by: Dean Goh for ProButterfly.comTM
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Mega real estate developers like Mapletree Investments and CapitaLand Limited own a gamut of properties worldwide. As a result, there are many SGX-listed REITs whose stock names contain the Mapletree or CapitaLand brand names.
This could be confusing for investors, who find it tough distinguishing such REITs. This is even more so when 2 different REITs with the same developers operate in the same industry (e.g. Mapletree North Asia Commercial Trust and Mapletree Commercial Trust).
In the first part of Probutterfly’s “Know Your REITs” series, ProButterfly shed some light on the similarities and differences in the portfolio of properties owned by both Mapletree Industrial Trust (MIT) and Mapletree Logistics Trust (MLT), and its implications for both REITs taking into account domestic and global economic trends.
Here in Part 2 of MIT vs MLT, we take a look at the latest financial performances of MIT and MLT.
Both MIT and MLT posted a q-o-q and y-o-y increase in their gross revenue and net property income.
For MLT’s q-o-q and y-o-y revenue growth, it was mainly due to contributions from completed redevelopments and accretive acquisitions it has had made. This growth was partially offset by the non-contribution from several divestments completed in FY17/18 and FY18/19.
This partial offset was also due to a weaker Australian dollar. This brings me to the FOREX risk MLT is exposed to with its properties spread throughout the Asian region. Nevertheless, about 78% of its distributable income in FY19/20 is hedged into/derived in SGD.
For MIT’s q-o-q and y-o-y revenue growth q-o-q, this was mainly due to new contributions from recent acquisitions of a Business Hub at 18 Tai Seng, a high tech space at 30A Kallang Place and a built-to-suit data centre at Mapletree Sunview 1. This was partially offset by lower occupancies in MIT’s flatted factories and Stack-up Buildings segments.
However, both MLT and MIT posted a q-o-q and y-o-y decrease in its net profit. However, this decrease was largely due to the significant q-o-q and y-o-y fall in the net fair value gain on its investment properties. This is highly unlikely to have any adverse impact on MIT as net fair value gains on investment properties are non-cash items which will not have significant financial implications for MIT and MLT.
MIT and MLT have managed to increase their quarterly DPU consistently since at least the first quarter of FY16/17 till present (barring slight blips across a few quarters). This is due to the consistent increase in distributable income MIT and MLT has produced, allowing investors to receive increasing q-o-q distributions.
MIT and MLT’s increase in quarterly DPU is not due to the decrease in the number of distributable units, which can be done through share buybacks. This would have presented investors a misleading image of a healthy company that has been able to consistently boost its distributable income.
Both MIT and MLT have prudent and well managed debt profiles. But let’s take a closer look at some of the less comforting figures on their debt profiles:
Green means an increase in figure y-o-y.
Black means an unchanged figure y-o-y.
Red means a decrease in figure y-o-y.
Note: For MIT and MLT’s interest coverage ratios, they are the ratios of EBIT over interest expense for the 12 Months up to 31 March 2019.
MIT also exhibits a well spread out debt maturity profile with no more than 18% of their debt expiring on a single financial year. This reduces refinancing risk (where the borrower cannot take new loans with better conditions to repay existing debt) in an environment of rising interest rates. Of course, to mitigate such a situation, the company can choose to place its debt on fixed interest rates.
Fig. 6: MIT Debt Maturity Profile
Source: MIT quarterly report
On the other hand, MLT’s debt expiration is more concentrated in the financial year FY22/23 to FY24/25. In fact, up to 68% of their existing debt will expire within these 3 FYs!
Fig. 7: MLT Debt Maturity Profile
Source: MLT quarterly report
MIT recently completed the acquisition of 18 Tai Seng Street with a total acquisition outlay of SGD 271 million. It has a committed occupancy rate of 95.1%, with a tenant base including MNCs in high value-added services like MedTech, Information and Communications technology and automotive technology. As of 30 September 2018, 78.0% of the leases at 18 Tai Seng will be expiring in FY 22/23 and beyond, enhancing income stability.
This acquisition is expected to result in pro forma DPU and NAV accretion for unitholders.
This industrial development is part of the high-specs building segment integrated with office and retail spaces. Hence, the percentage of hi-tech buildings in MIT’s portfolio is expected to increase. Hi-Tech Buildings command generally higher rental rates compared to other industrial building segments like flatted factories and light industrial buildings. Further, with the Singapore government’s push for an Industry 4.0 with advanced manufacturing processes, we expect rental rates of Hi-Tech Buildings to increase to a greater extent than for the average Industrial space.
MIT is also upgrading 7 Tai Seng Drive which it acquired from MLT. It will likely be repositioned from a warehouse into a data centre and is due for completion in the second half of 2019. MIT has achieved a 100% commitment rate by Equinix Singapore at 7 Tai Seng Drive for an initial term of 25 years with annual rental escalations. This gives MIT a reliable income stream upon the development’s completion.
These 2 recent property acquisitions at Tai Seng by MIT will add value to its investors.
MLT also made several acquisitions in FY18/19. We shall focus on the 2 largest acquisitions based on their property values.
MLT acquired five ramp-up logistics properties in Western Singapore for SGD 778.3 million. (The properties themselves are valued at SGD 730 million. The SGD 48.3 million premium paid is for the aggregate estimated upfront land premium for the balance lease). They are located in close proximity to PSA Terminals and the Jurong Port.
This increases the percentage of gross revenue coming from MLT’s Singapore properties from 34.5% pre-acquisition to 41.4% post-acquisition. This might leave MLT investors perturbed at the increased concentration of MLT’s properties in Singapore.
These properties will be 100% leased to CWT, with a Weighted Average Lease Expiry (WALE) (by revenue) of 8.7 years. This will probably help cushion MLT’s declining WALE over the past 5 Financial Years.
Regardless, this acquisition is expected to be DPU-accretive.
MLT has also acquired 50% of interest in 11 logistics properties in China, prior to the above acquisition of the Singaporean logistics properties. The aggregate property value is RMB 2.85 billion and MLT paid an acquisition price of RMB 985.3 million for 50% of the interest in these properties.
This is in light of broader domestic trends in China - increase in domestic consumption amidst a booming biddle class, rapid expansion of e-commerce and the lack of existing supply to support demand for logistics spaces.
This acquisition is expected to be DPU-accretive and NAV-accretive to MLT.
Hence, these 2 property acquisitions by MLT will add value to its investors as well.
Both MIT and MLT are currently overvalued as the REIT rally since October 2018 as just started waning.
MLT’s current Price/NAV stands at 1.31, almost 2 standard deviations above MLT’s 5 year historical average Price/NAV of 1.12. Hence, MLT is currently overvalued at the current trading price of $1.48. With MLT’s NAV at $1.17 (as of March 2019), MLT’s fair value is estimated to be approximately $1.31. A margin of safety of 10% would mean an entry price of $1.18.
Fig. 8: MLT’s historical Price/NAV
MIT’s current Price/NAV stands at 1.36, just slightly above the 1 standard deviation trading range of MIT’s 5 year historical mean Price/NAV of 1.27. Hence, MLT is currently overvalued at $2.06. With MLT’s NAV at $1.51 (as of March 2019), MLT’s fair value is estimated to be around is SGD1.92. A margin of safety of 10% would mean an entry price of $1.73.
Fig. 9: MIT’s historical Price/NAV
MIT and MLT’s portfolio of properties are located in economies which are very integrated into the global economy and are thus subjected to global economic headwinds.
MIT and MLT both exhibit very sound financials and have a track records in exhibiting growth in the key financial indicators like gross revenue and distributable income to its investors. They have also made consistent decent acquisitions that is of value to its investors.
Hence, both MIT and MLT are worth keeping an eye out for, and when the price is right, they both look like attractive targets.
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