Higher interest rates are having a noticeable impact on the REIT sector.
Earlier this week, Keppel DC REIT (SGX: AJBU) reported a 73.4% year on year surge in finance costs for its fiscal 2023’s first half earnings, resulting in distribution per unit (DPU) rising just marginally to S$0.05051.
The same scenario can be seen for Mapletree Logistics Trust (SGX: M44U), or MLT, when it released its fiscal 2024’s first quarter (1Q FY2024) results.
The logistics REIT saw a 13.4% year on year rise in borrowing costs and reported a flat year-on-year DPU.
However, the REIT manager has several ongoing business initiatives that will benefit the REIT in the years to come.
Here are five highlights from MLT’s latest earnings.
1. Currency headwinds
For 1Q FY2024, MLT reported gross revenue of S$182.2 million, down 2.9% year on year.
The decline was because of weakness in currencies such as the Chinese Yuan, Japanese Yen, South Korean Won and Australian Dollar against the Singapore Dollar.
Part of the fall was mitigated by recent acquisitions made by the REIT in Japan and South Korea.
Net property income fell by 3.1% year on year to S$158.1 million.
However, DPU inched up by 0.1% year on year to S$0.02271, helped by a larger divestment gain along with a capital gain tax write-back.
Unitholders had already received S$0.00234 as an advanced distribution paid out on 22 May.
Hence, the balance of DPU, being S$0.02037, will be paid out on 19 September.
The manager announced that MLT’s dividend reinvestment plan (DRP) will apply to the balance distribution for 1Q FY2024.
The issue of units in place of cash will boost the REIT’s working capital and help it to fund its ongoing redevelopment projects.
2. Healthy operating metrics
Despite the higher interest costs and exchange rate headwinds, MLT reported healthy operating metrics.
Portfolio occupancy inched up slightly from 97% in the previous quarter to 97.1% in 1Q FY2024.
The logistics REIT also reported yet another quarter of positive rental reversion at 4.2%.
3. Well-hedged debt exposure with low cost of debt
Looking at MLT’s debt profile, total loans increased to S$5.6 billion as the REIT drew on borrowings to fund the acquisition of eight properties in Japan, South Korea, and Australia.
As a result, aggregate leverage climbed from 36.8% as of 31 March 2023 to 39.5% in the current quarter.
However, the REIT’s cost of debt declined from 2.7% to 2.5% over the same period as the additional borrowings were denominated in Japanese Yen which were at lower interest rates.
Elsewhere, the manager has hedged 82% of MLT’s debt into fixed rates with just 5% of total debt due in the current fiscal year.
A sensitivity analysis projects that quarterly DPU will decline by S$0.0001 or just 0.4% for every 0.25 percentage point increase in the cost of borrowing.
4. Increasing its asset and tenant base
With the acquisitions completed, MLT has increased its assets under management from S$12.8 billion in the previous quarter to S$13.5 billion as of 30 June 2023.
Over the same period, the number of properties and tenants also increased to 193 and 903 from 185 and 887, respectively.
With this increase, MLT’s top tenant, logistics company CWT, now accounts for 4.3% of its gross revenue, down slightly from 4.4% three months ago.
The REIT’s top 10 tenants make up close to 22.6% of gross revenue and approximately three-quarters of its portfolio serves consumer-related sectors such as food and beverage and consumer staples that should be resilient to economic downturns.
5. Acquisitions and redevelopments to drive growth
Investors can look forward to more acquisitions by the REIT in the coming quarters.
The manager had floated the potential acquisition of two Chinese assets worth S$209.6 million three months back.
Apart from acquisitions, two ongoing projects should also help to gradually boost MLT’s rental income.
One involves the amalgamation of two land parcels in Malaysia with MLT’s existing assets.
With a development cost of around S$173 million, this project will increase the plot ratio of the two pieces of land to obtain a gross floor area (GFA) of 1.4 million square feet post-development.
The expected completion is in the first quarter of 2027.
Another redevelopment project is at 51 Benoi Road in Singapore which will cost approximately S$205 million.
Slated for completion in the first quarter of 2025, this redevelopment will increase the total GFA from 391,000 square feet to 887,000 square feet.
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Disclosure: Royston Yang owns shares of Keppel DC REIT.
