The Second Largest REIT Holding in my Portfolio- Mapletree Industrial Trust.

As shared in a previous post, Parkway Life REIT is the largest REIT holding in my portfolio.  Today I am sharing why I am comfortable with Mapletree Industrial Trust (MIT) being the second largest REIT holding in my portfolio.

Although MIT is regarded as a data center REIT, unlike Keppel DC REIT (KDR) and DigiCore REIT (DCR) which are 100% focussed on data centers, MIT has only approximately half of their asset under management being data centers as of 2022.  The remaining assets under management include Hi-Tech Buildings, Business Park Buildings, Flatted Factories, Stack-up/ Ramp-up Buildings and Light Industrial Buildings.  Recently, their share price had experienced downward pressures due to several factors.

1)    Data Centers are highly correlated with the technology sector and even cryptocurrencies. With the NASDAQ falling into the bear territory this year and the “crypto winter” that is still ongoing, they will pose negative sentiments around these REITs.

2)    The news of the 5th largest tenant of DCR declaring bankruptcy definitely spooked investors.  This is especially scary as the “demise” of Eagle Hospitality Trust still lingers in the memories of many retail investors.

3)    Rising energy costs exert cost pressures for these REITs, as data centers generally consume more electricity than other REITs.

4)    Rising interest rate environment still send negative sentiments to many investors towards REITs, even though historical data usually show otherwise, as most REITs hedge their borrowings to fixed rates.  However, do note that DCR has only fixed rates on 50% of their total borrowings.

5)    According to the Financial Times, hedge fund manager Jim Chanos' is starting a new fund that takes short positions on data center REITs.  His negative sentiments towards such REITs is because he believes that cloud service providers such as Amazon Web Services, Google Cloud Platform and Microsoft Azure prefer to build their own hyperscale data centers based on their own design.  This could in the end, convert the 3 main customers to become the 3 main competitors to these REITs.

So what gave me such confidence to continue holding on to MIT, and even consider gradually adding on shares by reinvesting dividends.

1)    MIT's share price has been the most stable out of the all data center REITs listed on SGX.

Since its IPO, MIT has been growing, and its share price has risen gradually and steadily.  If we ignore the period of abnormal spike in its share price during the 2020 pandemic, the current share price still reflects a steady upward trend in share price.  Comparing with other data center REITs, from the high in July 2020, MIT's price retreated by 17.8%, while KDR's price fell by 34.2%, almost double compared to MIT.  Year to date, MIT's price retreated by only 1.5%, while KDR and DCR retreated by 20.6% and 29.6% respectively.  This shows the resiliency in MIT's share price, and the confidence that investors have on the manager of MIT.

2)    Diversified Portfolio of Assets and Tenants

As only half of its asset under management is in data centers (which is planned to increase to 66% in future), with the remainder being traditional properties like industrial buildings and flatted factories etc, such diversification serves as a cushion to MIT's income, in case any particular type of properties show any negative reversion in rentals due to slowing/ diminishing demand.  In addition, the diversified tenant profile also helped to mitigate risks in case any tenant stopped their renewal for any reason.

3)    Improving Metrics Year-on-Year

As reported by MIT in their 2022 AGM, their revenue, income and distributions available has been improving yearly.  How far these metrics can continue to improve will depend on the manager.  Based on reports by CIMB and Maybank analysts, positive rental reversions of 2.9% and improving occupancy rates will help to support MIT's revenue and income.

4)    Well-Hedged Borrowings

An estimated 72.3% of the REIT's total debt has been hedged into fixed rates.  Hence, even if interest rates continue to rise, the impact on its debt will be cushioned, and the erosion on distributions per unit will be minimized.

So here it is.  With all these diversifications in place, and being a well-managed REIT, MIT definitely deserves the 2nd position in my REIT holding.  Will continue to reinvest dividends as long as fundamentals of the REIT remains strong, and harvest the compounded dividends in future.  Barista FIRE, here I come...!


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