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Mapletree Logistics good! Suntec REIT bad?

REITs

Written by:

Alex Yeo

Mapletree Logistics Trust (MLT) and Suntec REIT were the first two major REITs to release results and we thought it would be worth looking at their contrasting results as it could be a preview for the other SREITs.

Mapletree Logistics Trust

First we look at the good set of results, MLT delivered 3Q23 and 9MFY23 distributions to its unitholders that were up 1.9% and 3.4% respectively.

The higher distribution was on the back of a resilient operational performance, underpinned by stable occupancy rate of 96.9% and 2.9% positive rental reversions. MLT’s portfolio of assets in Australia, India and Vietnam are 100% occupied while Malaysia’s is at 99.7%. Occupancy rates remained strong in most countries and jurisdictions with the exception of China as the underperformed, recording a decline in occupancy rates from 93.3% in Sep 22 to 92.4% in Dec 22.

Revenue grew 8% in 3Q23 and 11.3% in 9MFY23 due to accretive acquisitions. Revenue would have been higher if not for the depreciation of foreign currencies such as JPY, KRW, RMB and AUD. Fortunately the currency fluctuations were partially mitigated with 79% of its distribution hedged into SGD.

Property expenses increased 12.6% in 3Q23 and 17.6% in 9MFY23 mainly due to cost inflation and some provision for doubtful debts.

MLT is well diversified with 186 properties in 9 countries and jurisdictions and with 882 tenants. The REIT has a stable WALE of 3.2 years with 34.3% of leases up for renewal by March 2024. Its top 10 customers account for 23.2% of total gross revenues and are big well known names such as Coles, Woolworths, JD.com, Cainiao, Woolworths and CWT.

MLT’s balance sheet weakened slightly on a QoQ comparison as the value of its investment properties declined due to the depreciation of the aforementioned foreign currencies. This led to gearing creeping up by 0.4% to 37.4%. 

Borrowing costs increased 0.1% to 2.6%, a remarkably small percentage as MLT had fixed 83% of its debt earlier. As we are still in a rising interest rate environment, MLT expects to be hit by 0.01 cent in DPU every quarter for each 0.25% increase in interest rates. This 0.01 cent hit to its DPU translates approximately to -0.5% lower distribution, a figure we think is insignificant.

MLT has 17% of its total debt due by March 2024 and should the interest rate environment continue to remain high, this portion of debt would likely incur higher rates in time to come.

MLT is also actively rejuvenating its portfolio with proposed divestments of three properties in Singapore and Malaysia amounting to S$37.3m as well as taking the chance to carry out a redevelopment project in Singapore at the cost of S$197 million.

The divestment would provide MLT with financial flexibility to pursue investment opportunities of modern high-spec assets while the redevelopment project will increase gross floor area by 2.3 times from 391k sqft to 887k sqft and is expected to be completed in 1Q25.

Looking at the slide above, one can tell that MLT has foresight and plans ahead as it plans to carry out a massive amalgamation project of two land parcels with existing assets to form a large modern ramp-up logistics facility. Not only would there be efficiency savings, but plot ratio would also increase five folds to 700k sqft.

MLT expects the global economic outlook to remain subdued amidst elevated inflation, rising interest rates and slowing growth. MLT has also noted that logistics customers continue to be cautious and are more selective on asset quality and location.

MLT’s portfolio of well-located properties and modern facilities means that MLT will remain resilient and will be many customer’s choice picks, underpinning its stable occupancy rate of 96.9%.

MLT will also continue to focus on cost management and value-adding opportunities such as asset enhancements and divestments while seizing growth opportunities to strengthen MLT’s portfolio.

Overall, amidst tough economic conditions with headwinds such as slowing economic growth in China and the rest of the world, foreign currencies weakening, higher interest rates as well as cost inflation, MLT was able to deliver higher distributions per unit to its unitholders while keeping its balance sheet robust and its key metrics such as gearing ratio and interest costs under control.

With the higher interest rate environment limiting opportunities for acquisitions, MLT has also looked inwards at its assets and initiated redevelopment projects to improve and scale up its existing assets.

Suntec REIT

We thought that we should start with a comment from Suntec REIT’s CEO, Mr. Chong Kee Hiong:

“We are pleased to have achieved stronger operating performance across our portfolio despite a higher cost and interest rate environment.”  

“While we have increased our fixed interest rate borrowings and foreign currency income hedge, the expected continued rising interest rates, weaker exchange rates and higher energy costs are expected to erode operational gains and impact our distribution significantly in the near term. We are also actively looking at the potential divestment of our mature assets to strengthen our balance sheet.”

With Manulife REIT’s recent devaluing of its investment property portfolio by 10.9% and an increase of Manulife REIT’s gearing to 49%, it is probably alarming to unitholders of Suntec REIT to hear that their distribution would be impacted significantly in the near term and that the REIT is looking at potential divestment to strengthen balance sheet.

However, investors will realise that their concerns while valid, are not required, as unlike Manulife REIT, Suntec recorded a net valuation gain with the valuation of the Singapore properties increasing by 3.3%, this was offset by Australia with a -2.1% decline and UK with a -6.4% decline. Consequently, gearing reduced from 43.7% a year ago to 42.4% as at Dec 22.

When comparing 2H22 to 2H21, Suntec was able to increase its gross revenue by 16.9% and net property income by 14.6% off the back of higher contributions from Suntec City and The Minster Building in London which was acquired by Suntec in June 2021. Suntec’s net property income grew at a slower pace due to higher property expenses as a result of cost inflation.

However, distributable income actually declined 9.0% due to higher interest rates as well as the payment of fees in cash instead of units (which do not impact DPU).

In 2H22, Suntec’s DPU of 4.074 cents was 9.7% lower than the 2H21 distribution of 4.512 cents. However, excluding the capital distribution of 0.4 cents, Suntec’s distribution from operating income would have been 3.674 cents or 18.5% lower.

Looking at Suntec’s key financial indicators, other than the improved gearing ratio, other metrics seem significantly worse off, warranting the comment from Suntec’s CEO. Financing costs spiked 0.61% YoY to 2.94%. Suntec’s financing cost was 2.51% at June 22 and 2.76% at Sep 22. Due to the highest financing cost, ICR weakened from 2.6X to 2.4X.

Suntec has a relatively lowerer percentage of fixed interest rate at 66%, a 0.25% increase to interest rates would decrease Suntec’s DPU by 0.42 cents per year or 5% (Being 0.42 cents divided by FY22 DPU of 8.884 cents less capital distribution of 0.4 cents). Should financing costs increase by 1%, Suntec’s DPU would decrease by 1.68 cents or almost 20%!

Suntec actually expects strong operational performance of its assets. In Singapore, revenue of the Singapore Office Portfolio is expected to strengthen on the back of past quarters of positive rent reversion. Rent reversion is expected to remain positive, though moderated.

Revenue performance from Suntec City Mall is expected to improve, underpinned by higher occupancy, rent and marcoms revenue. The rebound of Meetings, Incentives, Conventions and Exhibitions (“MICE”) events and the return of tourists will help boost tenant sales and mall traffic.

Australia Portfolio rent reversion is expected to be positive, but revenue will be impacted by leasing downtime and incentives. Revenue for the UK Office Portfolio will remain resilient, underpinned by high portfolio occupancy and long weighted average lease expiry with minimal lease expiry until 2028.

Overall, while Suntec’s assets have recovered well and are expected to remain resilient, the higher gearing ratio is proving unwieldy in the current macroeconomic climate, in part due to its low percentage of fixed rate debt and high financing costs.

The only likely option for current unitholders of Suntec REIT is to wait it out as Suntec looks to strengthen its balance sheet. As Suntec looks to divest its mature assets, while gearing would be reduced, total income would also be reduced.

Closing statements

While it seems like both REITs have done relatively well managing its strong portfolio of assets, the end result between the two REITs are very different due to the industry in which the assets operate in, the REIT’s capital management policies and robustness of the balance sheet.

This further brings home the point to investors that investing in REITs is completely different from investing in properties. In such uncertain times, it is probably safer to pick REITs with a stronger performance track record.

P.S. Chris is sharing how he picks the best REITs and Singapore dividend stocks that keeps paying him a consistent dividend income. Join him here

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