Mapletree Industrial went into a joint venture with its sponsor, Mapletree Investment Trust, to acquire a portfolio of 10 Powered Shell Data Centers. The properties are valued at USD 557.3 million. The Joint venture in turn went into another Joint Venture with Digital Realty, 8th largest publicly traded REIT in the US, to invest in three turnkey data centers.
For the 10 Powered Shell Data Centers, Mapletree Industrial will not have to look for new tenants as these properties have been fully leased. They will also provide a net operating income of USD 37 million in 2020, which will equate to about a 6.6% cap rate. Digital Realty will help to transition the ownership of the data centers.
The Powered Shell Data Centers and the Turn Key Flex are medium to large deployments. These data solutions take longer to implement and have longer contracts that range from 5-10 years.
The newly acquired portfolio is relatively stable given the long WALE of 9.1 years. There is also an inbuilt rental reversion of more than 2%. However, there are some risk to this transaction that we feel need to be managed.
- 3 out of the top 10 technology company makes up more than 50% of the Joint Venture’s Gross Rental Income.
- More than 90% of JV’s Gross Rental Income will be coming from Triple net lease.
High concentration of tenants
Having 3 companies account for more than 50% of the gross rental income puts the joint venture in a lesser position when it comes to rental negotiations.
Triple Net Leases
Given that the Gross Rental Income is coming from Triple Net Leases, it will appear that the joint venture will continue to pay Digital Realty a management fee. As the agreement is for Digital Realty to continue its services for a transitional period, it is operationally unclear if Mapletree will be able to successfully build its on the ground know how in managing these large hyperscale datacenters
Financing
Mapletree Industrial Trust certainly got a boost from its sponsor through the latter’s participation in the joint venture. The entire acquisition will amount to around USD 1.3 B, of which Mapletree Industrial’s share is USD 694 million.
Of which, USD 250m will be raised through an equity raising, and the remaining 60% will be funded by debt. This will cause Mapletree Industrial Trust’s pro forma aggregate leverage to increase to 38.5%.
While MINTSP is an established name with a great track record, given the risk of leverage going wrong, it helps to look at the debt maturity profile to check if management can comfortably roll their debt.
Is the Deal Distribution Accretive?
Of all the questions asked, one of the key questions will be whether the deal was distribution accretive. This is majorly important as it will provide support both for the equity raising as well as help to attract the marginal buyer to acquire units in the REIT.
The deal was structured in a way that creates a 3.5% increase in distributions per unit. Hence management estimates that DPU will increase form 12.16 cents to 12.58 cents.
