Analysts from Citi Research and CGS International (CGSI) are keeping their “buy” and “add” calls on Mapletree Logistics Trust M44U (MLT) respectively, despite headwinds in China.
According to Citi Research analyst Brandon Lee, headwinds in China “cannot be ignored”.
MLT has achieved above-market occupancy of around 93%, which the analyst believes will be sustained for the next six to 12 months due to the REIT’s defensive strategy, despite high market vacancies in China, at above 20%,
That said, Lee notes that negative low-teens reversion is set to persist in coming quarters due to tenant demand taking a shorter-term view and weak consumer confidence.
“In the medium- to longer-term, China cannot be ignored as a market given long-term growth prospects are still there (driven by population and consumption) and diversification benefits,” writes Lee in his July 25 note.
He adds that Mapletree Investments expects a recovery in two to three years time and is choosing to “stay put” currently.
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While Mapletree Investments is still investing in development projects with a development pipeline, MLT will not acquire more China assets in the next two years.
Additionally, the analyst notes that Mapletree Investments has since opened an open-ended fund with a “build-to-core” strategy focused on China logistics, Mapletree China Logistics Investment Private Fund.
Through this, MLT can benefit from Mapletree Investments’ selling and buying of assets.
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Both Mapletree Investments and MLT can also sell to China REITs, while joint asset redevelopment of MLT’s existing assets, such as Mapletree American Industrial Park, is also possible.
As for asset divestments, MLT does not really look at country-specific, but more asset-specific metrics like returns on investment, future capital expenditures and growth prospects.
Lee also notes that Mapletree Investments has stated that MLT is expected to achieve assets under management (AUM) of $20 billion as part of its fourth Five-Year Plan, ending FY2029. “MLT is open to development opportunities given the 10% development limit and so far it’s been doing asset enhancement initiatives (AEIs),” adds the analyst.
On acquisitions, yield spread remains attractive in Japan while remaining challenging in Australia.
Despite this, as the pace of acquisitions is dependent on the pace of divestments, MLT aims to sell $150 million - $200 million in assets.
Portfolio rejuvenation continues to be a key strategy for the REIT.
The analyst says: “While Mapletree Investments’ REITs (including MLT, Mapletree Industrial Trust ME8U (MINT) and Mapletree Pan Asia Commercial Trust N2IU ) now have unit buyback mandates, it is a weapon to frighten short-sellers and they won’t blatantly buy back shares unless there is excess cash.”
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In view of these developments, Citi Research’s target price sits at $1.58.
Similarly, CGSI analysts Lock Mun Yee and Natalie Ong have highlighted “weathering challenges” from China faced by the REIT.
In their July 25 note, they note that MLT experienced a 0.3% y-o-y decline to $181.8 million while net property income (NPI) fell 0.9% y-o-y to $156.7 million in 1QFY2025 ended June.
This comes on the back of lower China contributions, an income vacuum from divested assets, higher utilities expenses and weaker Japanese and Chinese currencies which were partly offset by higher income from Singapore and Hong Kong.
The REIT’s distribution per unit (DPU) stands at 2.068 cents, including divestment gains of $5.7 million, which are broadly in line with the analysts’ expectations.
The analysts also note that MLT’s portfolio occupancy has declined marginally q-o-q to 95.7%, as at end 1QFY2025.
This was driven by lower take up in Singapore and Vietnam due to leasing downtime while occupancy in Malaysia was impacted by lease expiries of two properties slated for redevelopment.
Overall rental reversion achieved in 1QFY2025 was up 2.6% or 4.6% excluding China, with continued strong reversions in Singapore, Vietnam and India which saw increases of 7.8%, 4.3% and 4% respectively.
Meanwhile, China saw an 11.3% decline in rent reversion.
The analysts add: “Management guided that China’s rental reversions are likely to remain negative over the next six to 12 months on the back of a still challenging operating environment.”
Currently, MLT has 24.5% and 24.7% of leases due to be re-contracted in FY2025 and FY2026, respectively.
Additionally, the analysts note that the REIT’s asset divestments and portfolio rejuvenation “remains in focus”.
As at end 1QFY2025, MLT’s gearing stood at 39.6% and interest cost averaged 2.7%.
However, management guided for higher borrowing cost for the rest of FY2025, which will weigh on 9MFY2025 DPU.
As of now, around 83% of the REIT’s debt is hedged into fixed rates, with 78% of its distributable income hedged into the Singapore dollar in the next 12 months.
In 1QFY2025, MLT completed $227 million of acquisitions and proposed completed divestments of an estimated $45 million of assets.
“Management guided that it plans to recycle $200 million worth of assets, redeploy capital into the new acquisitions as well as focus on rejuvenating its portfolio towards higher-specs modern logistics properties,” write the CGSI analysts.
Overall, the analysts have lowered their FY2025 - FY2027 DPU estimate by 6.2% - 11.6% and reduced their target price to $1.63 from $1.85 previously.
Current estimates do not include any pre-emptive new acquisitions or divestments.
Potential re-rating catalysts identified by the analysts include more accretive acquisitions and accelerated asset recycling activities.
That said, a soft macroeconomic outlook that could dampen rental growth outlook and adversely impact portfolio value; and the operating environment in China remaining challenging are downside risks.
As at 3.44pm, shares in MLT are trading at 2 cents lower or 1.52% down at $1.30.
