Sentiment for REITs has been weak in the last few months.
Singapore’s core inflation is running at a 14-year high of 4.8%, caused by a surge in prices of food, electricity, and gas.
Investors expect expenses to rise for REITs which will negatively impact distributable income.
To make matters worse, interest rates are also on the rise globally because of the Federal Reserve’s move to hike the Federal Funds Rate.
Higher rates translate to more expensive borrowing costs that will also crimp REITs’ distributable income.
Due to these worries, Mapletree Logistics Trust (SGX: M44U), or MLT, has seen its unit price decline by 15% in the past year.
Does the logistics-focused REIT have what it takes to continue doing well?
Industrial is a resilient sub-segment
Poor sentiment for the REIT sector may be affecting the unit prices of REITs across the board, but let’s not forget that not all REITs are built the same.
In particular, the industrial segment has proven to be one of the most resilient of all the REIT sub-segments, with healthcare also belonging to this category.
A quick look at MLT’s occupancy rate throughout the pandemic gives an idea of the stability of its tenants.
For fiscal 2020 (FY2020) ended on 31 March 2020, the occupancy rate stood high at 98%.
A year later, the overall occupancy had only dipped slightly to 97.5%, with full occupancy reported for properties in countries such as Australia, Malaysia, and Vietnam.
Finally, MLT’s latest quarter, 1Q2023 ended 30 June 2022, saw its occupancy rate at 96.8%.
Throughout the two years, the logistics REIT’s occupancy has been relatively stable and has stayed above 95%, attesting to its resilience.
A track record of rising DPU
For income-driven investors, REITs are a great vehicle for dividends as they are required to pay out at least 90% of their earnings to enjoy tax benefits.
These distributions help to provide a steady stream of passive income that can prepare you for your retirement.
When it comes to distribution per unit (DPU), MLT has done well.
DPU has seen a steady, uninterrupted rise from FY2016’s S$0.0738 to FY2022’s S$0.08787.
1Q2023 saw DPU continue its upward momentum, increasing by 5% year on year to S$0.02268.
Annualised DPU for FY2023 stands at S$0.09072, giving MLT’s units a forward distribution yield of 5.2%.
An acquisition specialist
MLT also has an excellent track record of making accretive acquisitions.
The REIT has been active throughout the last two years snapping up logistics assets in the Asian region.
For FY2022, a total of seven acquisitions were made ranging from a logistics warehouse in Japan to a cold storage facility in Australia.
And even during FY2021, in the thick of the pandemic, MLT made a total of six acquisitions that included five modern logistics facilities in South Korea and two logistics properties in India.
That momentum has continued into 1Q2023 as the REIT concluded two acquisitions in China and South Korea.
All these purchases have helped to further grow and diversify MLT’s portfolio and also lifted its DPU along the way.
Other positive traits
Aside from the above-mentioned strengths, MLT also boasts a few other positive traits.
For one, the REIT enjoys a positive rental reversion of 3.4% for 1Q2023 and has reported positive rental reversions for every quarter since 1Q2021.
Aggregate leverage has also remained fairly low at 37.2% as of 30 June 2022, giving the REIT sufficient debt headroom to engage in more accretive acquisitions.
What’s more, 80% of MLT’s debt is hedged to fixed rates, thereby mitigating the effects of higher interest rates on borrowing costs.
The REIT’s weighted average annualised interest rate on its borrowings is low at 2.3%, and the interest cover ratio stood healthy at 4.8 times.
MLT has also quantified the effects of higher rates on its DPU.
Every 0.25 percentage point increase in base rates will result in a S$0.0001 decline in DPU per quarter.
Assuming interest rates jump by 2.5%, DPU will decline by S$0.001 or around 4.4% of 1Q2023’s DPU.
Get Smart: Chugging along just fine
Although MLT’s unit price has slid in the past year, investors should keep their eye on the business instead.
The industrial REIT has a great track record of raising its DPU and has demonstrated a knack for positive rental reversions and yield-accretive acquisitions.
Backed by a strong sponsor in Mapletree Investments Pte Ltd, the REIT looks positioned to do well over the long run.
Did you know there are 5 REIT sectors with a high potential for creating passive income? If you are building retirement wealth, this is crucial information. We have a new report that details all you need to know about them. Find out which sector to pay attention to, and see if you can fit them into your portfolio. Click HERE to download the guide here for free.
Disclaimer: Royston Yang does not own shares in any of the companies mentioned.