2024-01-02 04:30:03 ET
Summary
- Mapletree Industrial Trust's unit price increased by 8.2% since the middle of December 2023, as the interest rate outlook has become more favorable.
- However, the REIT's financing cost could still increase going forward due to the expiry of fixed rate hedges and the maturing of debt.
- Investors should also pay attention to the REIT's risks pertaining to tenant health and lease expiry.
- I leave my existing Hold rating for Mapletree Industrial Trust stock unchanged, after assessing the REIT's forward distribution yield and distribution per unit growth outlook.
Elevator Pitch
I rate Mapletree Industrial Trust ( OTCPK:MAPIF ) [ME8U:SP] as a Hold.
On its investor relations website , MAPIF refers to itself as a REIT with a mandate of investing in "income-producing real estate used primarily for industrial purposes in Singapore" and "data centers worldwide beyond Singapore." Previously, I wrote about Mapletree Industrial Trust's distributions, rental reversions, and debt headroom in my May 11, 2020 update .
I still have a Hold rating assigned to Mapletree Industrial Trust. The downside for Mapletree Industrial Trust is limited by the fact that REITs have valuation support from expectations of potential rate cuts. But Mapletree Industrial Trust's upside isn't likely to be substantial, as the REIT could still be hurt by higher funding costs in the near future and it faces risks associated with lease expiry and tenant health.
Investors should note that Mapletree Industrial Trust units are traded on both the Singapore Stock Exchange and the OTC market. Mapletree Industrial Trust's OTC shares have limited trading liquidity, but Mapletree Industrial Trust's Singapore-listed units boast a three-month mean daily trading value of close to $10 million (source: S&P Capital IQ ). Readers can buy or sell Mapletree Industrial Trust units on the Singapore Stock Exchange by utilizing US stock brokerages like Interactive Brokers that offer trading access for foreign markets.
Focus On Both Interest Rates And Funding Costs
Mapletree Industrial Trust's Singapore-listed units with the ME8U:SP ticker symbol rose by +5.2% from S$2.32 at the end of the December 13, 2023 trading day to close at S$2.44 as of December 14 last year. The REIT's unit price increased by a further +2.9% to $2.51 on the last trading day of 2023, December 29. On a cumulative basis, Mapletree Industrial Trust's unit price went up by +8.2% since December 13.
It is reasonable to credit Mapletree Industrial Trust's recent outperformance to a favorable outlook relating to lower interest rates. A December 13, 2023 Seeking Alpha News article mentioned that "Federal Reserve sees three rate cuts in 2024." Separately, Singapore's business media publication, The Business Times , noted in a January 1, 2024 commentary piece that Singapore REITs as a group witnessed a +9% gain in the month of December 2023 thanks to expectations of "a more resilient performance from S-Reits (Singapore REITS)" in 2024 against the backdrop of "interest rate cuts."
REITs in general, including Mapletree Industrial Trust, are expected to benefit from a potential decline in interest rates for the current year. However, Mapletree Industrial Trust might not benefit from rate cuts to as large an extent as what the market anticipates.
One thing to note is that MAPIF's financing costs might still increase going forward, even if rate cuts materialize.
Mapletree Industrial Trust's funding cost for Q2 FY 2024 (July 1, 2023 to September 30, 2023) was 3.2% as disclosed in its investor presentation slides . MAPIF had acknowledged at its 1H FY 2024 results call that (event transcript taken from S&P Capital IQ ) the REIT "would expect the interest cost to increase a bit" for FY 2025 (April 1, 2024 to March 31, 2025).
A significant 17.8% of Mapletree Industrial Trust's debt will be maturing in FY 2025. Taking into consideration the REIT's average debt tenor at around 3.3 years, it is realistic to assume that MAPIF's borrowings due for renewal in FY 2025 carry interest rates that are substantially lower than the current market rates. At its most recent results briefing, the REIT also shared that it has "US$120 million of hedges that will be up for renewal" at the joint venture level which have locked in fixed interest rates "at around the 1% level" in 2020.
Another thing to watch is that reduced rates don't necessarily translate into a faster pace of inorganic growth for Mapletree Industrial Trust.
MAPIF stressed at the company's 1H FY 2024 earnings call that "we'll be very selective and careful the way we look at the acquisition opportunities", and referred to potential value-accretive M&A deals as "few and far in between." In other words, even if the financing cost of acquisitions decrease, it might be still too expensive for Mapletree Industrial Trust to buy high-quality properties at reasonable valuations.
In summary, REITs are seen to be rate cut beneficiaries, but the positives associated with lower interest rates for MAPIF appears to have been priced in. Mapletree Industrial Trust's unit price increased by +8.2% since mid-December last year, but the REIT's financing cost could still rise in the next fiscal year and its M&A growth potential might be weaker than expected.
Consider Tenant Health And Lease Expiry
Earlier in mid-November last year, Mapletree Industrial Trust revealed that the REIT's "fourth-largest tenant" (unnamed due to disclosure restrictions) which "initiated a pre-arranged court supervised process under Chapter 11" in June 2023 has "entered into an asset purchase agreement with Brookfield Infrastructure Partners ( BIP )" that includes "all eight of the Data Center leases held by" MAPIF. The troubled tenant is likely to have been Cyxtera Technologies, Inc. ( OTC:CYXTQ ) as indicated in a November 16, 2023 Seeking Alpha News article for BIP.
On one hand, it is good news that MAPIF's tenant profile has gotten stronger with Brookfield Infrastructure Partners replacing Cyxtera Technologies as the new tenant for the eight data center leases.
On the other hand, it is natural to be concerned about the health of Mapletree Industrial Trust's other tenants. It is worth noting that there is considerable industry concentration for the REIT with tenants from the data center services and telecommunications industries accounting for 17% and 12% (source: investor presentation slides) of MAPIF's gross rental income, respectively.
Separately, the lease for Mapletree Industrial Trust's key data center property located at 7337 Trade Street, San Diego , which has AT&T ( T ) as the tenant, will expire in December 2024 .
This expiring lease for the San Diego asset is a significant one for MAPIF, as it accounted for 5.3% of the REIT's FY 2023 gross rental income. Mapletree Industrial Trust disclosed at the 1H FY 2024 earnings briefing that the REIT is "exploring all options" for the San Diego property which includes "divestment" and "redevelopment." Nevertheless, there is still the possibility that MAPIF is unable to make up for the potential loss of rental income from this particular asset in the future.
In addition, Mapletree Industrial Trust has 15.5% and 17.7% of its leases (in terms of gross rental income contribution) expiring in FY 2025 (April 1, 2024 to March 31, 2025) and FY 2026, respectively.
The market currently forecasts that Mapletree Industrial Trust's distribution growth for the coming fiscal years will be limited as per S&P Capital IQ consensus data. The analysts' consensus FY 2023-2026 distribution per unit growth projection for Mapletree Industrial Trust is a modest +0.9%. If MAPIF's risks relating to tenant health and lease expiry materialize, the REIT's actual distributions might be even lower than what the sell side estimates.
Closing Thoughts
Mapletree Industrial Trust offers a consensus forward next twelve months' distribution yield of 5.38% (source: S&P Capital IQ ), which is pretty close to its historical three-year and five-year mean distribution yields of 5.46% and 5.30%, respectively. Therefore, I deem Mapletree Industrial Trust to be trading at a fair valuation now.
The REIT's unit price has already gone up by +8.2% in the past few weeks due to expectations of lower rates, but it is also critical to consider the other risk factors for Mapletree Industrial Trust. In that respect, I view a Hold rating for Mapletree Industrial Trust as fair.
For further details see:
Mapletree Industrial Trust: It Isn't Just About Rate Cuts