A Tale of Two Reits Part 2

Please read Part 1 first if you have not, link here: https://www.investingnote.com/posts/1470480

M Reit: $Mapletree Ind Tr(ME8U.SI)
S Reit: $Sabana Reit(M1GU.SI)

You may have guessed which are the Reits but I think that the difference in performance may have surprised you. It is a fair comparison as they are both in the same sector and country although MIT have expanded to US in Dec 2017. MIT faced the same macro economic problems as Sabana, excessive supply of new Industrial Properties in SG. This brings me to the most important criteria for selection of Reits, a strong sponsor.
Sabana’s sponsor was Vibrant Group (formerly known as Freight Links Express), a logistic company that’s struggling to remain profitable. They are unable to help the Reit secure new leases and even have difficulty renewing their own master leases with the Reit. On the other hand, the sponsor of MIT, Mapletree Investments has 46.3b in assets under management which it can inject to the Reit. MIT is not immune to the problems facing the sector, it faced negative rental reversions and loss of big tenants like Johnson & Johnson. However with the sponsors help, it has been able to secure lucrative BTS projects from HP and Equinix with super long leases. It is also able to make accretive acquisitions like the 14 data centres in US and the recent 18 Tai Seng mixed use development.
However before making a decision to buy, we still need to deep dive into the Reit’s results to know what are problems and future developments of the Reit. I wouldn’t touch Sabana although it’s cheap as they are not only losing tenants but also selling their properties which means declining DPU although there is short term gain. In Jan’19, they sold 9 Tai Seng Dr for more than twice the valuation but will lose the rental income. The latest DPU of 0.75 cents which is 14.8% lower than last year includes 0.12 cents from capital gains from divestment of properties which is unsustainable. In sharp contrast MIT purchased 7 Tai seng Dr through the sponsor and is spending 27m to develop the property into a data centre for Equinix under a 25 year lease agreement with annual rent increase! Which is better for a long term investor?
Having said that, Sabana share price have increased this year due to a possible takeover by ESR as the sponsor of ESR Reit recently bought shares in Sabana from the troubled Vibrant. This is speculative and may not happen as ESR have looked into acquiring Sabana before. The good news for Sabana is they have a new CEO and they have received permission from URA to carry out AEI to their crown jewel New Tech Park which would add 43k sqft of space to the property.
MIT has grown it’s quarterly DPU by 60% in 8 years, is it still able to continue this growth? I think it can this year for the following reasons.
1. Increasing occupancy of 30A Kallang Place. This is a major AEI where MIT converted an old JTC flatted factory to a spanking new glass office building, see photo. When this building was completed in Feb 2018, they had only one tenant, a child care centre. However the management persevered and the occupancy increased from 38% in Dec’18 to 86% in Mar’19. This building now has committed occupancy of 93%. The rentals at this Hi-Tech building are high, around 3.50 per sqft which is in the Business Park rental range. In Singapore, for new tenants there is a one to two months rent free period for fitting out of the unit before occupation. So the rentals would be coming in from this quarter onwards.
2. Full rent for HP Phase 2 BTS. For HP, instead of rent free period for fitting out, they opted for a rental discount of 13.9% for 18 months. The full rent would start from this current quarter. Note: HP is their biggest tenant.
3. Completion of 7 Tai Seng Drive. This Data Centre for Equinix is scheduled to be completed in 2H2019.
4. More accretive acquisitions. MIT’s current gearing is only 33.8%. For the recent acquisition of 18 Tai Seng, the Reit had enough debt headroom. There was no need to make any share placement to raise funds but the Reit went ahead to raise 200m which would made this acquisition non accretive. This tells me that there are more acquisitions lined up. The management have also shared that they intend to expand their US Data centre portfolio, they are probably looking for good acquisitions now.
MIT has also performed better than the more popular Ascendas Reit. In the last 5 years, MIT price has risen by 45% versus around 20% for Ascendas Reit. As the supply of new Industrial properties will drop sharply from this year, things should be looking good for this Reit baring a full fledged recession. I have been invested in this Reit since IPO, my only regret is that I didn’t accumulate more as this share price is very resilient and does not correct by much. Vested 15k shares, please DYODD.

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11 comments
Pizzaprata

Thank you @NinjaStars for your support and to the other readers for bumping up the post. The update of this post is at the following link: https://www.investingnote.com/posts/1530456

richdad

Reply to @InvestingNote : Thank you, much appreciated :)

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NinjaStars

This post got bumped up after several - the 3 below me - people helped to bump it with their comments.

As usual, always a joy reading your analysis. 1 pizza for you!

leesheauchyn

Thank you for sharing.

sapbasis

Thank you for sharing

Spinning_Top

Thanks for sharing


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$Mapletree Ind Tr(ME8U.SI) MIT AGM Update

Attended the MIT AGM this week. Here are some of the information that I gathered from the meeting that you won’t find in the Annual Report.
1. Committed occupancy of 30A Kallang Place have reached 100%. As mentioned in my previous post: https://www.investingnote.com/posts/1470981, this property is the main driver of MIT’s DPU growth this year with the occupancy growing from 38% in Dec’18 to 86% in Mar’19.
2. Committed occupancy 18 Tai Seng has increased from 94.3% at acquisition to 97.4%.
3. Data Centre BTS for Equinix was completed on 3 Jul 2019. There’s a 2 month fitting out period so the rental income will commence in September.
4. MIT is very close to signing a new tenant for The Strategy which would lift the occupancy to 85%. This was revealed after some shareholders expressed concern over the occupancy which is at 72% after Johnson & Johnson left in 2017.
All of the above will ensure MIT DPU’s continued growth this year. Also with their current gearing at 33.8%, the CFO said that they have a debt headroom of 500 million before hitting 40% leverage which gives them plenty of ammo for acquisitions. However the Chairman has expressed caution on any new acquisitions given the state of the world economy.
MIT recently announced their biggest redevelopment project, Kolam Ayer 2. Like 30A Kallang Place, this would bring significant growth to MIT as the project would increase the GFA by 360,000 sqft. Furthermore as a Hi-Tech building it should command rents at least 75% more than current. However first there must be pain before gain. The existing tenants would need to move out, currently the Kolam Ayer properties account for 1.8% of MIT’s Gross Revenue. MIT will be providing incentives for the existing tenants to move into other MIT properties and they have been successful for around 50% of GRI for 30A Kallang Place. However due to incentives like Rent Free Period, I estimate that the DPU will be impacted by around 2.3% initially when the tenants move out in 2H2020.
So if you like to take profit, I reckon that May 2020 will be a good time.

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$Mapletree Ind Tr(ME8U.SI) has closed an all time high of 2.24. To sell or not to sell. As I mentioned in my previous post on MIT: https://www.investingnote.com/posts/1470981, this is a Reit that grows it's DPU continuously. At 2.24 it will give a yield of at least 5.5% so I would still be keeping it. Having said that, if the market goes crazy and the yield compressed to below 5%, I will sell. From this rally on strong reits, I think it is possible to reach this level which is 2.50 for MIT.
Although it's a good Reit, the reason to sell would simply be there will be other higher yielding options available. Not all Reits rallied this time. One Reit that makes a compelling buy is $ManulifeReit USD(BTOU.SI)
It has a portfolio of Class A Office buildings in USA and currently gives a yield of 7% which is much higher than the Office Reits in Singapore that yields below 4.5%. Moreover it's properties are FREEHOLD! Although you will be exposed to forex risk but the USD is one of the strongest currencies in the world and it actually appreciated against the SGD in the past 5 years. The US economy actually performed better than Singapore's GDP growth in the last quarter! MUST recently completed an accretive acquisition on 13 May so the yield will be even better, the DPU should go up in the next two Quarters distribution.
One possible reason for the laggard share price is the possible changes in the US tax regulations but I think this is an unlikely event. Please DYODD, vested 40k shares.

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$Mapletree Ind Tr(ME8U.SI) performed very well as I expected in my post https://www.investingnote.com/posts/1074768
DPU for the quarter is a record high of 3.01. If you exclude the one off compensation due to lease termination by J&J last year, the DPU increased by 6.4% yoy.
The good news is that Kallang Place now has 75% of NLA committed which would be taken up from January 2019. Together with the Tai Seng development which would complete end 2019, this would ensure the REITs continued growth. Furthermore the REIT is looking to add more overseas data centers to their portfolio.
The only thing is the price didn't fall during this recent correction for me to accumulate more ;)

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Expiry:
Target Price
$2.1
(+7.69%)
NOW:

$Mapletree Ind Tr(ME8U.SI)
Just a quick one as I am overseas. Have been holding this REIT since IPO and it has been my best performing REIT. They have been increasing their DPU every year without any Rights Issue. So will they be able to continue with their performance in the current oversupply market for industrial properties?
I believe they still can despite losing a major tenant HGST (9th largest, ~1.1% of GRI) last quarter so the Singapore portfolio occupancy of 87.8% is expected to dip further for 2QFY18/19.
MIT's largest tenant HP have been paying a one-third discount on the rent for Phase 1 of the HP BTS project. They will be paying full rent from May 2018. Also another BTS project, Sunview Data Centre has TOP and should start contribution for this Quarter.
Finally for Kallang Place, they had 40% pre-commited tenants on TOP in February. The free fitting out period for these tenants should be over and rentals would have started in June 2018.
So hopefully with all these MIT will release good results this evening. Good luck to all vested.

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