<Alert!> Mapletree Logistics Trust: Asset recycling a value-accretive strategy
- Robust operational results; China expected to “turn the corner” after lock-downs
- Strong expansionary demand drive positive rental reversions to a new high of 3.4%
- Asset recycling a key strategy to optimise portfolio yields; acquisitions (if any) an upside to our estimates.
- BUY call, TP S$2.05 maintained
Stable operational results
(+) 1Q23 DPU rose 5.0% y-o-y to 2.268 Scts, in line with expectations.
- 1Q23 revenues and net property income (NPI) rose by c.14.6% and c.13.2% to S$187.7m and S$163.2m respectively. The stronger performance was mainly driven from (i) positive portfolio rental reversions of c.3.4%, a slight increase q-o-q, (ii) contribution from accretive acquisitions in 1FY23 and the past financial year. This more than offset the impact of currency fluctuations given its regional footprint but impact is mitigated by forward contracts in place to hedge MLT’s foreign source income.
- Net property income margins remained fairly stable at 87% (vs 88% in 1QFY22).
- As a result, distributable income to unitholders (after perpetuals) rose by 17.2% y-o-y to S$108.6m. DPU rose to a lower proportion at 5.0% y-o-y to 2.268 Scts on an enlarged units base from the equity fundraising exercise.
- Gearing increased marginally to dipped to 37.2% (vs 36.8% as of Mar’22) due to additional debt taken to fund recent acquisitions in South Korea and China, which is offset by the translations impact from the weaker JPY and MYR vs the SGD.
- Average interest cost remained stable at 2.3% due to the floating portion of their loans.
- The REIT has hedged close to c.80% of total debt at fixed rates which somewhat shields the REIT from rising interest costs, and close to c.73% of income stream for next 12 months has also been hedged into SGD.
Outlook & Our recommendation
(+) Maintaining robust operational metrics; China “turned the corner”.
MLT occupancy rates remained stable at 96.8%, flat q-o-q. Overall performance have been stable with most countries maintaining occupancy rates and retention rates. While we saw slight declines in occupancy rates in Singapore (-0.7 basis points to 98.3%) and China (-0.2 basis points to 92.9%), the manager expect that performance to turn the corner, especially in China. The portfolio have remained resilient in 1QFY22 despite lockdowns seen in selected cities in China, with the manager sensing improvement sentiment on the ground (especially for its properties in the 1st tier cities). The manager has c.24.2% of its NLA expiring in FY23 of which close to c.50% are from China. That said, we understand that conversations with most of their major tenants are general conducive and expect a good level of retention with positive rental reversions expected.
During the quarter, MLT renewed or replaced leases at an average rental reversion of 3.4% (vs 2.9% in 4QFY22) with generally positive rental reversions when leases come due, with its key growth markets of Singapore (4.3%), India (4.1%), Vietnam (3.9%), Japan (3.7%), Malaysia (3.5%), Korea (3.%), China (2.8%) and HK (2.8%) implying good recovery signs.
(-/+) Financial metrics robust; but cost of funds will increase over time
The REIT has a well staggered debt maturity with an average debt duration of 3.7 years. The REIT has only 9% of its debt expiring in FY23. While we see upward pressure in refinancing rates in the near term (new AUD and Korea loans possibly at c.4+%, SG loans at 3+%), we believe that the high hedged rates of c.80% will substantially shield the REIT from higher debt obligations in the medium term. A 25 bps increase in base rates will result in a <1% impact on DPU.
(+) A disciplined approach towards acquisitions.
The manager continue to see acquisitions as a key driver for earnings in FY23, with the Asia Pacific region remaining in focus, but remained disciplined in its approach towards securing deals. The manager is looking at close to c.s$2.5bn in possible opportunities in the developed markets of Japan, Australia and Korea and is hopeful to covert part of these deals into AUM. In addition, given its scale and diversity, the REIT is looking to work on development and value-added deals to optimise returns and in the meantime, capture some NAV upside through value-add re-positioning selected assets. We believe this strategy will be positive development for the stock.
Implications for stock
With macro uncertainties and a global slowdown, we have seen recent share price have seen some strength in MLT is due to an increased allocations into “defensive” subsectors. Given strong visibility income and a high income hedged ratio, we believe that MLT will stand strong in the midst of volatility. The stock currently trades at MLT is currently trading at 5.2% yield and a P/NAV of 1.16x, which is below its 3-year mean. We believe that MLT remains one of the key stocks that investors should be vested in.