by: Tam Ging Wien
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Mapletree Logistics Trust (MLT) announced its 2Q-FY20/21 on 19-Oct-2020 (Mon) and as expected, the management declared a 2.055c DPU for the quarter, up 1.5% from the same period last year of 2.025c. On a half-yearly basis, the DPU rose 1.2% year-on-year to 4.100c.
MLT’s portfolio occupancy rate remained stable with 97.5% of its floor space occupied with a well-staggered lease expiry profile and WALE (by NLA) of 4.2 years. Gearing remained stable at 39.5% compared to last year’s 39.6% and maintaining its strong interest cover of 4.9x. It continues to retain its triple-B (Baa2) credit rating with a stable outlook.
While the results come as no surprise, immediately following the result announcements MLT also announced a proposal to acquire of 9 logistics properties in China, Malaysia and Vietnam, and also the remaining 50% interest in 15 properties in China for a total of S$1.09bil. The acquisition will be funded via a private placement, preferential offering amounting to S$644.1mil and issuance of consideration units S$300.0mil.
Approximately 153.06mil of consideration units are expected to be issued, however the price has yet to be determined. A discount to both the private placement and preferential offering price.
The private placement was strongly received with an oversubscription rate of 5.5 times including the upsize option at the top end of the price range at S$2.027 per new unit. With the placement of 246.67mil new units, MLT successfully raised S$500mil.
The reminding S$144.1mil will be raised via a preferential offering with the price determined to be at S$1.990 per unit. The total amount of new units expected to be issued is 72.41mil.
Just immediately after the successfully placement, MLT again surprised the market with another acquisition announcement. This time, the proposal is for the Acacia Ridge Distribution Centre in Brisbane, Australia at a purchase consideration of A$114.0mil (S$109.8mil). This acquisition will be fully funded by debt. The property is located at 338 Bradman Street, Brisbane, Queensland, Australia.
All these announcements are just a string of many acquisitions that MLT has executed over the course of 2020, some earlier acquisition examples include:
MLT is truly on an acquisition spree and fueling its rapid expansion in portfolio and setting up for growth in the coming years. It almost seems that MLT is on an ever-expanding mode!
With the COVID-19 global pandemic, it has accelerated the adoption of e-commerce and last mile delivery services of goods. As a result, this has led to an accelerated demand for modern logistics facilities. As the e-commerce market continues its grow powered by e-commerce in the years to come, MLT is well positioned to capture those opportunities.
In this article, we will focus on what we like and our concerns about the recent acquisition.
MLT proposes to acquisition of 9 logistics properties in China, Malaysia and Vietnam, and also the remaining 50% interest in 15 properties in China for a total of S$1.09bil. All in all, there are a total of 24 assets involved in the transaction with a total net lettable area (NLA) of 1,223,660 sqm. These properties will be purchased from subsidiaries of sponsor Mapletree Investments and subsidiaries of Itochu Corp.
The target assets will come with an implied net property income (NPI) yield of 5.2%, a little lower than the current portfolio NPI yield of 5.56%. The committed occupancy is of the acquisition target is a blended 94.7%, lower than the current 97.5% of the existing portfolio. WALE is also significantly shorter at 2.3 years while the existing portfolio WALE clocks in at 4.2 years.
Key tenants include e-commerce players such as JD.com and Cainiao, international logistics companies like Maersk and Kuehne + Nagel, as well as consumer brands like Decathlon. In aggregate, e-commerce/e-fulfilment tenants account for approximately 58% of the Properties’ gross revenue.
Post-acquisitions, MLT's regional footprint will expand to 51 cities in eight geographic markets with access to an aggregate population base of over 150 million people.
In almost all respects, the target acquisition is just slightly weak than the current portfolio. But on the flip side, we could view this acquisition as a potential growth opportunity if MLT manages to increase its occupancy rate of the properties.
Lifting directly off MLT’s acquisition press release gives a good summary of the entire target portfolio: “The Properties are high-quality logistics facilities built to Grade A specifications, including strong floor load, high ceilings, large floor plates and ramp access for the multi-storey properties. In addition, the majority of the PRC Properties have cross-docking features that enable fast movements of goods. With their modular design and high specifications, the Properties cater to the modern requirements of third-party logistics firms and e-commerce tenants” and “scarcity of modern Grade A warehouses in these markets, thus enabling them to command a rent premium averaging 20% over traditional warehouses”.
Some of these key features of strong floor load, high ceilings, large floor plates and ramp access are essential and fit very well to the needs of logistics tenants. A particular term stands out, “cross-docking” as a feature is also an important design for high efficiency distribution facilities and the term itself is worth elaborating for readers to get a better appreciation.
Source: Adaptalift Group
For distribution facilities that are designed with cross-docking features, there is an in-bound dock and an out-bound dock which are directly opposite each other. These docking bays will allow supplies to dock their delivery vehicles rear in and unload their shipment quickly and efficiently to their customers. The receiving party also have their various distribution vehicles docked rear in on the opposite site of the docking bays to accept the incoming shipments quickly.
As the incoming shipment arrives, they can be unloaded with forklift, robots, or conveyor belt. They are then efficiently sorted, reassigned to their appropriate destinations, and loaded into the out-bound transportation vehicle on the other side. This cross-docking feature is particularly efficient in the supply chain for perishables and/or temperature-controlled items such as food which needs to be unloaded and reloaded quickly to ensure quicker delivery times and lower spoilage.
This acquisition in particular targets the assets on the high growth countries of Vietnam, China, and Malaysia. According to the independent research presented by in the announcement documents, consumption expenditure per capital is expected to grow 9.7%, 7.3% and 5.5% in Vietnam, China, and Malaysia respectively in the next 5 years.
These 3 countries are also expected to rapidly urbanise, and the urban population are expected to growth 32%, 20% and 21% respectively, between 2019 and 2030.
As a result of rapid urbanisation and increase consumption per capita, these 3 nations are expected to lead the growth for e-commerce and therefore the logistics facilities.
Before the acquisition, the top-10 tenants contribute a total of 26.8% of MLT’s gross revenue. Post-merger, JD.com and Cainiao, among the established Chinese ecommerce players will form part of MLT’s top-10 tenant base and the top-10 tenants will now contribute 26.0% of MLT’s gross revenue. The largest contributor to MLT’s revenue, CWT will now be reduced from 8.6% to 7.6%.
CWT is a logistics player and subsidiary of CWT International and controlled by HNA Group. Last year, CWT’s parent, CWT International made headlines for defaulting on a loan. Hence, reducing exposure so a tenant who may have internal financing issues would reduce risk for MLT in the longer term.
Based on the illustrative pro forma presentation assuming that units are issued at S$1.96, the DPU and the NAV per Unit would be 1.3% and 6.6% accretive. Gearing would reduce by 2.4%, down from 39.5% and 37.1%.
As of the time of writing, we are already aware that the Private Placement has Preferential Offering unit prices have already been set to the upper range of S$2.027 and S$1.990 respectively. This means that the number of units needed to be issued to raise the same amount of funds are now less and the assertiveness is likely higher upon completion.
Personally, we like our REITs to be well supported by institutional investors. Proxy is to observe how oversubscribed their private placements are when the REIT raises equity fund raising. In this instant, the private placement was oversubscribed 5.5x over indicating strong overall institutional demand for the placement units.
With strong institutional interest and wider analyst coverage in a REIT, it likely will translate to higher transaction volume and market liquidity, strong take-up rate when raising funds using equity and potentially a higher valuation and demand for share in the open market leading to increasing share prices.
The Preferential Offering and Private Placement units where announced at the following ranges:
• Private Placement range between S$1.973 and S$2.027 for each new unit
• Preferential Offering range between S$1.940 and S$1.990 for each unit
The prices of the units were finally fixed at S$2.027 and S$1.990 for each unit for the Private Placement and Preferential Offering respectively to raise a total of S$644.1mil.
Another S$300.0mil is expected to be raised by issuing of consideration units to the sponsor/vendor. In principal, payment and issue of consideration units for the proposed acquisition should bring an alignment of interest between the sponsor/vendor and the REIT unitholders.
However, whether the alignment of interest is intact would depend on the issue price of these consideration units. In our view, a reasonable price without prejudice to the unitholders would be to issue the consideration units at a price between S$1.990 to S$2.027, between the price fixed for the Preferential Offering and Private Placement.
We are not able to identify the exact issue price of the consideration units and would certainly be concerned if they are priced below S$1.990. So likely we will have to monitor to see the final price for the consideration units, perhaps to be shared at the EGM?
In the appendixes, we can see that the oldest property is the Mapletree Wuxi logistics facility which was completed in Dec-2015. For the remaining assets, 7 where completed in 2016, 5 in 2017, 5 in 2018 and 6 in 2019. This means that MLT will be acquiring fairly new and stable assets.
This is both a double-edged sword. On one hand, these assets ensure that the REIT does not need to dwell into the frequent maintenance required of older assets. On the other hand, it’s likely that these assets are already well built and have little room for improvement in the foreseeable future. Hence, there is limited asset enhancement upside built into the acquisition. It’s likely the price paid is already factored in all these upsides into the consideration.
Assets which are highly desirable, sought after and have speciality features not present in other assets tend to command a longer lease-term, higher than average market rates, loyal tenants with high retention rates, built in rental escalations and typically on a triple-net basis where the property tax, property insurance and property maintenance cost are borne by the tenant.
A highly desirable and in demand logistics assets tenanted out to a long-term loyal tenant would likely have a triple-net lease structure with rental escalations. Could MLT be focusing on keeping the rental short to be able to ride quicker rental reversions in this high growth countries of China, Malaysia and Vietnam and intentionally not signing long-term triple-net leases?
Given that the average weighted lease expiry of the assets are 2.3 years, it appears to suggest that the assets do not command the same level of rarity or desirability as the rest of MLT’s portfolio having 4.2 years. It is not entirely clear as to the different and it is also not obvious to us to be able to point out those key differences. As a result of the acquisition, the WALE of the entire portfolio will fall to 3.8 years.
Similarly, the occupancy rate is also lower than MLT’s current portfolio at 97.5%. At a 94.7% occupancy rate, it is still decent, but post-merge will result in a lower overall occupancy rate of 97.0% for MLT’s entire portfolio.
Or is it simply that MLT prefer shorter leases to enjoy higher rental growth rates in the high growth countries of China, Malaysia and Vietnam?
It is also worth pointing out that all the Chinese assets are owned on a leasehold basis with remaining land tenure between 43 to 47 years. The Malaysian asset has a land leasehold expiry of 34 years while the Vietnamese asset has another 37 years to go before its land leasehold expires.
Overall, there is much to like about this acquisition and much benefit that unitholders will derive from the expanded portfolio in the years to come. Having higher exposure to key growth markets like China, Vietnam and Malaysia will benefit the REIT over the long term as it is well placed to ride the growth of ecommerce and consumption in those regions. We also like the fact that MLT has strong support from institutional investors evidence from the 5.5x oversubscription of its private placement.
However, we do also have some mild reservations about this acquisition such as why the acquired properties did not have similar WALE and occupancy rates at point of acquisition? Why didn’t the assets come negotiated with long-term triple-net leases with built in rental escalations? Is the strategy to keep the leases sort in order to ride the rental growth upside or are the properties not as desirable as the assets in the current portfolio?
We also would like to observe if the consideration units are issued to the vendor at a fair and arms-length value between S$1.990 to S$2.027. Or is the vendor taking the opportunity to obtain units cheaper than what was placed out to unitholders. This would be a good gauge of the alignment of interest.
Overall, we do still look forward to MLT continuing its track record of growing the REIT consistently over the long term.
The COVID-19 crisis has brought about an unprecedented economic shock to many sectors, and yet it has also generated opportunities in others.
The tech sector has been a major beneficiary and along with that, S-REITs exposed to the Data Centre sector such as Keppel DC REIT and Mapletree Industrial Trust gained phenomenally.
But are the investment opportunities in REITs now gone? Personally, we do not think so. There are still many REITs below their pre-COVID-19 levels poise to recover strongly in the coming quarters – and now it is the best time to prepare to capture the post-COVID recovery.
Join us as we discuss the opportunities and risk in the S-REIT space sector-by-sector as we try to uncover recovery opportunities for FY2021 and beyond. Real estate sectors that we will be covering include the Retail, Hospitality, Offices, Healthcare, Industrial and Data Centres.
Our speaker Tam Ging Wien will be sharing his knowledge and experience including:
Some key highlights that will be covered includes:
During the sharing session, various Singapore-listed REIT examples will be used.
There will also be a Q&A so that members of the investing community may engage in open dialog and discussions in order to deepen their understanding of REITs. Do prepare your writing materials for note taking.
Please note that the duration of the on-site seminar is 7pm to 9:45pm Singapore Time (GMT +8).
The details of the event are as follows:
To learn more about REITs, we recommend the article: What are REITs?
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