Mapletree Logistics Trust - DBS Research 2022-10-26: A Lighthouse In The Storm

• See Mapletree Logistics Trust's announcement dated 25 Oct 2022 for its 2Q23 earnings update:

2Q23 DPU rose 3.5% y-o-y to 2.268 cents, in line with expectations.

• Mapletree Logistics Trust (SGX:M44U)'s 2QFY23 revenue and net property income (NPI) rose by ~11.4% and ~10.8% to S$183.8m and S$160.0m, respectively. The stronger performance was mainly driven by
  1. positive portfolio rental reversions of ~3.5%, a slight increase q-o-q, and
  2. 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 the impact is further mitigated by forward contracts in place to hedge Mapletree Logistics Trust’s income from foreign sources.
• Net property income margins remained fairly stable at 87% (vs. 87.5% in 2QFY22). As a result, distributable income to unitholders (after perpetuals) rose by ~15.6% y-o-y to S$108.0m. DPU rose to a lower proportion of 3.5% y-o-y to 2.248 cents on an enlarged unit base from the equity fundraising exercise.

Financial metrics

• Mapletree Logistics Trust's gearing marginally dipped to 37.0% (vs. 37.2% as of Jun 22) due to translation impacts from the weaker JPY and AUD vs the S$.
• Average interest cost increased marginally to 2.5% (vs. 2.3%) a quarter due to the floating portion of their loans.
• Mapletree Logistics Trust has hedged close to ~80% of total debt at fixed rates for four years, which somewhat shields the REIT from rising interest costs, and close to ~72% of its income stream for the next 12 months has also been hedged to the S$.

Mapletree Logistics Trust - Outlook & our recommendation

Maintaining robust operational metrics; China outlook remains mixed.

• Mapletree Logistics Trust's occupancy rates remained stable at 96.4%, a 0.4% dip q-o-q.
  • Overall performance has been stable, with most countries maintaining occupancy rates and retention rates. While we saw slight declines in the occupancy rates in Singapore (-0.7 basis points to 97.4%), this was mainly due to the conversion of a single-tenanted property to a multi-tenanted property (master tenant was CWT Limited) as the REIT looks to diversify its earnings base and also establish a new working relationship with underlying tenants.
  • We did, however, see a decline in China’s occupancy rates (-0.5 basis points to 92.4%). As per the manager, even with the continued general weakness in China, it should remain resilient in 2YH22, despite lockdowns seen in selected cities. The manager has ~16% of its NLA expiring in FY23 and will be watching its China performance closely. That said, we understand that conversations with most of their major tenants are generally conducive.
• During the quarter, Mapletree Logistics Trust renewed or replaced leases at an average rental reversion of 3.5% (vs. 3.4% in 1QFY22) 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

• Mapletree Logistics Trust has a well-staggered debt maturity with an average debt duration of 3.7 years. It has only 7% of its debt expiring in FY23. While we see upward pressure in refinancing rates in the near term, we believe that its high hedge rates of ~80% will substantially shield Mapletree Logistics Trust from higher debt obligations in the medium term.
• The manager has hedged interest rates for a duration of four years. A 25bps increase in base rates will result in a < 1% impact on Mapletree Logistics Trust's DPU.

A disciplined approach towards acquisitions.

• The manager continues to review but will hold off on acquisitions, given the higher cost of equity limiting accretions for the REIT. With higher cost of capital and acquisition yields yet to normalise, Mapletree Logistics Trust is looking to work on development and value-added deals to optimise returns and, in the meantime, capture some NAV upside through value-addition and repositioning selected assets. We believe this strategy will be a positive development for the stock.

Implications for stock

• With macro uncertainties and a global slowdown, we have seen the recent share price weakness to be an opportunity for investors to buy in due to the “defensive” nature of the logistics industry. Given the strong visibility of its income and a high income hedge ratio, we believe that Mapletree Logistics Trust will stand strong amid volatility.
• Mapletree Logistics Trust's share price is currently trading at a ~6.0% yield and P/B of 1.1x, which is below its 3-year mean.
• Our target price for Mapletree Logistics Trust is revised to S$1.80 from S$2.05 previously on the basis of higher risk-free rate assumptions (3.5% from 3.0%) and we also raised our interest rate assumptions for FY23/24.