In this new economic environment, there is an even greater need for investors to seek out REITs with strong balance sheets and healthy capital structures.
For instance, a REIT with a higher proportion of fixed-rate debt will be better insulated from paying higher financing costs.
An example is Mapletree Logistics Trust (SGX: M44U), or MLT.
The REIT recently released its earnings report for the quarter ended 30 September 2022 (2Q2023).
Here are five highlights from the logistics REIT’s business update.
1. Stable financial performance
MLT reported a satisfactory financial performance for 2Q2023.
For the quarter, the REIT reported gross revenue of S$183.9 million, 11.4% higher year on year.
Net property income (NPI) increased by 10.8% year on year to reach S$160 million.
Revenue growth was mainly driven by S$1.8 billion worth of accretive acquisitions that was completed by March 22 and the prior fiscal year.
These include the acquisitions of 20 modern logistics facilities in Australia, China, Japan, Malaysia, Singapore, South Korea and Vietnam.
On the back of these good results, MLT declared a distribution per unit (DPU) of S$0.02248 for 2Q2023, 3.5% higher than the same period last year.
The increase in DPU was partially offset by the 11.8% year on year increase in its total issued units to 4.8 billion.
2. Portfolio updates
The industrial REIT continues to enhance its portfolio through both value-accretive acquisitions and optimisation of its current properties.
In the recent quarter, MLT completed the acquisition of two parcels of industrial land in Subang Jaya, Malaysia.
Through this latest acquisition, MLT aims to build the first mega modern logistics facility through amalgamation with its existing assets.
The development project is estimated to cost approximately S$173 million and is estimated to be completed by 1Q2027.
This will increase total gross floor area (GFA) of existing assets by five times to 700,000 square feet.
MLT also has an ongoing redevelopment project for its existing property at 51 Benoi Road in Singapore to turn it into a six-storey Grade A ramp-up warehouse.
The redevelopment is expected to cost S$197 million and be completed by 1Q2025.
As a result, GFA is expected to increase by 2.3 times from 391,000 to 887,000 square feet.
3. Future-proof and resilient portfolio
MLT’s extensive network of logistics facilities across key geographies is well-positioned to benefit from the structural trend of higher demand for logistics in the region.
Many businesses are now placing greater emphasis on supply chain resiliency, especially after the extensive supply chain disruptions witnessed during the Covid-19 pandemic.
For instance, the inventory of retailers is expected to increase by 10% to 15% to act as safety stock.
Furthermore, as governments worldwide push for supply chain diversification, this will boost demand for logistics requirements in countries such as Vietnam and Malaysia.
More businesses are starting to adopt the “China Plus One” strategy where they avoid investing only in China but seek to diversify into other countries.
Consequently, Vietnam and Malaysia are projected to benefit from strong growth in foreign domestic investments.
To capture these growth opportunities, management is making the strategic decision to make acquisitions outside of Singapore.
Not only will this move reward unitholders with higher DPU, it also helps to diversify its portfolio across different geographies.
Such diversification makes the REIT’s portfolio less reliant on the economic performance of any one country.
As of 30 September 2022, only 26% of gross revenue came from Singapore, while the remaining 74% was from other countries in Asia and Australia.
4. Consistent operating metrics
Average rental reversion stood at 3.5% for the current quarter, a slight improvement from the previous quarter where average rental reversion came in at 3.4%.
MLT achieved a portfolio occupancy of 96.4%, down slightly from 96.8% in the previous quarter.
Its portfolio weighted average lease expiry (WALE) by net lettable area stood at a healthy 3.3 years as of 30 September 2022.
In comparison, its WALE was 3.4 years in the previous quarter.
The REIT boasts a robust portfolio of 186 properties.
The REIT’s largest customer by gross revenue, local logistics company CWT, now contributes just 4.4% of overall revenue, down from 6.3% three months ago.
5. Buffering against higher interest rates
To curb rising inflation, the US Federal Reserve has hiked interest rates by 0.75 percentage points over three consecutive sessions.
All REITs borrow for their business expansion.
In a period of higher interest rates, this means REITs will have to fork out higher finance costs.
Therefore, investors are concerned that higher finance costs will depress DPU.
Management announced that every 0.25 percentage point increase in interest rates may result in an approximate S$0.0001 decline in DPU per quarter.
MLT’s trailing 12-month (TTM) DPU ended 30 September 2022 amounted to a total of S$0.08969.
The 2.25% increase in interest rates (i.e. 0.75% x 3) thus far has resulted in DPU declining by S$0.0001, representing a 4% drop for the REIT’s TTM DPU.
While the impact of higher interest rates cannot be avoided, a strong balance sheet helps to provide some buffer against their effects.
Dividend-seeking investors should stick with REITs that have prudent capital management as such REITs are more likely to continue meeting their debt obligations.
For instance, 82% of MLT’s borrowings were based on fixed interest rates as of the recent quarter, slightly higher than 80% in the previous quarter.
Meanwhile, the REIT’s aggregate leverage ratio and interest coverage ratio remained roughly unchanged at 37.0% and 4.6 times, respectively.
The average cost of debt increased from 2.3% in 1Q2023 to 2.5% in 2Q2023.
Since the majority of MLT’s gross revenue comes from countries outside Singapore, it is also exposed to foreign currency risks.
In 2Q2023, revenue growth was tempered by the depreciation of the Japanese Yen and Korean Won against the Singapore Dollar (SGD).
As a countermeasure, MLT has hedged 72% of its income stream for the next 12 months into SGD.
This should lessen the impact of any foreign currency depreciation in the future.
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Disclosure: Ryan Yap does not own any of the shares mentioned.