It is REIT reporting season once again and it is a good time for investors to review how REITs are performing in this current climate.
Against the backdrop of surging interest rates and high inflation, share prices of REITs have taken a beating.
Mapletree Industrial Trust (SGX: ME8U), or MIT, is one of the many REITs that saw its share price plunge.
Nevertheless, the REIT reported a resilient set of earnings for its fiscal 2023 third quarter (3Q2023) ending 31 December 2022.
Here are five key highlights from MIT’s latest results.
1. Robust financial performance
For the quarter, the REIT’s gross revenue rose 5.0% year on year to S$170.4 million.
The increase is primarily attributed to the rental income generated from new leases across the REIT’s assets in Singapore.
Consequently, net property income (NPI) also increased by 4.9% year on year to S$128.8 million.
The higher NPI is a good sign as it indicates that the REIT’s property operating expenses were well managed.
However, this increase in NPI was offset by higher borrowing costs which jumped 35.4% year on year.
As a result, distribution per unit (DPU) dipped by 2.9% year on year from S$0.0349 to S$0.0339.
MIT’s trailing 12-month (TTM) DPU stood at S$0.1373, giving its units a trailing 12-month distribution yield of 5.7%.
2. High occupancy rates
The REIT’s resilient set of earnings can be attributed to its high occupancy rate.
As of 31 December 2022, MIT’s portfolio consisted of 141 properties.
Assets under management (AUM) stood at S$8.8 billion, with 50.1% coming from the US and the remainder from Singapore.
The industrial REIT’s portfolio occupancy remained high at 95.7%, a slight improvement from the 95.6% in 2Q2023.
Singapore’s portfolio saw its occupancy move up from 96.8% to 96.9% quarter on quarter while the occupancy of its US portfolio remained unchanged at 93.1%.
In addition, its portfolio weighted average lease expiry (WALE) by gross rental income (GRI) stood at a healthy 3.9 years as of 31 December 2022.
3. Consistent operating metrics
The industrial REIT’s operating metrics also point towards a resilient business that can withstand the difficult macroeconomic environment.
Positive rental revisions were achieved across most property segments in Singapore.
For 3Q2023, the REIT’s gross rental rate stood at S$2.15 per square foot a month.
This figure has been consistently increasing for the past 10 years despite dips in 2021.
Furthermore, the REIT has a loyal tenant base.
The REIT’s tenant retention rate remains high at 92.2% for its Singapore portfolio and 63.3% of the tenants have leased the properties for more than four years.
Moreover, the REIT has a large and diversified tenant base of over 2,000 tenants.
The top tenant contributes 6% of its GRI while its top 10 tenants form about 29.8% of its GRI.
4. Buffering against higher interest rates
The surge in interest rates has a noticeable effect on MIT’s cost of debt.
In just three months, the REIT’s weighted average funding cost has risen from 2.9% to 3.3%.
While the impact of higher interest rates cannot be avoided, a strong balance sheet helps to provide some buffer against their effects.
MIT has 74.3% of its total loans on fixed rates, thus helping to mitigate some of the impact from higher interest rates.
In addition, its aggregate leverage ratio also dipped slightly from 37.8% in 2Q2023 to 37.2% in 3Q2023.
To help investors, the REIT has provided a sensitivity analysis table on the impact of an increase in base interest rates on its unhedged borrowings.
For instance, it estimates that a two-percentage-point increase in base rates is expected to reduce DPU by 2.9%.
To curb rising inflation, the US Federal Reserve has hiked interest rates by 0.75 percentage points over four consecutive sessions.
This 3% increase in interest rates (i.e. 0.75% x 4) will result in MIT’s DPU declining by 4.4%.
The REIT also has a well-spread debt maturity profile, with the bulk of debt expiring in FY2027 and beyond.
5. Improving its portfolio
MIT continues to embark on asset enhancement initiatives (AEI) to optimise its portfolio and drive rental income growth.
Its build-to-suit development, 165 Kallang Way, obtained its Temporary Occupation Permit on 10 November 2022.
The seven-storey purpose-built property will be fully occupied by a global medical device company for at least 15 years with annual rental escalations.
The remaining blocks of the redevelopment, 161 and 163 Kallang Way, are expected to be completed in the first half of the calendar year 2023.
To-date, about 39% of the redevelopment at 161, 163 and 165 Kallang Way’s net lettable area have been committed.
Upon completion, this redevelopment project should lead to higher NPI and distributions for its unitholders.
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Disclosure: Ryan Yap does not own any of the shares mentioned.