Analysts are mixed on the outlook and recommendations for the Mapletree REITs given the challenging operating environment. Krishna Guha, investment analyst at Maybank Research, is cautious and has “hold” recommendations on all three REITs — Mapletree Pan Asia Commercial Trust N2IU (MPACT), Mapletree Industrial Trust ME8U (MIT) and Mapletree Logistics Trust M44U (MLT). JP Morgan’s analysts, Terence Khi and Mervin Song, also sound relatively cautious with a “neutral” recommendation on MIT but an “overweight” recommendation for MPACT.
For MPACT, top-line growth was led by better Singapore performance and margins. This was partly offset by higher borrowing costs and continued weakness in the overseas portfolio. Singapore achieved robust rental reversion but not the overseas properties. Meanwhile, funding costs inched up.
As Guha describes it, the 2.6% y-o-y and 3.2% y-o-y rise in revenue and net property income (NPI) in 4QFY2024 ended March were underpinned by the Singapore portfolio which performed well. “This, along with forex gains and contribution from the Korean asset, more than offset higher borrowing cost, resulting in 1.8% growth in distribution,” Guha says in his report.
For FY2024, revenue and NPI rose 16% and 15.2%, respectively, due to the full-year impact of the merger of Mapletree Commercial Trust and Mapletree North Asia Commercial Trust. However, higher borrowing costs and lower margins more than offset the impact, resulting in a 7.3% y-o-y fall in distributions per unit (DPU) for the full year.
According to JP Morgan, MPACT’s Singapore properties, which contribute around 60% to NPI, are expected to benefit from improving electricity costs, particularly for retail leases at VivoCity, although this is likely only from 2HFY2025 when electricity contracts expire. On the other hand, most of MPACT’s overseas assets saw negative rental reversions, including Festival Walk in Hong Kong, says Guha.
The JP Morgan analysts are also cautious about the outlook of overseas assets. “We expect a slower recovery from overseas assets, notably for Festival Walk, which saw negative reversions of 8.7% in FY2024. Notably, we see competitive pressures such as easier cross-border access to Shenzhen and muted tourist spending impacting tenant sales recovery,” JP Morgan says.
See also: MLT to divest two properties in Japan for JPY4.3 bil
For the Japanese portfolio, JP Morgan has factored in the partial exit of MPACT’s seventh-largest tenant NTT (1.9% of gross rental income or GRI) and the third-largest tenant, Seiko (2% of GRI). NTT partially exited mBAY Point in March and Seiko is due to exit the SII Makuhari Building in June, according to the JP Morgan report.
The US bank retains an “overweight” recommendation on MPACT with a target of $1.55 using a 7.6% discount rate and a long-term growth rate of 1.75%. The price target implies a forward yield of 5.7% based on FY2024 DPU of 8.91 cents and a forward yield of 5.8% for FY2025. Maybank Research has lowered its target price for MPACT to $1.30 from $1.40 previously. MPACT ended at $1.26 on April 30.
The main concern at MIT is the lower occupancy of its US portfolio, coupled with its lower valuations. Tham Kuo Wei, CEO of MIT’s manager, has articulated that the manager is looking to divest some of these lower-yielding assets in the US.
See also: Elite UK REIT to divest Hilden House for GBP3.3 mil
On the other hand, MIT benefitted from a full quarter from Mapletree Hi-Tech Park @ Kallang Way, which was ready in March 2023, and the data centre portfolio in Osaka. Distributions from its joint venture in the US with its sponsor grew 22.5% q-o-q, Maybank Research says. However, higher funding costs mitigated the growth in distributable income, the broker adds.
JP Morgan is “neutral” on MIT. “We think the expected decline in core DPU over the next two years due to the impact of higher borrowing costs and utility costs as well as elevated vacancy risks in its US data centre portfolio are balanced by a mid-5% yield, strong management track record, capital top-ups and potential disposal gains from the sale of its non-core Singapore properties,” analysts Khi and Song say in their report.
The US bank has a December price target of $2.50, based on a 7.5% discount in its dividend discount model and a 2% terminal growth rate. The target implies a forward yield of 5.3%. Guha of Maybank has lowered his price target by 6% to $2.15. MIT’s historic DPU for FY2024 was 13.43 cents (–1% y-o-y), and it closed at $2.27 on April 30.
Over at MLT, high interest costs, weak regional currencies and continued weakness in China operations were offset by otherwise stable operations and divestment gains, notes Guha in his report. Despite a negative $470 million impact on MLT’s valuation, the portfolio remained broadly stable as at the end of March. Funding costs are expected to move higher, albeit still among the lowest in the S-REIT universe at under 3%. The focus is on accelerating divestments and achieving green certification.
MLT’s weaker performance during its financial year was driven by a lack of income from divested properties, weaker performance in China and Singapore, and currency weakness, Maybank Research says.
Additionally, higher borrowing costs and an enlarged number of units from an equity fundraising in calendar 2023 also hit DPU although this was offset by the distribution of divestment gains, Maybank Research adds. Since MLT’s manager guided for negative reversions of low teens in China, the portfolio is expected to be supported by Singapore, Hong Kong, Japan and Australia, which contribute 70% to revenue.
Against this sombre outlook, Maybank Research has lowered its target price by 24% to $1.30, with a “hold” rating. MLT ended April at $1.35. Its full-year DPU of 9.003 cents translates into a yield of 6.67%.
