Mapletree Industrial Trust’s Proposed Acquisition: Here’s What You Should Know

The Acquisition

Fresh off their acquisition of Mapletree Redwood Data Centre Trust (MRDCT), Mapletree Industrial Trust (SGX: ME8U), or MIT, has announced another acquisition proposal, this time for a data centre and office property in Virginia, USA.

The new target is valued at between US$205 million and US$266 million.

The data centre cum office sits on freehold land and already has an existing tenant.

According to MIT’s announcement, the tenant is a “multinational company with strong credit standing”, and the lease is for at least five years.

Strong growth prospects

The quick succession of data centre acquisitions demonstrates MIT’s bullishness on the data centre segment and demonstrates the resilience and prospects of the data centre segment amid the pandemic, which has accelerated digitalization.

According to research from Ericsson, global mobile data traffic is expected to grow by 31% per year.

The rise in digital traffic is expected to drive enterprise spending on cloud infrastructure, which is projected to grow 22% annually over the next five years.

The two trends above translate to a greater appetite for data centres.

The proliferation of 5G technology, which generates 2.5 times more traffic than 4G connections, will also help to bump up demand for data centres.

Clearly, MIT is trying to tap on the demand for data centres.

If the proposed acquisition for the property in Virginia goes through, data centres will form 41% of MIT’s assets under management (AUM), up from the current 38.5%.

Like MIT, other real estate investment trusts (REITs) are also bolstering their data centre assets.

In May 2020, Keppel DC REIT (SGX: AJBU) announced acquisitions of the remaining leasehold assets in Dublin and Kelsterbach, which forms 7% of their AUM.

Cromwell European REIT (SGX: CNNU) also revealed in July 2020 that they would be co-investing in data centre projects in London and Frankfurt.

Together, the two assets have a capacity of 400 megawatts, larger than the entire demand for European data centres in 2019.

Portfolio Resilience

Beyond the enticing growth prospects, MIT unitholders will also be pleased with how this acquisition will shore up the stability of the REIT’s portfolio.

Freehold properties would form 55.9% of MIT’s AUM, up from 51.8%.

The higher ratio reduces the uncertainty that the REIT might be unable to renew their land lease, and instead, allows it to have complete and total ownership of the property.

It also ensures that the property is less likely to depreciate in value over time, unlike a leasehold property that tends to lose value as the lease approaches expiry.

Furthermore, the new tenant will contribute 2.7% of MIT’s gross rental income, making it the fifth-largest tenant in MIT’s portfolio.

The addition also reduces MIT’s exposure to its largest tenant to 7.2%, down from 7.4% pre-acquisition.

MIT’s weighted average lease expiry (WALE), a key metric for REITs, will also be lengthened by the acquisition, inching up from the previous 4.2 years to an expected 4.3 years as of 30 June 2020.

The deal is also expected to be accretive to the REIT’s distribution per unit (DPU) based on pro-forma historical impact.

The announcement of this proposed acquisition by MIT is in line with its strategy of investing in diversified assets that have long-term growth potential.

It will also enhance MIT’s income stability in the short term, making it a more attractive REIT to invest in.

While the finer details of the deal have yet to be announced pending final discussions over the terms, it definitely looks like a promising transaction worth keeping an eye on.

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Disclosure: Herman Ng does not own shares in any of the companies mentioned.

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