Mapletree Logistics Trust (SGX: M44U) (MLT) is a logistics REIT with 118 properties in eight countries – Singapore, Malaysia, Vietnam, Australia, Japan, Hong Kong, South Korea, and China. The properties include logistics parks, distribution centres, food and cold storage, and industrial warehouses.
As you can see from the chart above, Singapore’s industrial production has been especially weak the past 12 months. I attended MLT’s annual general meeting to discover how the REIT performed over its last financial year and how the management planned to navigate the tough economic climate.
Here are 15 things I learned from Mapletree Logistics Trust’s FY2016 AGM:
- Gross revenue and net property income (NPI) rose 6.0% and 4.8% respectively driven mainly by growth in Hong Kong. However, this was offset by weaker results from Singapore as a number of single user assets (SUAs) are being converted to multi-tenanted buildings (MTBs). Distribution per unit (DPU) fell 1.6% to 7.38 cents. In its most recent Q1 2017 results, MLT has managed to maintain its DPU of 1.85 cents for unitholders.
- MLT’s current distribution yield (based on FY2015 DPU) is 6.83%. The current yield is near its historical high yield of 7.10% in 2008. Its historical low yield is 5.13% in 2006.
- MLT’s net asset value (NAV) per unit fell marginally from $1.03 to $1.02 year-on-year. NAV per unit has since fallen further to $1.00 in MLT’s Q1 release. With MLT’s share price at $1.08 (as at 27 July 2016), the REIT is currently trading above book value.
- Portfolio value grew from $4.63 billion to $5.07 billion year-on-year – largely from fair value gains from Hong Kong properties. Singapore still comprised the largest proportion of portfolio value at 34.4%, followed by Hong Kong (22.5%) and Japan (20.4%). These three countries also make the largest contributions to MLT’s gross revenue.
- MLT’s gearing ratio is 39.6% at financial year end. This has since been reduced to 35.7% due to the issuance of S$250 million perpetual securities in May 2016. The REIT’s debt maturity profile is also well-staggered with a maximum of 17% of debt maturing in a single year over the next eight years. About 84% of debt is hedged or drawn in fixed rates.
- MLT’s portfolio occupancy rate is 96.2% which has since fallen further to 95.4% in its Q1 release. Singapore has the lowest occupancy levels at 92.9% though, as the CEO pointed out, this number is still higher than the overall Singapore warehouse occupancy rate of 90.4%. MLT’s tenant base is also well-diversified; it has 519 customers and the top ten only contribute between 1.4% to 4.3% of gross revenue.
- Weighted average lease expiry (WALE) is 4.5 years. Lease expiry profile is well-staggered with the majority of leases expiring in FY2021 and beyond. The weighted average land lease is 42 years with the majority (54.4%) of land leases expiring in 31-60 years. Only 4.7% of land leases expire in the next 20 years and 28.6% of MLT’s properties are actually freehold (none in Singapore, of course). This gives a measure of long-term stability to MLT’s property portfolio.
- One investor made a point that although gross revenue and NPI have increased, unitholders ultimately look at DPU – and MLT’s was decreasing. He then asked the management if they had any strategy to navigate the current difficult conditions. MLT chairman Paul Ma agreed that current conditions are tough especially in Singapore and that the board has taken steps to cushion the slowdown. He mentioned that MLT has diversified its portfolio and without doing so, results could have been much worse. He used Hong Kong as an example where demand for warehouse space is still strong and MLT has seen positive rental reversions. Besides diversification, the REIT is also looking at divesting older assets that no longer fit the portfolio criteria and embarked on redevelopments for assets like 5B Toh Guan Road East and 76 Pioneer Road.
- MLT CEO Ng Kiat followed up on the chairman’s account and highlighted that MLT is one of the older REITs in Singapore (ten years old) and as such have older assets that need to be renewed/restructured. She mentioned that a number of SUAs in Singapore are up for renewal and the REIT is in the process of converting them into MTBs. When a tenant leaves an SUA, its occupancy rate immediately drops to zero. When the SUA is finally converted to an MTB, it takes time to find new tenants to ramp up occupancy levels. In the case of MLT, this SUA-to-MTB conversion happens to take place during a tough economic period. The CEO asked for patience during this transitional phase and that results won’t be immediate but unitholders will see the efforts pay off down the line.
- A unitholder enquired about the pros and cons of converting SUAs to MTBs. The CEO explained that a property loses overall net lettable area as the common areas can no longer be leased and expenses increase as the REIT now has to manage shared services like security. The positive is MLT is able to charge higher rents which, in most cases, is more than enough to offset the higher costs. MTBs also allow the REIT to diversify its tenant base.
- One unitholder asked the board on the reasons why they decided to enter the Australian market. The CEO replied that Australia’s market is highly scalable and properties there enjoy long WALEs with annual rental escalations of 2.75-3%. Australia is also part of the board’s strategy of diversifying MLT’s portfolio.
- A unitholder by the name of Mr. Chan expressed his concern if any of MLT’s properties housed chemical or hazardous materials as the REIT continues to expand into foreign countries. He gave the example of the chemical explosion in Tianjin, China which killed 173 people and ranted for a few minutes about the danger to MLT’s reputation and business if such an incident was to occur. The CEO calmly replied that only 3% of MLT’s tenant base is in the chemicals industry. Beyond that, MLT has tenancy agreements that require tenants to comply with all regulatory requirements and safety checks. In less ‘well-governed’ countries, MLT also sends a surveillance team to check on tenants at least once a month. The answer wasn’t enough to satisfy our unitholder however and he carried on with his rant when he regained the microphone. At the end, the chairman firmly stated that MLT’s properties are not exposed to hazardous chemicals like Tianjin and the REIT is very serious about the safety and security of its properties.
- Another unitholder questioned how MLT made a net foreign exchange loss of 18.8 million for the financial year. CFO Wong Mei Lian explained that MLT usually borrows in foreign currency as a natural hedge when acquiring assets overseas and gains/losses occur when forex rates move. She reassured the unitholder that the losses are unrealized and non-cash in nature which will not affect DPU. The chairman carried on with his explanation that REITs have to hedge their foreign exposure to stabilize its distributions to unitholders. On the contrary, if a REIT doesn’t do so, unitholders will be even more unhappy with higher fluctuations in DPU.
- One unitholder asked if Japan’s negative interest rate policy (NIRP) affected the REIT’s Japanese assets. The CFO replied that MLT has made small interest savings in the unhedged portion of Yen loans, but the amount is small ($1 million) as Japanese interest rates were already extremely low to begin with. The CEO added that NIRP meant that investors are now chasing harder for yields which have made their Japanese assets more valuable. This might open some divestment opportunities but the management will wait and see on this. Compared to NIRP, the REIT is more concerned about the upcoming supply of logistics/warehousing space in Tokyo.
- Finally, a unitholder asked why MLT is doing so well in Hong Kong, unlike Singapore. The CEO said there is a limited supply of warehouse space in Hong Kong as landowners are converting warehouses to commercial and residential spaces. This has kept demand high which is why MLT has seen positive rental reversions and higher asset revaluations in Hong Kong. To add, the land is freehold in Hong Kong. On the other hand, Singapore has 1.4 million square feet of logistics/warehouse space coming on-stream. 70% of this is already pre-committed but CEO Ng Kiat conceded that it is still a large amount of supply. With the slowing economy and shorter leases, MLT has challenges to face in Singapore.
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