Chloe Lim Tue, Sep 20, 2022
Citi analyst Brandon Lee has downgraded Mapletree Logistics Trust from “buy” to “neutral” with a lowered target price of $1.75. This is in light of benign forward DPU growth with a three-year CAGR of 1% as compared to a five-year historical CAGR of 3.4% observed by Lee, and a subdued acquisitions outlook on rising cost of capital, especially that of debt.
Most recently, MLT has acquired $100 million of assets year-to-date (ytd), a decrease from its five-year-average of $1.2 billion. According to Lee, the decline in acquisition spending is due to rising debt cost, increasing equity costs, as well as flattish prime logistics cap rates, which may end up narrowing cap rate spreads and complicating distribution per unit (DPU) accretion.
MLT traded at 1.3x P/B from FY2017-FY2021 when acquisition per year was $1.2 billion.
Within MLT’s four core markets of China, Hong Kong, Japan and Singapore, the analyst believes that DPU-accretive acquisitions are still possible in China and Japan due to accommodative monetary policies. “However, the possibility is not high given MLT’s reluctance to explore the sponsor’s pipeline of China assets in the next six to 12 months as per 1QFY2023 ending June results and intense competition in Japan,” Lee says.
“We think scarcity of prime logistics assets remains an issue in Hong Kong and Singapore, with higher debt cost resulting in negative or narrowing cap rate spreads,” he adds. “With debt cost expected to rise another 50 to 116 bps through 2023 from here, we think MLT will continue to face difficulties in acquiring accretively, unless the sponsor is flexible on the injection price of its assets.”
Lee also notes that the divestment of non-core assets is a hallmark of MLT’s proactive portfolio reconstitution from 2011-2019, with gains of an average of a 33% and 27% premium over book and acquisition value respectively and proceeds channelled towards DPU and gearing improvement to free up debt headroom for higher-yielding better-quality assets respectively.
“While initial lull from 2020 to 2021 likely stems from Covid-19, the lack of asset sales ytd reflects broader slowdown in transactional activity, which could persist into 2023,” warns the analyst.
Lee posts an FY2023 and FY2024 DPU of -0.4% and 1.2% respectively on revised forex and rent growth assumptions. The analyst also mentions that he prefers Ascendas REIT (AREIT) and Frasers Logistics and Commercial Trust (FLCT) within industrial Singapore REITs (S-REITs).