line with the average P/B of 1.2x in FY2015 to FY2016 when no acquisitions were made by MINT.

He has also cut MINT’s DPU estimates for the FY2023 and FY2024 by 1.5% and 6.1% respectively to 14.01 cents and 14.11 cents on higher debt cost (+34/101 bps to 2.9%/3.6% vs. current 2.5%). He also sees MINT to see lower NPI margins at 74% and 76% for the FY2023 and FY2024 respectively, down by six and four percentage points.

Within the industrial Singapore REIT (S-REIT) sector, Lee has indicated his preference for MINT peer CapitaLand Ascendas REIT.

As at 12.31pm, units in MINT are trading 3 cents lower or 1.32% down at $2.25.

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