It’s no secret that the combination of higher interest rates and soaring inflation has dealt a big blow to the REIT sector.
Many Singapore REITs saw their operating and finance expenses surge, causing their distributable income to fall and their distributions to decline.
Mapletree Logistics Trust (SGX: M44U), or MLT, is no exception.
The industrial REIT saw its distribution per unit (DPU) get badly hit in its latest quarter.
Can MLT turn the situation around the start posting higher DPU? Let’s find out.
A stellar track record
MLT is a REIT with an impressive DPU track record.
Backed by a strong sponsor in Mapletree Investments Pte Ltd, the logistics REIT saw its DPU rise every single year without fail from fiscal 2016 (FY2016) to FY2023.
During this period, DPU went from S$0.0744 to S$0.09011.
It wasn’t until FY2024 that higher finance costs started to bite.
MLT’s DPU dipped to S$0.09003 in FY2024, a slight year-on-year drop from the S$0.09011 a year ago.
For the first quarter of fiscal 2025 (1Q FY2025) ending 30 June 2024, MLT saw a continuation of this DPU decline.
Both gross revenue and net property income (NPI) dipped slightly by 0.3% and 0.9% year on year, respectively, to S$181.7 million and S$156.7 million.
DPU, however, fell by close to 9% year on year to S$0.02068.
The annualised DPU for MLT stood at S$0.08272, and will represent an 8.1% year-on-year fall from FY2024’s DPU of S$0.09003.
A confluence of negative events
The REIT’s weak performance can be traced to a few factors.
The key reason was a weaker performance for its China properties, with the occupancy rate for China at 93.1%, lower than the portfolio’s overall occupancy of 95.7%.
China also registered a negative rental reversion of 11.3% for 1Q FY2025, slightly worse than the 10% negative rental reversion reported in the previous quarter (4Q FY2024).
MLT reported a positive rental reversion of 2.6% for its overall portfolio but if China was excluded, this would jump to +4.6%.
The slight revenue drop for the quarter was also because of a loss of revenue from divested properties.
To add to its woes, MLT also faced currency depreciation for the Chinese Renminbi and Japanese Yen which impacted its NPI when translated to Singapore dollars.
The REIT’s finance costs went up 9.4% year on year to S$38.5 million, which impacted its distributable income.
MLT’s total issued units edged up 1.5% year on year to five billion and was negative to DPU as distributable income had to be divided by a larger base.
Active capital recycling
Despite the weaker showing, MLT’s manager continued with active capital recycling to rejuvenate the REIT’s portfolio.
Three acquisitions were completed in 1Q FY2025 comprising three properties in Malaysia and Vietnam.
The Malaysian property had an initial NPI yield of 5.7% while the two Vietnamese properties enjoyed a high initial NPI yield of 7.5%.
The REIT is also working on strategic asset enhancements with two long-term asset enhancement initiatives (AEIs).
The first is the potential amalgamation of Subang 3 and 4 in Malaysia to increase its plot ratio by five times to 700,000 square feet.
The manager is seeking approval for this amalgamation from various government and state authorities.
If the green light is given, the project’s expected completion date will be the first half of 2028.
Over in Singapore, MLT has a redevelopment project for 51 Benoi Road.
At an estimated cost of S$205 million, the plan is to increase the asset’s total gross floor area (GFA) by 2.3 times to 887,000 square feet.
Construction is in progress and this project is slated to complete by the first half of next year.
During 1Q FY2025, the REIT announced and/or completed the divestment of four properties with older specifications and limited redevelopment potential.
These properties were located in Singapore, Malaysia, and China and all four were sold at a premium to their valuations.
These divestments will free up capital to be redeployed into modern assets with better growth prospects.
Last month, MLT also announced the divestment of three properties in Malaysia, continuing with its journey of active capital recycling.
These three properties were also sold above their valuations and are expected to be completed in FY2025.
Some respite in the near term
MLT should see some respite in the near term as the US Federal Reserve recently cut its benchmark interest rate by 0.5 percentage points.
There are plans to reduce interest rates further, though the central bank’s dot plot remains uncertain for now.
Lower rates should help to ease borrowing costs for MLT as it refinances its loans.
The Chinese government also recently announced a bazooka of stimulus measures aimed at propping up its economy.
If these measures work, it could result in a more positive operating environment for the real estate sector there and allow occupancy and rental reversions to recover.
Get Smart: Patience is the key
MLT is facing an unfortunate mix of negative factors that adversely impacted its DPU.
However, some of these pressures should ease in the short term and provide some respite for the REIT.
However, investors need to be patient and wait for more signs of recovery to emerge.
Meanwhile, the manager’s active capital recycling will help to improve MLT’s portfolio metrics and help it to achieve higher rental income.
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Disclosure: Royston Yang does not own shares in any of the companies mentioned.
