SINGAPORE (Oct 28): Another week, another placement. Mapletree Logistics Trust’s Oct 22 announcement of a proposed private placement to raise $250 million has taken monies raised by real estate investment trusts through follow-ons alone to almost $4.6 billion. Demand for MLT’s placement units was strong even though, at its current price of $1.69 a unit and placement price of $1.617 a unit, yields are remarkably low for an industrial REIT, at just 4.9% and 5% respectively, based on the annualised distribution per unit yield of 8.1 cents. The private placement was more than 13 times covered and saw strong participation from new and existing institutional, accredited and other investors, MLT’s manager announced.
For 2QFY2020 ended Sept 30, MLT reported a DPU of 2.025 cents and net asset value of $1.17. The placement price represents a 38% premium to NAV, making any acquisition accretive.
MLT is not just another REIT, though. It owns 137 logistics warehouses in eight countries, both developed and emerging markets, across Asia-Pacific. Although the occupancy rate is down one basis point to 97.5%, it is above 96% in all its geographies.
Logistics warehouses are seen as beneficiaries of Asia’s growing e-commerce market. On the other hand, the US-China trade conflict is an unknown. MLT’s manager says in a statement that some countries in Southeast Asia stand out as potential beneficiaries of the reconfiguration in global supply chains that has emerged in response to the trade conflict.
The rise of digital banking and e-commerce in Singapore has led to the launch of digital banks by the local banks, the digitalisation of banking in general and the trend of financial inclusion that is catching on after being a theme in the Singapore Fintech Festival 2018. These factors are likely to lead to a new megatrend that sees a large unbanked Asean population entering the formal banking system, which in turn will lead to economic opportunities and has not gone unobserved by analysts.
“The ease of e-commerce sales will increase, as many Asean countries are working to bring a larger proportion of the population into the formal banking system. The bypassing of landlines and the movement of the new middle class directly to mobile phones, combined with the ease of digital payment systems, should increase the size of the e-commerce market,” notes UOB Kay Hian in a report dated Oct 22. Digital payments are likely to make e-commerce even more convenient, it argues. The storage and movement of goods, essential for e-commerce, takes place in and out of logistics warehouses. MLT is the clear e-commerce play for Asean and Asia-Pacific in general.
More than AUM boost, DPU accretion
Of the $250 million raised in private placement, $240 million will be used as part-payment for a new acquisition. On Oct 21, MLT’s manager announced plans to acquire a property in Malaysia, two in Vietnam and four in China for a total of $422 million, including fees and expenses. The acquisition — which requires unitholders’ permission in an EGM, as the properties are interested-party transactions — is likely to take assets under management (AUM) to $8.3 billion when completed.
The new acquisition assets are focused on e-commerce tenants. “The properties are 100% leased to a strong and diversified tenant base catering mainly to the consumer markets, with a weighted average lease expiry (by net lettable area) of 1.9 years. The tenant base includes consumer brands such as Watsons and Ashley Furniture, as well as Lazada eLogistics and Shopee, leading e-commerce players in Southeast Asia. In aggregate, e-commerce companies account for 45% of the properties’ gross revenue,” MLT’s manager says of the acquisition assets.
Although logistics assets are a conduit for trade, they are also used to store and move goods for local consumption. Based on gross revenue of its current portfolio, almost three-quarters of MLT’s current portfolio serve the consumer-related sectors (see Chart 1).
The main downside in the portfolio is a 9.5% exposure by gross revenue to CWT, whose parent is CWT International, which is going through a restructuring, following a default on a HK$1.4 billion ($234.4 million) loan in April. MLT reported gross revenue of $121.75 million and $241.56 million in 2QFY2020 and 1HFY2020 respectively.
According to MLT’s announcement, the DPU accretion is 1%, lifting DPU from 7.941 cents to 8.019 cents. The actual accretion is likely to be higher, at 1.5%, as the private placement price was at the top end of the indicated range. The indicative accretion to NAV per unit based on MLT’s announcement is 1.7%, lifting NAV to $1.18 from $1.17.
In addition to the immediate boost to DPU and NAV, MLT can reap longer-term benefits from a larger, geographically diversified AUM because of a greater network effect. The REIT’s extensive network of logistics facilities across eight countries enables MLT to offer its customers a broad range of regional leasing options as they expand regionally to capture growth opportunities presented by the large consumption markets. As an example of the network effect, tenants who lease space at multiple locations account for a higher 34% of MLT’s leased area, compared with 25% in 2015.
Benefits from trade war
Three of the seven acquisition properties are in geographies that could benefit from the trade conflict. MNCs, daunted by the US tariffs on China goods, are relocating their supply chains from China to countries such as Vietnam and Malaysia, owing to their lower labour cost, presence of established manufacturing ecosystems as well as pro-investment policies, MLT’s manager says.
According to independent market research consultants, Vietnam could gain 7.9% of GDP from trade diversion. MLT’s manager, citing the consultants, says manufacturing investments in Malaysia in 1Q2019 alone had eclipsed that of 2018 by 3.6 times. In Malaysia, the increase in foreign direct investment and growth in the manufacturing sector, coupled with the positive knock-on effect on the economy as well as domestic consumption, are expect ed to strengthen the demand for logistics facilities, MLT’s manager says.
Although the acquisitions increase the net lettable area of MLT’s portfolios in Malaysia, Vietnam and China by 65%, 55% and 14% respectively, post-acquisition, 80% of the expanded gross revenue will continue to be from the developed markets of Hong Kong, Singapore, South Korea, Japan and Australia.
REITs remain popular despite yield compression
Average yields for the 42 S-REITs have compressed to 6.2% in October compared with 7.1% (for 39 S-REITs) in January. There has been a significant yield compression for REITs with developer-sponsors such as Mapletree Commercial Trust, CapitaLand Mall Trust, CapitaLand Commercial Trust, Frasers Centrepoint Trust and ParkwayLife REIT trading below DPU yields of 5%.
The yield on 10-year Singapore government securities has also fallen this year and is hovering near the low for the year at 1.73%, down from 2.05% in January and 2.53% a year ago.
Howie Lee, an economist at Oversea-Chinese Banking Corp, thinks yield products such as REITs are in demand because of the current low interest rate environment.
“If your government bonds are at negative rates, you are essentially just living off your savings income. This is the reason dividend yield is so compressed. If yields are at best 4% on what was supposedly 7%, you really have no choice but to accept that. We are living in a world of low yields,” he says resignedly.
Analysts unexcited
Maybank-Kim Eng and CGS-CIMB have retained their “hold” ratings on MLT, and Credit Suisse has an “underperform” rating. According to Credit Suisse, the outlook is not that great. “[In 2QFYT2020] portfolio reversions were similar to previous quarters at 1.8% (flat in Singapore and China). Management continues to note cautious renewals and expansions by tenants, and expects slower (albeit slight positive) reversions for Hong Kong,” the Credit Suisse report states. “MLT trades at a FY2020E yield of 4.9%, which is also its tightest yield since 2007 and already pricing upside from acquisitions.”
Maybank-Kim Eng reckons the stock is more or less fairly valued with its valuation at $1.60. “The stock is likely to be capped in the near term, as equity fund-raising activity raises DPUs by up to 1.3%. Our DPUs are mostly unchanged after some fine-tuning of estimates,” Maybank-Kim Eng says, pointing out that the assets were acquired at a 2.3% to 2.5% discount to their independent valuations, but at tighter capitalisation rates of 5.7% to 7.9% versus its portfolio’s capitalisation rates 6.4% to 9.7%, suggesting that the acquisitions may not be net property income yield-accretive.
CGS-CIMB has an even lower valuation of $1.55 for MLT compared with its last traded price of $1.69 as at Oct 23. “While we are positive on the deals, as they help to offset the weaker sentiment in its key markets and boost exposure to growing economies, we think that the stock continues to trade at elevated levels (more than 2 standard deviations above historical mean, see Chart 2),” CGS-CIMB says, adding that a key risk would be the default of its major tenant CWT.
For all its detractors, MLT remains popular among investors, despite the yield compression; the private placement’s record oversubscription is testament to its popularity.
