13 things I learned from the 2017 Mapletree Industrial Trust AGM

Mapletree Industrial Trust (MIT) (SGX: ME8U) is a REIT with a diversified portfolio of 86 industrial properties located in Singapore. The properties have a total gross floor area of 20.1 million square feet and include flatted factories, hi-tech buildings, business parks, and light industrial buildings. As at 31 March 2017, MIT’s portfolio is valued at S$3.7 billion.

While the Singapore economy grew 2.5% year-on-year for the second quarter of 2017, the industrial sector remains challenging due to continued new net supply of industrial space and global trade uncertainties.

How will this affect MIT since it is currently an entirely Singapore-focused industrial REIT? I went to the 2017 Mapletree Industrial Trust AGM to find out more:

1. Gross revenue increased 2.7% year-on-year to S$340.6 million and net property income (NPI) increased 4.8% year-on-year to S$256.8 million. This was driven by higher rents achieved across MIT’s portfolio and the initial contribution from Phase One at 1 Depot Close (Hewlett Packard’s new Singapore headquarters) which was completed 21 October 2016.

2. Distributable income rose 3.6% year-on-year to S$205.0 million and distribution per unit rose 2.2% to 11.39 cents. Net asset value per unit increased 2.9% to S$1.41. Based on MIT’s closing unit price of S$1.88 (as at 21 July 2017), MIT is trading 33.3% above its book value and its current distribution yield is 6.1%.

3. Gearing ratio as at 31 March 2017 is 29.2%. Weighted average debt to maturity is 3.5 years and interest coverage ratio is 7.9. 74.9% of MIT’s borrowings are hedged at fixed interest rates. Average cost of debt rose 200 basis points to 2.6% — CFO Ler Lily explained some interest rate swaps expired and were replaced with new hedges at slightly higher interest rates that the market commands now.

4. Weighted average land lease is 39.3 years. 5.9% of MIT’s land leases (based on land area) will expire in 20 years or less. But CEO Tham Kuo Wei explained that 4.5% have an option to renew the land lease with only the balance — situated in the Kallang Basin 1 and 2 Clusters — left with no option. He reassured unitholders that the management is keeping an eye on this moving forward.

5. Portfolio occupancy rate fell to 92.4% (from 94.1% in 2016). MIT’s light industrial buildings segment saw the largest drop in occupancy from 99.9% in 2016 to 92.5% in 2017. The CEO explained that the master tenant at Changi South decided not to renew its lease after expiry and it took a bit of time for MIT to find replacements, hence the dip for light industrial buildings segment in FY2017. Weighted average lease expiry is 3.1 years.

6. While occupancy rates have dipped slightly, MIT’s average passing rent rose to S$1.91 per square foot and has increased steadily over the last five years. The CEO highlighted the good rental rate secured at 1 Depot Close from Hewlett Packard. Hewlett Packard is now MIT’s largest revenue contributor at 5.3%. However, another major tenant, Johnson & Johnson (which contributes 2.2% of revenue), announced they will be vacating its premises in September. A unitholder raised his concerns about this and the impact on the portfolio. The CEO agreed there would be some impact but said this was “business as usual”. He recounted that Credit Suisse had previously vacated a larger space and the gap took some time to fill, but the diversification and resilience in MIT’s portfolio means the Trust has continued to deliver growth in revenue and distributions regardless.

7. MIT has steadily grown its hi-tech buildings segment from four years ago and the segment now comprises 28.8% of MIT’s portfolio value. The management realised there was a limit to the amount of organic growth MIT could achieve from rent reversions alone and, therefore, sought a new area of growth in high-tech, high-spec buildings. The S$226 million redevelopment of 1 and 1A Depot Close is a case in point. The property is a built-to-suit facility for Hewlett Packard comprising an eight-storey and 11-storey high-tech building. It is fully leased out to Hewlett Packard for 10.5 + 5 + 5 years with annual rental escalations.

8. A unitholder shared his concerns that one single tenant, Hewlett Packard, now contributes 5.3% of gross revenue. Chairman Wong Meng Meng said that MIT is well aware of the risk of having such a large tenant if they were to leave. But it’s important to weigh the situation and there are also benefits to having one large tenant occupying one large property – it is easier to negotiate the rents, etc. To mitigate the risk, the chairman said it is important to find “a good a tenant as you can find” and Hewlett Packard is a very strong tenant. The building is also built to their specifications and will give them reason to stay for a long time. The CEO shared that MIT shouldn’t have a problem finding a replacement if Hewlett Packard ever decides to leave – the property has a long land lease (51 years left) and the building is brand new. He added that some of MIT’s much older buildings still enjoy over 90% occupancy rates.

9. Tenant retention rate is at 71.0%. The CEO shared that a rate that is too high means that rents are being priced too low. For example, MIT’s retention rates were at 80-85% when its rents were artificially constrained when the Trust first IPOed. He added that a retention rate of 70-80% is a good balance between keeping existing tenants and finding new ones at same or higher rents.

10. MIT is undertaking a S$77 million asset enhancement initiative (AEI) at 30A Kallang Place. The AEI will see the development of a new 14-storey building built over an existing open-air carpark and add an additional 336,000 square feet in gross floor area. MIT is also developing a S$60-million six-storey built-to-suit data centre in the west of Singapore. The building is already fully committed to an established data centre operator for an initial 10-year lease with staggered rental escalations. The chairman added that, whenever possible, MIT sounds out possible tenants before undertaking an AEI, so that a property has ready tenants once the AEI completes.

11. MIT divested 65 Tech Park Crescent for $17.69 million. The sales price is equal to the book value of the property and above the original acquisition price of S$13.2 million. The CEO mentioned the property has 36 years left on its land lease and only contributes 0.3% to MIT’s gross revenue.

12. Since MIT’s portfolio of properties are entirely in Singapore, a unitholder asked if the management was looking at expanding overseas. The chairman explained that MIT won’t expand overseas for the sake of doing so but only if there are viable opportunities at the right price. But price isn’t the only factor, the management also needs to consider a country’s political stability, whether a tenant is reliable and will stay long-term, and whether it makes operational sense for MIT to manage a single property in a foreign country. He added that even though Singapore is a small market, all of MIT’s growth thus far has been local. In fact, Singapore has advantages when it comes to attracting big investors in the high-tech building segment: the country is a business and commercial hub, politically stable, and has virtually no blackouts/brownouts. While other countries may have their advantages in other industrial segments, the chairman said that MIT must move ahead in order to stay relevant and reduce its reliance on older industries.

13. A unitholder asked if MIT ever considered adding solar panels to the rooftops of its properties in accordance with its green policy and to lower energy costs. The chairman revealed that the management has looked at the issue, but not in great detail. He shared that the HDB considered adding rooftop gardens and solar panels to HDB flats 10 years ago, but solar panel and battery technology wasn’t advanced enough then. If MIT decides to add solar panels, it will have to do so at a large scale. The unitholder helpfully suggested leasing rooftop space to companies who rent the space to place their own solar panels and the chairman said he would bring the matter up to the board.

Liked our analysis of this AGM? Click here to view a complete list of AGMs we’ve attended »

Adam Wong is the editor-in-chief of The Fifth Person and author of the national bestseller Lucky Bastard! which made the Sunday Times Top 10 Bestseller’s List in 2009 and Value Investing Made Easy which made the Kinokuniya Business Bestseller’s List in 2013. In 2010, he appeared on U.S. national television on the morning show The Balancing Act. An avid investor himself, Adam shares his personal thoughts and opinions as he journals his investing journey online.

4 Comments

  1. Siew

    July 24, 2017 at 10:40 am

    Dear Mr Adam Wong, I like reading your article “13 things I learned from attending Mapletree Industrial Trust AGM 2017”, although I don’t hold that stock but may consider taking up a small position. Now I have to change my mind after getting the facts from your article.
    I did not click “like” because of the viral effect of Facebook – my friends, relatives, etc would be able to see it and I don’t like that to happen. I would rather email my thoughts to you and the rest of the team “THE FIFTH PERSON”

    • Adam Wong

      July 24, 2017 at 11:34 am

      Thanks Siew.

      Haha sure. You’re free to comment here or email us with your thoughts and questions.

  2. Warren Tan

    July 24, 2017 at 6:28 pm

    I invested in MIT thru Standard Chartered, and hence couldn’t attend the AGM. It’s a pity AGM minutes aren’t commonly published, really appreciate ur nice summary of the AGM.Thanks!

    I have always wondered about MIT’s plan to venture overseas. It’s reassuring to know management is weighing it carefully instead of just following the crowd.

    Hard facts aside, what’s ur first impression of the management team? Are they motivated and cohesive?

    • Adam Wong

      July 25, 2017 at 3:24 pm

      Thanks Warren. You’re most welcome.

      Yes, my impression of the board and management is that they’re honest and motivated to do a good job for unitholders.

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