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www.jpmorganmarkets.com

Asia Pacific Equity Research

31 January 2020

Singapore Industrial REITs

Positivity in the midst of gloom

Singapore

REITs

Mervin Song, CFA

(65) 6882-7829

mervin.song@jpmorgan.com

Bloomberg JPMA MSONG <GO>

J.P. Morgan Securities Singapore Private

Limited

Terence M Khi

(65) 6882-1518

terence.ml.khi@jpmchase.com

Bloomberg JPMA TKHI <GO>

J.P. Morgan Securities Singapore Private

Limited

Cusson Leung, CFA

(852) 2800-8526

cusson.leung@jpmorgan.com

J.P. Morgan Securities (Asia Pacific) Limited

Ajay Mirchandani

(65) 6882-2419

ajay.mirchandani@jpmorgan.com

J.P. Morgan Securities Singapore Private

Limited

See page 23 for analyst certification and important disclosures, including non

US analyst disclosures.

J.P. Morgan does and seeks to do business with companies covered in its research

reports. As a result, investors should be aware that

the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this rep

ort as only a single

factor in making their investment decision.

Industrial REITs are our preferred sector within the S-REIT universe. We

believe industrial REITs are in a virtuous cycle, whereby their low cost of

capital enables accretive acquisitions that result in higher share prices and

greater accretion thereafter. We are also positive on their e-commerce and

datacenter exposure, with the sector relatively immune in the midst of the

coronavirus pandemic threat. Top picks: AREIT and MINT.

 In a virtuous cycle. With flattish rents across the different sectors, we

believe industrial REITs are best placed to deliver DPU growth via

acquisitions compared to other sectors, as their trading yields are at or

lower than target property cap rates. This was the basis of our initial

bullish thesis on the sector (link). As yields have compressed by 10-

50bps since then, this thesis has been strengthened further. Hence, we

believe industrial REITs are on the cusp of following KDCREIT’s

virtuous cycle, where investors are too fearful to stay on the sidelines.

We anticipate that AREIT/MINT/MLT will replicate KDCREIT’s

experience, with their yields approaching the low- to mid-4% level from

mid-4% to low-5% yields, as implied by our new PTs (6-14% higher, as

we assume a lower cost of capital and/or acquisitions). Index inclusion is

an added kicker for MLT/MINT, as discussed in our report REITifyng

the Singapore index.

 Best positioned to ride through pandemic threat. As discussed in our

report Time to bottom fish?, we believe industrial REITs are best placed

to handle the coronavirus threat, as their earnings are more resilient due

to their long WALEs and exposure to e-commerce and datacenters,

structural growth industries. Industrial REITs should also still deliver

DPU growth from announced acquisitions and the impact of the virtuous

cycle.

 Time for AREIT to catch up. AREIT has lagged other industrial REITs

due to the impact of the recent rights issue and concerns over the

expansion into the U.S. In our view, the 40-50bps yield differential

between MLT/MINT and AREIT is too wide. Given their smaller size,

MLT and MINT have the potential to deliver faster DPU. However, this

is balanced against AREIT’s larger scale and diversified portfolio, and

AREIT’s historically trading at a 50-60bps tighter yield than MLT and

MINT. With gearing at c.35% post-rights-issue, we expect the lack of

overhang from any equity-raising and positive news flow from

acquisitions as AREIT deploys its c.S$500m debt headroom (gearing

back up to 38-39%) to help close the yield gap. In addition, while select

U.S. markets face supply headwinds and an impact from the reduction in

avg. space per employer, as highlighted in our recent live call on the U.S.

office market (link), we are positive on AREIT’s U.S. exposure, which is

leveraged to growth in the technology and biomedical industries.

Table

: JPM industrial REIT coverage

REIT Rating

New PT

(S$)

PT (S$)

AREIT

3.65

3.45

KDCREIT

2.45

2.15

MINT

3.10

2.80

MLT

2.05

1.85

Source: J.P. Morgan estimates.

Asia Pacific

Equity Research

31 January 2020

Mervin Song, CFA

(65) 6882-7829

mervin.song@jpmorgan.com

Equity Ratings and Price Targets

Mkt Cap

Price

Rating

Price Target

Company

Ticker

($ mn)

CCY

Price

Cur

End

Date

End Date

Ascendas REIT

AREIT SP

8,297

SGD

3.12

n/c

3.65

Dec

3.45

n/c

Keppel DC REIT

KDCREIT SP

2,711

SGD

2.26

n/c

2.45

Dec

2.15

n/c

Mapletree Industrial Trust

MINT SP

4,480

SGD

2.77

n/c

3.10

Dec

2.80

n/c

Mapletree Logistics Trust

MLT SP

4,925

SGD

1.85

n/c

2.05

Dec

1.85

n/c

Source: Company data, Bloomberg, J.P. Morgan estimates. n/c = no change. All prices as of 30 Jan 20.

Industrial REITs

AREIT – Time to catch up. AREIT shares have lagged the STI and industrial REIT

peers due largely to concerns about potential expansion into the U.S. and

disappointment when the U.S. expansion occurred, funded with a rights issue.

However, with gearing of c.35% post-rights-issue, we believe any overhang from

another equity-raising or negative perception over expansion into a new geography is

no longer present. Combined with expected utilization of c.S$500m debt headroom,

we expect this positive news flow to act a re-rating catalyst for the stock. This should

help close the 40-50bps yield differential between AREIT and MLT/MINT. We

reiterate our OW rating with a higher PT of S$3.65 (previously S$3.45).

MINT – Catching the datacenter wave. The market has reacted positively to

MINT’s expansion into the datacenter market, with its yield compressing by

c.200bps from 6.3% at the start of 2019 to c.4.6% currently, given exposure to the

datacenter/cloud, which is in the midst of structural growth. With MINT now trading

at a 4.6% yield and further acquisitions of datacenters at high 5-6.5% NPI yields,

resulting in robust DPU accretion, we believe MINT is on the cusp of replicating the

success that KDCREIT, a pure-play datacenter REIT, has experienced. KDCREIT

shares have increased more than 50% over the last 1.5 years, as it was in a similar

situation to MINT currently, where its low cost of capital enabled it to make highly

accretive acquisitions, triggering a share price rally and yield compression that made

further acquisitions more accretive. Thus, we maintain our OW rating and raise our

PT to S$3.10 from S$2.80, as we impute a lower cost of capital assumption to

capture our belief that MINT is now in a virtuous cycle.

MLT – A winning combination. We believe MLT has three attractive

characteristics that should result in the continuation of 2019’s 46% rally: (1) being in

virtuous cycle, with its low cost of capital enabling DPU-accretive acquisitions; (2)

potential inclusion in MSCI Singapore; and (3) exposure to the growing e-

commerce/logistics sector. To better reflect our view that MLT’s strong ability to

deliver DPU-accretive acquisitions should trigger a share price re-rating and growing

investor interest in logistics/e-commerce exposure, we incorporate a lower cost of

capital. As a consequence, we lift our PT to S$2.05 from S$1.85. Maintain OW.

KDCREIT – Twin drivers of AEI and acquisitions. KDCREIT continues to build

on its twin growth drivers of AEI and acquisitions, with S$714m of acquisitions

announced in 2H19 and S$144m of upgrades completing in 2020. KDCREIT

continues to offer the brightest growth prospects, in our view, with FY20E/21E DPU

to rise 12%/14%. With KDCREIT leveraging its cost-of-capital advantage, we see

further upside from third-party acquisitions, coupled with organic growth via

upgrades. Maintain OW with a higher PT of S$2.45 (vs. S$2.15 previously), as we

adjust our FY20E/21E DPU by -1.5%/+3.0% on AEIs and a slight delay to

Intellicentre 3, and we also assume a forward S$200m acquisition. Maintain OW.

Asia Pacific

Equity Research

31 January 2020

Mervin Song, CFA

(65) 6882-7829

mervin.song@jpmorgan.com

Table 2: Industrial S-REITs peer comp

Price

ADTV

Bbg

Mkt ca

Jan

Pot.

JPM

P/B

DPS

rowth

3Y DPS

Yield

ode

(US$m)

(S$)

upside

rating

(S$)

(x)

(US$m)

FY19E

FY20E

FY21E

CAGR

FY19E

FY20E

FY21E

Ascendas REIT

AREIT

8,268

3.11

3.65

17.4%

2.13

1.46

28.9

0.3%

2.6%

6.8%

1.4%

5.0%

4.9%

5.2%

Keppel DC REIT

KDCREIT

2,663

2.22

2.45

10.4%

1.05

2.12

7.3

4.0%

12.0%

13.9%

9.9%

3.4%

3.8%

4.4%

Mapletree Industrial Trust

MINT

4,479

2.77

3.10

11.9%

1.51

1.83

10.7

3.6%

3.5%

5.8%

4.3%

4.4%

4.6%

4.8%

Mapletree Logistics Trust

MLT

5,078

1.82

2.05

12.6%

1.17

1.56

13.8

4.2%

2.6%

6.6%

4.5%

4.4%

4.5%

4.8%

Total / Wtd.

20,489

1.65

2.5%

1.9%

7.5%

3.9%

4.5%

4.6%

4.9%

Source: J.P. Morgan estimates, Company data, Bloomberg.

Rally expected to continue

Industrial REITs were among our two preferred sectors in our assumption of

coverage report (link), given their ability to deliver DPU growth via acquisitions and

exposure to e-commerce and datacenters, industries in structural growth. Our

conversations with investors suggest to us that investors have accepted our rationale

for industrial REITs trading at premium valuations and why historical average yields

and P/B multiples are not as relevant, given the change in asset composition over the

past few years.

Industrial REITs have been the best-performing sector since Oct-19, and we expect

them to continue to trade at a premium, given their exposure to structural growth,

superior ability to complete DPU-accretive acquisitions and changes in portfolio

position. We believe these factors should result in an extension of industrial REITs’

“winning streak” vs. other sectors. We reiterate our OW call on the sector. Our two

preferred picks with the industrial space are AREIT and MINT.

Figure 1: Industrial REITs have been the best-performing sector since Oct-19

Source: J.P. Morgan estimates, Bloomberg. Developers (CCT, CIT, UOL and FPL), Office (CCT, KREIT and SUN), Industrial (AREIT,

KDCREIT, MINT and MLT), Retail (CT, CRCT, FCT and MCT) and Hospitality (ART, CDREIT and FEHT). Past results are not an

indicator of future performance.

In a virtuous cycle

Yields have continue to compress, making acquisitions even more accretive

Industrial REITs have rallied around 10% on average since Oct-19, with forward

yields compressing 10-50bps. This makes potential acquisitions even more accretive

than they would have been three months ago. Thus, we believe industrial REITs are

now in a virtuous cycle, where DPU-accretive acquisitions result in a share price

rally that makes further acquisitions even more accretive. In addition, with their

95.0

100.0

105.0

110.0

115.0

Oct-19 Nov-19 Dec-19 Jan-20

Developers Office Industrial Retail Hospitality

Asia Pacific

Equity Research

31 January 2020

Mervin Song, CFA

(65) 6882-7829

mervin.song@jpmorgan.com

superior cost of capital, industrial REITs should increasingly be able to fund more of

their acquisitions with equity, rather than debt. This would provide additional debt

headroom to pursue acquisitions without having to rely solely on equity-raisings. We

anticipate that this may accelerate the pace of acquisitions and provide positive news

flow to sustain the share price rally over 2020.

Table 3: Compression in industrial REIT yields since Oct-19

Dividend

ield

–

Oct

Dividend

ield

–

Jan

Change in

ield

REIT

1FY

2FY

1FY

2FY

1FY

2FY

AREIT

5.0%

5.2%

4.9%

5.2%

0.1%

0.0%

MINT

5.0%

5.2%

4.6%

4.8%

0.4%

MLT

5.0%

5.1%

4.5%

4.8%

0.5%

0.3%

KDCREIT

4.0%

4.4%

3.8%

4.4%

0.2%

0.0%

Source: Bloomberg, J.P. Morgan estimates.

Table 4: Results in potentially higher DPU accretion

REIT Current trading yield

Trading yield after 3%

placement discount

Asset yields for potential

acquisitions

AREIT

4.9%

5.1%

5.5

7.0%

MINT

4.6%

4.7%

5.5

7.0%

MLT

4.5%

4.6%

5.5

7.0%

KDCREIT

3.8%

4.0%

5.5

7.0%

Source: Bloomberg, J.P. Morgan estimates.

MLT and MINT on the cusp of replicating KDCREIT’s highly virtuous cycle

The virtuous cycle is best illustrated by KDCREIT over the last few years, as its

yield has compressed from 6.8% at IPO to c.3.8% currently. At this stage, it is in a

strong position to complete DPU-accretive acquisitions by relying solely on equity,

given that acquisition targets have yields of 6% or higher.

With MLT and MINT now trading at 4.5-4.6% yields and in a sweet spot in terms

market cap (S$6-7bn), large enough to attract investor attention, but not too big for

acquisitions to make a material impact on DPU, we anticipate that they will

progressively be in a virtuous cycle similar to KDCREIT’s.

View through the lens of historical valuation range is less relevant now

Consequently, we believe historical yield and P/B multiple ranges, or even implied

NPI/NOI yields, will increasingly be less relevant. Furthermore, we expect investors

to focus on pegging the Singapore industrial REITs to overseas listed peers.

Therefore, investors who are cautious or have neutral ratings on industrial REITs or

who adopt the “expensive valuation” angle are likely to continue to miss the rally, in

our view. We believe investors will find it difficult to turn down an industrial REIT

offering new shares to fund an accretive acquisition, as seen in 2019.

Table 5: Level of oversubscription for industrial REIT equity-raisings in 2019

Date announced REIT

Equity

aised

(S$m)

Announced

forma

DPU accretion Level of oversubscription

Feb

MINT

201.0

0.7

3.1%

2.2x oversubscription. Upsized

from S$175m to S$201m.

Sep

KDCREIT

235.4

9.4

12.

9.3x oversubscription

Sep

MINT

400.0

3.5%

6.3x oversubscription.

Upsized

from S$350m to S$400m.

Oct

MLT

250.0

1.0%

>13x oversubscription.

Source: Company reports.

Asia Pacific

Equity Research

31 January 2020

Mervin Song, CFA

(65) 6882-7829

mervin.song@jpmorgan.com

Global M&A a re-rating catalyst

Another factor that makes historical P/B and yield metrics less relevant for industrial

REITs, especially datacenter plays, are the rising valuation multiples due to M&A

transactions. For example, we believe a key driver of the surge in KDCREIT’s share

price (KDCREIT, the top-performing S-REIT YTD, has risen 7.7% vs. S-REITs’

+2.4%) is the recent A$3bn transaction for AirTrunk in Australia (link) at a FY20E

EV/EBITDA multiple of 30x. While this is more reflective of M&A valuations for a

pure-play datacenter company, we believe KDCREIT offers comparative value at

19x EV/EBITDA vs. U.S. peers at 23x.

Table 6: Datacenter peer comps

Mkt

Price

Div

ield

DPU

rowth

FFO

ield

EV/EBITDA

ADTV

Jan

JPM

FY19E

FY20E

FY19E

FY20E

FY19E

FY20E

FY19E

FY20E

20D

Cty

REIT/c

ompany

Ticker

(US$m)

LCY

(LC)

(%)

(x)

Gearing

(US$m)

YTD

Keppel DC REIT

KDCREIT SP

2,663

SGD

2.22

3.4%

3.8%

4.0%

12.3%

3.9%

3.8%

21.4

18.5

31.4%

8.2%

Mapletree Industrial Trust

MINT SP

4,479

SGD

2.77

4.4%

4.6%

3.6%

3.5%

4.4%

4.5%

25.6

24.2

30.3%

6.5%

CyrusOne

Inc.

CONE US

6,974

USD

61.61

3.1%

3.4%

4.3%

9.4%

5.8%

6.4%

23.9

22.0

47.5%

5.8%

Digital Realty Trust

Inc.

DLR US

27,789

USD

127.63

3.4%

3.5%

6.9%

4.6%

5.1%

5.0%

22.7

23.4

46.7%

194

6.6%

Equinix

Inc.

EQIX US

51,396

USD

602.68

1.6%

1.8%

7.9%

8.0%

3.7%

4.2%

25.0

22.4

56.0%

223

3.3%

QTS Realty Trust

Inc.

QTS US

3,330

USD

57.18

3.1%

3.3%

7.3%

6.8%

4.5%

4.9%

24.0

22.0

47.0%

5.4%

CoreSite Realty Corp

COR US

5,711

USD

117.86

4.1%

4.5%

16.2%

9.8%

4.3%

4.5%

24.9

23.8

61.0%

5.1%

GDS Holdings

GDS US

8,065

USD

53.04

33.1

23.5

61.3%

2.8%

NEXTDC Ltd

NXT AU

1,743

AUD

7.48

36.1

32.1

47.5%

9.2

15.0%

21Vianet Group

Inc.

VNET US

1,086

USD

9.66

9.3

8.3

29.2%

4.7

33.2%

InterXion Holding NV

INXN US

6,930

USD

90.46

0.0%

3.0%

3.5%

23.2

20.5

57.0%

90.3

7.9%

USA

95,200

2.5%

2.6%

7.8%

7.2%

4.4%

4.6%

24.2

22.7

52.6%

185

Singapore

7,142

4.0%

4.3%

3.8%

6.8%

4.2%

4.3%

24.0

22.1

30.7%

China

9,151

30.3

21.7

57.5%

Netherlands

6,930

0.0%

3.0%

3.5%

23.2

20.5

57.0%

Australia

1,743

36.1

32.1

47.5%

15%

Source: Company data, Bloomberg, J.P. Morgan estimates. Past results are not an indicator of future performance.

What can halt the “unstoppable” industrial REITs?

We believe this “unstoppable train” – arising from the virtuous cycle of low-cost

capital that results in DPU-accretive acquisitions that trigger further share price

rallies, translating into better accretion for subsequent acquisitions – will stop when

the REITs’ market capitalizations are too large, making it progressively more

difficult to find a sufficient quantum of acquisitions to drive DPU accretion. This risk

is low to moderate for MINT, MLT and KDCREIT over the next two to three years,

in our view, given their market caps of only $3-7bn.

Another risk that could halt the virtuous circle is the acquisition of portfolios and

buildings that face major problems. Given that the majority of acquisitions made by

industrial REITs are located overseas with long WALEs, we do not foresee any

major vacancy issues, if at all, until three to five years’ time, when more leases come

up for renewal. A significant steepening of the yield curve, which is not our base

case in 2020, is also a risk. Finally, should the coronavirus become a global

pandemic with the knock-on effects of slower global growth, that would likely place

downward pressure on rents and occupancy.

Industrial REITs the most resilient sector in pandemic threat

In Time to bottom fish?, we espoused a strategy of first targeting sectors or REITs

where stock prices have corrected and/or there would be a minimal impact on

earnings if there were a slowdown in tourism or activities over a five- to six-month

period (it took six months for RevPAR to recover during the SARS/H1N1 episodes).

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