Sunday, January 4, 2015

Doing a stress test for Mapletree Industrial Trust

I recently added MIT to my portfolio.

A 7% yield for a blue chip Reit which I believed is sustainable, is good enough for me. I am not bothered by the fact that it is trading above NAV.

For my previous analysis, please see here.

I decided to do some stress tests. I am being realistic here, not conservative. You can apply a harsher test for bigger MOS.

First interest rate hike test.

126 mio to mature in FY 15, lets add 1% more interest cost for this amount.

199 mio to mature in FY 16, lets add 2% more interest cost for this amount

145 mio to mature in FY 17, lets add 3% more interest cost for this amount

1.25 mio + 4 mio + 4.35 mio = 9.6 mio extra cost.

Next occupancy loss.

The picture show industry occupancy rate as a whole, you can see vacancy rate has been creeping up except for business park. I like to buy when things are not so rosy to prevent shock. 

Next, stretching back to 2007.

Again, we can see the occupancy rate is already at a low of 90% but taking into the consideration the high available stock release into the system, it is safe to say that we can apply some further discount of 5%, and also 5% fall in rental rates.

We have

Flatted factories: 156.5 mio rev ->141 mio
High Tech: 44.4 mio -> 40.1 mio
Business Park: 50.1 mio -> 45.2 mio
Ramp up :42.1 mio -> 38 mio

Loss in revenue=29 mio
Loss in distribution = 29 mio * 0.75 * 0.75
=16 mio

Approximate total loss of distribution at 2017 or earlier = 26 mio

However, MIT has 2 BTS fully committed

Both are high tech building

BTS – Equinix: 385,000 sft
BTS – Hewlett-Packard: Increase of approximately 400,00 sft

Giving a 10% discount to spot rate, will yield $2.16 per month per square foot, which I think is a conservative enough rate in the next three year.

So we have 785000*2.16*12= 20.3 mio revenue

contribution to distribution = 20.3 * 0.75 * 0.75
                                            = 11.5 mio

Net impact on distribution = 26 - 11.5
                                           = 14.5 mio

1H distribution = 88 mio

Annualize it = 176 mio

Take away 14.4 mio, we will have 161.6 mio

Assume 10% dilution in the next 3 years due to DRP

We have have a DPU of 8.6 cents

At my purchase price of $1.47, it will be a yield of  5.8%

Now, I ask myself, what is the possibility of occupancy rate and rental rate all falling by 5% and dilution increase by 10 %? What is the possibility of something worse than that happening.

With government tapering land release for industrial use, I believe I am conservative enough in the stress test. 

I am quite sure I am not at the peak of the cycle, the longer term demand of the industrial area, will then depend on the economy of Singapore. I do not want to go into that. I believe Singapore Inc will continue to be sound, there is already noise about MAS doing something about our currency to make manufacturing more competitive. 

Is 5.8% yield a OK yield for me at the darkest hour? (If my projection is correct, the industrial space will be at its worst in a decade).

Given the strong pipeline of possible acquisitions, and a decent gearing of 33% (Which is expected to fall with DRP), will there be no more injections for the next 3 years to offset the falling occupancy?

My answer is 5.8% yield, could well be the worst case scenario, It is not too far from my target of 6% return and the probability of that happening is actually very low.

So I buy. This is my valuation method. =)

Your truly Silly


  1. at 1.2+ times book value and close to 52-week high, I think here could be little to no margin of safety
    however the 7% yield does look pretty attractive


  2. Hi Felix,

    I am not too concerned about Book value.
    When I investe In reit, I go for yield, it is unlikely for any unlocking of value for 60 years industrial lease, so even if it is below book value. What is the time if I cannot get back my cash flow asap

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