15 things I learned from the 2017 Mapletree Logistics Trust AGM
Mapletree Logistics Trust (SGX: M44U) is an Asia-focused logistics REIT with a diversified portfolio of 127 logistics and warehouse properties in Singapore, Japan, Hong Kong, South Korea, China, Australia, Malaysia, and Vietnam. As of 31 March 2017, MLT’s total portfolio was valued at S$5.5 billion.
I attended MLT’s 2017 annual meeting to assess its past year’s performance in the midst of an uncertain global economic climate and a challenging Singapore market due to an oversupply of warehouse space here.
I also wanted to find out about the management’s outlook on the regional markets as the Trust continues to broaden its footprint and invest heavily in Australia.
With that, here are 15 things I learned from the Mapletree Logistics Trust 2017 AGM:
1. Gross revenue increased 6.6% year-on-year to S$373.1 million and net property income (NPI) increased 7.3% to S$312.2 million. This was driven by higher rents from MLT’s existing portfolio, acquisitions (mainly in Australia), and asset enhancement initiatives.
2. Portfolio revenue contribution from Australia increased to 6.4% from just 2.6% in 2016. MLT continues to grow its presence in the country which has a large scalable market and where leases enjoy a long weighted average lease expiry (WALE) with built-in annual rental escalations. CEO Ng Kiat shared that this was part of MLT’s efforts to move into higher growth, faster-scaling markets.
3. Distributable income to unitholders rose 1.5% year-on-year to S$186.1 million and distribution per unit (DPU) rose 0.8% to 7.44 cents. Net asset value (NAV) per unit increased 2.0% to S$1.04. Based on MLT’s last closing share price of S$1.21 (as at 21 July 2017), MLT is trading at 16.3% over its book value and its current distribution yield is 6.1%.
4. Portfolio occupancy rate is at 96.3% and WALE is 4.0 years. The CEO highlighted that MLT continues to face downward pressure on rents in second-tier cities in China due to an oversupply of logistics space, but first-tier cities like Beijing and Shanghai still enjoy healthy occupancy rates and even positive rental reversions of 5-10%.
5. MLT has a diversified tenant base of 531 customers and none account for more than 5% of total revenue. The CEO shared that export-related logistics sectors have slowed down over the last few years and MLT has increasingly moved its tenant base towards sectors related to domestic consumption — which is strongly driven by growing urbanization across Asia.
6. Weighted average land lease, excluding freehold land, is 47.2 years. The CEO highlighted that the majority of MLT’s land leases expiring in the next 30 years are in Singapore, while land leases in Hong Kong are set to expire in 2047. (Expiry of land leases in the whole of Hong Kong were reset to 50 years during the 1997 handover to China.) She shared that MLT still views Hong Kong as a long-term investment and expects the leases to be extended in some form when the authorities address this issue closer to 2047.
7. A unitholder replied that this was a risky answer because “no one really knows” and asked if there have been examples of land leases being extended in Singapore to draw some parallel. The CEO explained the authorities are open to extending land leases on a case-by-case basis. For example, one REIT (she didn’t mention which) managed to extend the land tenure for one of their properties. But in the case of 30 Boon Lay Way, the authorities have already mentioned to MLT that the land will most likely be returned to the government and rezoned for commercial use as it is conveniently located near the upcoming Kuala Lumpur-Singapore high speed rail project.
8. MLT is currently carrying out asset enhancement initiatives (AEIs) for 76 Pioneer Road in Singapore and Ouluo Logistics Centre in Shanghai, China. The AEIs will raise the gross floor area of the properties by 1.8 times and 2.4 times respectively and increase their expected NPI yields to around 7%. The CEO shared that MLT looks to undertake at least one AEI per year.
9. MLT divested 20 Old Toh Tuck Road for S$14.25 million. The property has outdated warehouse specifications and its relatively small land area means it has limited potential for redevelopment. The divestment gain of S$1.9 million will be distributed to unitholders. MLT also announced the proposed divestment of Zama Centre and Shiroshi Centre in Japan for a total consideration of ¥13.5 billion (~S$165.4 million). The two properties are similarly outdated and the estimated divestment gain of ¥234 million (~S$2.9 million) will also be distributed to unitholders.
10. A unitholder questioned why the management decided to return the divestment gains and whether it was to make up for any shortfall in DPU. The CEO categorically said that this was not the case and explained that it is simply the management’s policy to return any divestment gains to unitholders and reinvest the capital for higher yields.
11. MLT acquired four properties in Sydney, Australia for a total of A$85 million (~S$87.4 million). The CEO shared there’s good demand and a limited supply of good logistics locations near Sydney. The four properties are fully leased out and generate a yield of 7.1%. WALE is at 5.5 years with built-in rental escalations.
12. MLT also acquired four properties in Victoria, Australia near Melbourne for A$142.2 million (~S$151.9 million). The CEO shared that Victoria is a large market but, unlike Sydney, has a large supply of logistics space and competition for tenants will be more robust. The four properties are also fully leased out and have a yield of 7.6%. WALE is at 6.4 years with built-in rental escalations.
13. Gearing ratio as at 31 March 2017 is 38.5%. Average cost of debt maintained at 2.3% and average debt duration is 3.9 years – an increase from 3.5 years in 2016. Interest coverage ratio is at 5.6 which CFO Ivan Lim mentioned is comfortably above the 1.25-1.5 required by MLT’s debt covenants. 81% of total debt is hedged at fixed interest rates.
14. A unitholder asked about the management’s decision to issue perpetual securities at 4.18% when MLT’s average cost of debt is only 2.3%. Chairman Lee Chong Kwee explained that a REIT requires various sources of financing including bank loans, notes, perpetuals, and equity from unitholders. However, there’s a limit to how much debt a REIT can have and issuing perpetual securities allows a REIT to raise funds without raising its debt level. He also added that the management does its best to get the best price for each source of funding and pointed out that at 4.18% perpetual security holders earn a lower yield compared to unitholders.
15. A unitholder asked if MLT was looking at expanding into India since the country has a huge population and a young demographic. The chairman replied that India remains a country of interest but MLT has to weigh different opportunities (like in Australia) and decide which investment will make the best use of capital. The CEO added that she’s personally interested in India but issues like clarity in the law remain a challenge.
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