Mapletree Industrial Trust pays a 6.3% dividend yield – Will I buy this Data Centre REIT?

I’ve been getting quite a few questions on Mapletree Industrial Trust recently.

A data centre REIT, sponsored by Mapletree, with a 6.3% dividend yield – what’s not to like right?

I myself hold a position in Mapletree Industrial Trust, and it used to be one of my favourite REITs.

Since their pivot into data centres though, my interest in this REIT has cooled quite significantly.

So today I wanted to take an updated look at Mapletree Industrial Trust – to decide whether I should buy more, or sell my position in this REIT.

Mapletree Industrial Trust Property Portfolio

I’ve extracted Mapletree Industrial Trust’s asset breakdown below.

It’s about 56% data centres, and 44% Singapore industrial properties (this is post-acquisition of the Osaka Data Centres):

Of the Data Centres, the bulk of them (47% of the entire REIT) is in North America:

The rest is Singapore industrial properties – the original portfolio of Mapletree Industrial Trust before their data centre pivot:

Mapletree Industrial Trust valuations – 6.3% dividend, 1.17x Price to Book

Some quick valuations to frame the discussion.

At current price of $2.19, Mapletree Industrial Trust trades at:

• 6.3% Dividend Yield
• 1.17x Price to Book

Benchmarks against other comparable REITs below:

My biggest concern about Mapletree Industrial Trust – the 47% exposure to US Data Centres

Let me cut to the chase.

My biggest concern about Mapletree Industrial Trust.

Is their 47% exposure to US Data Centres.

Bankruptcy of Cyxtera – Mapletree Industrial Trust’s third largest customer

You may have seen the news this week of the bankruptcy of Cyxtera, which is:

• Mapletree Industrial Trust’s third largest customer
• Digital Core REIT’s second largest customer

Here’s the disclosure from Digital Core REIT to provide some colour:

• Digital Core REIT’s second-largest customer, a global colocation and interconnection provider representing approximately $16.3 million, or 22.4% of annualised rent, filed for bankruptcy protection in the state of New Jersey on 4 June 2023
• The customer is deployed across six data centres representing 26.6% of total portfolio value
• The customer occupies 100% of three shell & core facilities in Silicon Valley; 100% of two shell & core facilities in Los Angeles; and 1.5 megawatts, or 4%, of a fully-fitted facility in Frankfurt

And here’s the disclosure from Mapletree Industrial Trust:

The Tenant currently occupies space in eight Data Centres located in North America; of which, seven are held under the Mapletree Rosewood Data Centre Trust, a 50:50 joint venture with Mapletree Investments Pte Ltd. The Tenant has met its full rental obligations for the month of April 2023. It has partially fulfilled its rental obligations for the month of May 2023 and MIT is pursuing the balance of the outstanding rental payments for the month of May 2023.

As at 31 March 2023, the Tenant contributed about 3.2% of the monthly Gross Rental Income and was the third-largest tenant within MIT’s portfolio.

Mapletree Industrial Trust isn’t as badly impacted as Digital Core REIT

So comparatively speaking, the impact on Mapletree Industrial Trust isn’t as bad as Digital Core REIT – only 3.2% of gross rental income, vs 22.4% for Digital Core REIT.

This is a good case study of why you don’t want too much exposure to one tenant, and why investors like to look at the list of Top 10 tenants for tenant concentration.

But what happens next though?

Are more tenant bankruptcies going to come in the US Data Centre space?

How strong is Mapletree Industrial Trust’s US Data Centre Portfolio?

A bit of background on data centres is required here.

60.5% of Mapletree Industrial Trust’s US Data Centre portfolio is what is known as a “Powered Shell Data Centre”.

What is a “Powered Shell Data Centre”?

Powered shell data centers are:

“facilities with exterior construction completed, available power and connectivity, but with the interior left as raw space to be finished by the customer.

 This can be delivered as a floor/section of an existing building or as an entire building dedicated to one customer.

While there is no industry or market standard for what power/space capacity constitutes a powered shell data center, commitments are on the larger side – many starting at 5,000 square feet (500 kW) depending on the facility design and strategic intent of the operator.”

So if you look at the breakdown of a Data Centre below.

A Powered Shell Data Centre will have (1) Building Shell & Core, and likely (2) Electrical Systems and (3) HVAC / Mechanical systems.

What is the “moat” of a data centre? How vulnerable are they to competition?

So how secure the is the competitive “moat” of Mapletree Industrial Trust’s data centre portfolio?

If all you have is a building with electrical and cooling systems – frankly anyone else in the market can do that given enough time.

Contrast that with a retail mall right smack in the centre of a residential zone, or a Grade A office in the heart of the CBD, and the competitive moat is very different.

Because of this I’ve never been the biggest fan of data centre REITs.

I always thought that when it comes to data centres, I want to own the guy building the hardware that goes in (eg. NVIDIA, AMD, TSMC etc), or the guy building the software that goes in (eg. FAANG).

The guy that owns the buildings… meh.

Keppel DC REIT is different though

Not all data centre REITs are created equal though.

For example there’s a big difference with Keppel DC REIT – where the bulk of their data centres are leased out to Keppel who is the “Operator” – who brings in the expertise to run the Data Centre.

This provides much more stability in terms of the tenant, because you know Keppel is less likely to walk away and abandon the REIT (unlike a commercial tenant).

Also a bulk of Keppel DC’s data centres are located in Singapore / Asia, which comparatively is a less competitive market compared to the US.

So you can see why Keppel DC REIT trades at a premium to Mapletree Industrial Trust, despite being a smaller REIT.

How is the next 12 – 24 months going to play out for US Data Centres?

And as the bankruptcy of Cyxtera has shown, there are cracks starting to show in the US Data Centre space.

Will more cracks emerge in the next 12 – 24 months?

Or will the AI wave be sufficient to offset the slowdown in traditional tech?

Frankly – I don’t know the answer to this one.

But here’s the 3 year chart for Digital Realty Trust, one of the largest US Data Centre REITs (sponsor of Digital Core).

The market doesn’t look all that optimistic about the prospects for US data centres.

US Data Centres is a very competitive asset class – Can Mapletree compete?

To sum up my concern – US Data Centres are a very competitive and fast-moving asset class.

And the outlook for US Data Centres is not so clear over the next 12 – 24 months.

Traditional Tech is not doing so well, so the question is whether AI can come in and replace all that demand.

But a data centre that is fitted out for traditional tech would be heavy on x86 processors, while one that is heavily AI focussed would be heavy on NVDIA chips.

How seamless will the transition be?

Yes, Mapletree is a great real estate manager in the Singapore context.

But to go half a world away, and compete in one of the most competitive real estate markets in the world, in a fast moving and dynamic asset class, I’m not so sure if they’re up to it.

Valuations of Mapletree Industrial Trust don’t price in much room for things to go wrong

And at current valuations the market isn’t pricing in much room for things to go bad.

With Digital Core REIT priced at 50% book value and a 10% yield – you could argue that’s pricing in some bad outcomes.

With Mapletree Industrial Trust at 6.3% dividend yield and 1.17x price to book, you don’t really have a big margin of safety there.

If the US data centre portfolio underperforms, it’s not impossible to see further downside.

What about the Singapore Portfolio for Mapletree Industrial Trust?

For what it’s worth, I like the Singapore industrial portfolio of Mapletree Industrial Trust.

It’s the main reason I bought this REIT to begin with, before they made their big pivot over to data centres.

In any case, Mapletree Industrial Trust has reiterated their vision of having 50% – 60% of the REIT be focussed on data centre assets going forward.

So it doesn’t matter what you think about their Singapore industrial portfolio, you need to have a view on the data centres as well.

This just illustrates the risks that comes when a predominantly Singapore focussed REIT makes a big move to go overseas.

I’m looking at you Mapletree Commercial Trust…

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Mapletree Industrial Trust performance vs other Industrial and Data Centre REITs

For reference, I’ve charted the performance of Mapletree Industrial Trust against other notable REITs below, for the past 2 years:

• Purple is Digital Core REIT (Pure US Data Centre).
• Blue is Keppel DC REIT (Pure Singapore / Asia Date Centre).
• Pink is Ascendas REIT (Majority Industrial with some data centre).

Key takeaway is that:

1. Mapletree Industrial Trust’s performance is closest to Keppel DC REIT, which is surprising considering how different their portfolios are (US vs Singapore/Asia assets)
2. Ascendas REIT has outperformed Mapletree Industrial Trust with a predominantly industrial portfolio
3. Mapletree Industrial Trust is far outperforming Digital Core REIT though

I suppose the lesson here is that market likes Singapore industrial /data centre assets more than US data centre assets.

Will I buy Mapletree Industrial Trust at 6.3% dividend yield?

As shared above, my biggest concern with Mapletree Industrial Trust really lies with the 47% exposure to US Data Centres.

I genuinely don’t know how the next 12 – 24 months is going to play out for US Data Centres.

Even if you assume that AI can replace all the demand from traditional tech, you also don’t know how seamless or painless the transition will be.

And given how competitive and fast moving the US Data Centres space is, I’m not sure if Mapletree has the expertise to compete in that market.

No doubt they are one of the best real estate developers and managers in the Singapore context.

But going to the US and competing with other mega players on their home turf is a whole different story.

And at current valuations, it’s not really pricing in a lot of room for things to go bad.

Because of this I have cooled my interest in Mapletree Industrial Trust significantly since their data centre pivot, and I haven’t added to my position in a big way since.

I don’t think I’ve seen anything today that will make me change my mind on this.

I might just buy Ascendas REIT instead?

Considering that my original interest in Mapletree Industrial Trust was for the Singapore industrial assets rather than the data centre assets.

I’ve a good mind to just add to my Ascendas REIT position instead.

Ascendas REIT only has 8% exposure to data centres.

And 62% of the asset base is Singapore based.

At current price, you’re buying in at a 6% yield, and a 1.1x book.

For a REIT with almost double the market cap of Mapletree Industrial Trust.

Not sure why I would want to take the risk with US data centres.

In any case I’ve started buying REITs again given that we’re close to peak interest rates, and Patreons can see the list of REITs that I am buying.

Just to be clear… I’m not saying that Mapletree Industrial Trust is a bad investment

Just to be clear though.

I’m not saying that Mapletree Industrial Trust is a bad investment.

Who knows, maybe their US Data Centre portfolio does fantastically well in the next 2 years and this REIT soars to all time highs.

All I’m saying, is that I don’t know enough about the quality of the US data centre portfolio to make a call on this one.

And at current valuations, you’re not exactly getting a big margin of safety if things go wrong.

Like I said, I like REITs where we are in the cycle and I am buying, I’m just not sure if Mapletree Industrial Trust will be one of those.

Patreons can see the full list of REITs that I am buying, and how much of my portfolio I am allocating into REITs.

Mapletree Industrial Trust did a Private Placement at $2.212

In any case though, Mapletree Industrial Trust just did a private placement at $2.212.

At latest price of $2.19 you’re effectively buying in at cheaper than what those institutional investors bought at placement.

That might be sufficient to tempt some of you, in which case I leave you guys to decide for yourself if you’re comfortable with the risk-reward at this price.

This article was written on 9 June 2023 and will not be updated going forward. For my latest up to date views on markets, my personal REIT and Stock Watchlist, and my personal portfolio positioning, do sign up as a Patreon.

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