Date of Report: 3 October 2024
Broker: UOB Kay Hian

Acquisition of Mixed-Use Facility in West Tokyo

Mapletree Industrial Trust (MINT) has entered into a sale and purchase agreement to acquire an effective interest of 98.47% in a mixed-use facility located in West Tokyo, Japan, for ¥14.5 billion (S$129.8 million). This acquisition represents a 3.3% discount to the independent valuation of ¥15 billion. The facility consists of a data centre (28%), back office and training facilities (48%), and an adjacent accommodation wing (24%).

Potential for Redevelopment

The mixed-use facility has the potential to be redeveloped into a multi-storey core and shell data centre. It is expected to have the capacity for 30-40 MW of IT workload, with a redevelopment cost estimated at S$200-300 million. The redevelopment could enhance the yield on cost to 5.5-6.0%, offering significant potential for increasing returns.

Strategic Location in West Tokyo

The property is situated on a 91,200 square feet freehold site in Tama-shi, West Tokyo. This area is a key data centre hub within Greater Tokyo, which accounted for 40% of the total live IT supply in the region. Demand for data centre space in Greater Tokyo is projected to grow at a compounded annual growth rate (CAGR) of 9.3% from 2023 to 2033, driven by cloud service providers seeking wholesale colocation and build-to-suit projects.

DPU-Accretive Acquisition

According to management, this acquisition is expected to be distribution per unit (DPU) accretive by 0.4-0.5% before any redevelopment. The acquisition will be funded by Japanese yen-denominated borrowings, with an all-in cost of 1.7-1.8%. Upon completion, aggregate leverage for MINT is expected to increase from 39.1% to 39.8%. The acquisition is anticipated to be completed by December 2024.

Growth in Data Centre Portfolio

MINT continues to focus on expanding its presence in the data centre market, aiming to increase geographical diversification in established data centre hubs across Asia Pacific (such as Hong Kong, Japan, and South Korea) and Europe (including London, Dublin, Frankfurt, Amsterdam, and Paris). The Trust’s exposure to Japan will rise from 5.1% to 6.4% of its assets under management (AUM) following this acquisition.

Occupancy and Leasing Updates

MINT has secured Vanderbilt University Medical Center as a replacement tenant for its data centre in Brentwood, Tennessee. This lease has a long duration of 30 years, with annual rental escalations of 2%. Occupancy for MINT’s data centre portfolio improved by 1.5 percentage points quarter-on-quarter to 89.2% in the first quarter of FY2025.

Positive Financial Outlook

MINT’s financial performance is expected to benefit from the acquisition and redevelopment opportunities in Tokyo. The acquisition is projected to contribute to steady revenue growth and enhance the Trust’s portfolio yield. The potential redevelopment of the Tokyo facility into a data centre could also significantly increase the returns on investment.

Target Price and Recommendation

UOB Kay Hian maintains a “BUY” recommendation for MINT, with a target price of S$3.05. The recommendation is based on a discounted dividend model (DDM), with a cost of equity of 6.75% and terminal growth of 2.2%.