More divestments are on the cards for Mapletree Logistics Trust M44U (MLT), with management signalling a potential sale of assets back to its sponsor via a development fund.
Speaking at Citi’s 2024 Asia Pacific Property Conference on June 24, the manager of MLT says it wants to sell more property in China and be more aggressive in selling. However, the transaction market is slow and these will take some time, they add.
For example, the recently-announced sale of Mapletree Xi’an Logistics Park took nine months due to tax-related issues. “While MLT knows there are people selling China properties at 30%-40% discount, it will not sell below book value; at worst at book value,” says Brandon Lee, analyst at Citi Research.
Interestingly, MLT mentioned it can potentially sell some assets back to its sponsor, says Lee. “Mapletree Investments (MIPL) via a development fund, helped by interest from insurance funds, and preliminary talks have started, though it could likely be in two years’ time.”
In a June 27 note, Lee maintains his “buy” call with a target price of $1.58. With an expected dividend yield of 6.2%, the total expected return is 26.8%.
Lee notes that MIPL successfully closed its first open-ended fund — Mapletree China Logistics Investment Private Fund (MCLIP), with a focus on logistics development assets in China — in December 2022. The fund has a build-to-core strategy and initial portfolio of US$1.8 billion of 43 Grade A logistics properties.
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However, MLT does not want to share a particular target for its China exposure, as it is part of emerging markets (EM), which it still wants to grow in geographies like India, Malaysia and Vietnam.
China would automatically come down if these three geographies expand, notes Lee. In Hong Kong, there are currently two other new interested parties looking at the asset in New Territories, he adds, though the price will be slightly lower than the $100.3 million offered by the initial buyer.
Selective acquisitions
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Developed markets (DM) will remain dominant at 65%-68% exposure, says Lee, with MLT wanting to grow more in Singapore in absolute value terms.
Meanwhile, Hong Kong acquisitions are more opportunistic and hard to buy, hence MLT will have to depend on its sponsor, which is still looking to grow the pipeline.
Lee points to a “mixed operational outlook” for MLT. “For China, if things don’t change from here, hopefully it can start to bottom in six months’ time, or 2HFY2025.”
MLT’s China tenants are more domestic-driven, hence they are less likely to be impacted by tariffs than weak domestic consumption, says Lee.
For South Korea, there are some headwinds due to oversupply, with 5.8 million sq m completed over 2023-1Q2024 in the Seoul Metropolitan Area, with 50% pre-committed. This is on top of 15.4% vacancy in 1Q2024, compared to 13.1% in 4Q2023.
According to Lee, tenants are starting to prefer short-term leases as more vacant space is coming up for rent, though supply will slow down in 2024 due to high land cost and development cost.
For Hong Kong, MLT expects 2%-2.5% positive rent reversion, compared to double digits in the past.
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MLT does not see the sizeable Cainiao Smart Gateway, which was completed in 3Q2023 with 40% of its 0.4 million sq ft in gross floor area already pre-committed, as having an impact on its Hong Kong business given that it caters to products that need to be near the airport, says Lee.
Finally, for Australia, MLT expects high-single-digit positive reversion for upcoming expiries.
Key risks
Key downside risks that could result in MLT’s shares not reaching Citi’s target price include a “sharp decline” in trade and economic activity in the APAC region, which could reduce overall demand for logistics space, hence affecting MLT’s occupancy, rents, DPU and valuations.
Lee also warns about a sharp rise in interest rates, which could increase MLT’s cost of debt and lower distribution per unit (DPU), as well as increased cost of capital.
On the flip side, key upside risks that could push MLT’s shares above Lee’s target price include a sharp recovery in trade and economic activity in the APAC region, which results in increased demand for overall logistics space and a boost to MLT’s portfolio occupancy.
MLT could also benefit from a lower-than-expected financing cost, which could lower its cost of capital. Finally, MLT could surprise with earnings accretion from potential acquisitions, which Lee has not factored into its model.
As at 2.18pm, units in Mapletree Logistics Trust are trading 1 cent lower, or 0.77% down, at $1.28.
