The future may hold a Southern Waterfront play, a generative AI play, and an Asean China+1 proxy for Mapletree Investments’ three listed S-REITs. Now, times are challenging though.
The three Mapletree REITs are among the best-managed and most resilient S-REITs. Their capital management strategies, recycling plans and views on the outlook for distributions per unit (DPU), rents and occupancies are expected to define the S-REIT sector in the aftermath of the rate hike cycle.
Amid the gloom surrounding S-REITs, a flicker of hope stands out. Mapletree Industrial Trust ME8U (MIT) and Mapletree Pan Asia Commercial Trust N2IU (MPACT) reported y-o-y increases, albeit modest, in their DPU for 4QFY2024 ended March. In terms of DPU, Mapletree Logistics Trust M44U (MLT) reported a y-o-y decline in its 4QFY2024 distribution despite the inclusion of divestment gains. All three REITs reported y-o-y DPU declines in FY2024.
The messaging and outlook from their managers remained very cautious. All three have articulated capital recycling strategies to improve and upgrade their portfolios as they navigate the interest rate cycle.
Most S-REITs, including the Mapletree REITs, face interest rate pressures as cheap Covid debt gives way to higher debt costs and low-cost hedges roll off to be replaced by higher-cost hedges. In the case of MPACT and MLT, there was the additional challenge of volatile foreign exchange (forex) trends versus a strengthening Singapore dollar despite hedging.
Ng Kiat, CEO of MLT’s manager, says: “The big part where we get hit is forex. Without forex, our revenue [in FY2024] would have risen by 3.6% but it rose by 1.2% instead. That was the main factor to hit our topline.” Additionally, MLT reported a negative $470 million impact on its FY2024 portfolio valuation due to forex movements.
Having been listed as far back as 2005, MLT was also one of the first REITs to go regional, which means its manager knows a thing or two about forex hedging. MIT was listed in 2010 as having mainly industrial buildings and flatted factories. In partnership with its sponsor, it ventured overseas in 2017 with a 40% stake in a data centre portfolio in the US. As at the end of March, more than half of MIT’s portfolio by AUM (assets under management) is in data centres.
Mapletree Commercial Trust (MCT) was listed in 2011 with a wholly Singapore-focused portfolio and Mapletree Greater China Commercial Trust (MGCCT) was listed in 2014 with Festival Walk in Hong Kong and two buildings in China. MGCCT acquired a portfolio in Japan and an office building in Seoul and was renamed Mapletree North Asia Commercial Trust (MNACT) in 2018. In 2022, MCT and MNACT merged to form MPACT.
The post-pandemic economic backdrop, coupled with the fastest rise in interest rates in living memory, is posing significant challenges to all S-REITs, including the Mapletree REITs. Since 2021 and the Mapletree REITs’ FY2022 (their financial year ends on March 31), their interest expense has grown at a faster clip than net property income (NPI) which has affected DPU. In addition, China, once the world’s growth engine, is facing overcapacity.
See also: Changes in ICR, leverage to come into effect immediately, with additional disclosures in March
Managing precious capital
Astute capital management has kept the average cost of debt stable for the REITs. In their latest financial year, MIT’s weighted average all-in cost of debt is 3.1%, MPACT’s is 3.35% and MLT’s is a low 2.7%, unchanged y-o-y.
Most recently, MIT has used yen-denominated debt to lower total interest expense. It acquired a newly completed data centre in downtown Osaka on Sept 28, 2023. This acquisition benefitted the REIT in a few ways. The weighted average lease expiry for the property is 20 years, with a net lease structure and minimal landlord operational obligations. The acquisition is 2.1% and 0.5% accretive in terms of DPU and net asset value (NAV). The acquisition has also helped deter the rise in MIT’s average debt cost.
The consideration for 98.7% of the data centre is the equivalent of $500.1 million. The Osaka property currently accounts for 4.2% of MIT’s total assets and should comprise around 5.7% of total assets once the entire data centre has been completed and fully acquired. As at the end of March, yen-denominated debt accounts for 13.2% or $394 million of MIT’s total debt of $2.98 billion.
In terms of interest expense, MIT’s interest expense has risen by 50% from $70.8 million in FY2022 to $106.6 million in FY2024. However NPI rose 10.5% from $471.9 million in FY2022 to $521.4 million in FY2024.
The rate of increase in MIT’s interest expense has slowed. It was up 34% y-o-y in FY2022, partly because of the acquisition of a data centre portfolio, and a further 37.7% in FY2023 but slowed to just 9.2% in FY2024, a year when MIT raised $200 million for its Osaka data centre acquisition. “Any company that has yen-denominated assets must tap yen-denominated debt to keep the average debt cost low,” an analyst says.
Lily Ler, CFO of MIT’s manager, says that the average cost of debt in the current financial year ending March 2025 is likely to average around 3.5% compared to 3.1% for the January–March quarter and 3.1% for the October–December 2023 quarter. “I don’t think that we are going to shoot beyond 3.5%,” Ler says, adding this includes $67 million which expires in this financial year. In FY2022, MIT’s average cost of debt was just 2.5%.
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Similarly, MPACT’s manager has used cheap yen-denominated debt and lower-cost CNH debt to keep its average cost of debt relatively low. CNH is RMB that is traded offshore from mainland China. As at the end of March, MPACT swapped HKD loans into CNH which costs less. Thus, the CNH component has expanded from 0.3% to 7% of total gross debt while HKD loans fell from 30% to 23% as at the end of March, Maybank Research observes.
In addition, yen-denominated debt accounts for 15% or $1.02 billion of MPACT’s total debt compared to the $1.28 billion valuation of its Japanese portfolio. Some analysts have cautioned that MPACT has “maxed out” on yen-denominated debt with one believing it could be close to maxing out on RMB debt. At present, MPACT appears to have more leeway on RMB debt although this could be a concern if the valuations for Sandhill Plaza in Shanghai and Gateway Plaza in Beijing decline.
MPACT’s weighted average all-in cost of debt in FY2024 rose to 3.35% from 2.68% in FY2023. When asked for guidance on interest rates in its FY2025 outlook, Sharon Lim, CEO of MPACT’s manager, says: “It’s higher than what we have now. There are legacy interest rate swaps. Japanese rates are going up and we have some refinancing in yen this month. [They will be high] for another year or two even if there is a decline by the end of this year. We will still have to backfill cheap debt that is dropping off. We won’t go back to the good old times but there should be some reprieve by the end of the year.”
JP Morgan says it is expecting a higher average cost of debt for MPACT. “A 50 bps increase in interest rate costs is anticipated for FY2025 from 3.35% in FY2024 on the back of higher financing costs for refinancing of SGD and yen-denominated debt. This is largely in line with the 3.8% financing cost in FY2025 estimates by the Street,” JP Morgan reckons.
MPACT’s capital management remains conservative, with not more than 21% of debt expiries a year. Although aggregate leverage remains above 40% as at the end of March, Singapore valuations are conservative and any uplift in the Singapore valuations could lower leverage.
In FY2024 ended March, MPACT’s total interest expense rose by 39.2% y-o-y. Its FY2023 total interest expense does not have a comparison as the merger took place in the financial year.
During a results briefing on April 29, Ng of MLT guided that the average cost of debt is likely to be 2.9% for the current FY2025 compared to 2.7% in FY2024 and FY2023. “Management guided that average interest cost could trend up from 2.7% in FY2024 to 2.9%–3% in FY2025. An estimated 84% of its debt is hedged into fixed rates and 78% of distributable income hedged into SGD in the next 12 months,” notes a CGS International report.
Maintaining stability
Operationally, rental reversions and occupancy rates are closely watched because these metrics affect both DPU and valuations. For MIT, revenue contributions from the redeveloped Mapletree Hi-Tech Park @ Kallang Way and Osaka Data Centre as well as higher distributions from its joint venture in the US with the sponsor underpinned NPI in FY2024, which rose 0.6% y-o-y to $521 million, and distributable income of $378 million, which rose 2.7% y-o-y. However, DPU fell 1% y-o-y due to a higher base from equity fundraising.
Tham Kuo Wei, CEO of MIT’s manager, expects a steady state occupancy of 90% to 95% at Mapletree Hi-Tech Park @ Kallang Way. “We will reach [that level] and be able to deliver from an accretion perspective. We need 50,000 sq ft to 100,000 sq ft of tenants to provide meaningful improvement to the figures.” The property comprises a gross floor area of about 865,600 sq ft. Of this, 211,000 sq ft is leased to an anchor tenant.
In the US, MIT has faced downsizing tenants with AT&T and Cyxtera which is restructuring. “We are very close to getting a replacement for Brentwood (Tennessee). We are at the very last yard in a 100-yard dash. This tenant has very traditional practices and it needs to collect autographs from all relevant signatories and our occupancy should go back up beyond 91%,” Tham says of the property vacated by AT&T.
NPI margins in the current year are likely to depend on occupancy. For properties with expired AT&T leases including Brentwood, MIT does not get any revenue but has to meet expenses such as property tax and this has resulted in the drag.
Tham expects the drag to persist in the US. However, the Singapore portfolio could be more stable. During an analyst briefing on April 24, Tham cautioned against getting too exuberant for the future.
“In the last 10 quarters, rental reversions have been positive. It was 7.2% in the previous quarter and 6.6% this quarter so we are reaching diminishing returns. In the next two quarters, we will have positive rental reversions but they will trend towards 4%–5%. The upward adjustment has already been effected three years ago and additional upshift would be a bit more muted,” Tham explains.
Over at MPACT, VivoCity remains its star property and its Singapore assets, including Mapletree Business City and the Singapore office portfolio, were able to provide a modicum of stability to the portfolio.
On the other hand, MPACT’s largest asset, Festival Walk in Hong Kong, remained challenging as it has done since the protest movement back in 2018. Lim says Festival Walk’s negative reversions are narrowing from –20% y-o-y to between –20% and –10% y-o-y to negative single-digits. “We are hoping to close the gap. Reversion is not everything. NPI is a combination of other factors and has not deteriorated,” Lim says.
She believes that Hong Kong natives going to Shenzhen during long weekends is temporary and only because of a weaker RMB. “We remain more optimistic. Our mall is servicing the locals,” Lim points out.
JP Morgan says Gateway Plaza has been more stable due to BMW’s long lease and its occupancy of 90%. On the other hand, Sandhill Plaza has an occupancy in the low 80% levels, with limited prospects of a near-term recovery in the next few months, JP Morgan says. Some tenants are likely to exit in Japan including MPACT’s third-largest tenant Seiko, JP Morgan points out. However, JP Morgan expects positive reversions from the space vacated by Unilever at Mapletree Business City.
Ng’s outlook for MLT was cautious. She indicated that DPU growth is likely to be negative. “We announced our first DPU decline for MLT. We are one of the last few REITs to have managed to maintain positive DPU but we cannot fight against macro-economic trends of forex weakening and the higher interest rate environment,” Ng says. “Headwinds of forex weakness, higher interest rates and China will continue to hit us.”
Operationally, Ng alluded to China being “weaker than what we would like it to be”. Although rental reversions for the portfolio in MLT’s 4QFY2024 were positive, China’s rental reversions were –10% y-o-y.
“We expect China to be volatile and uncertain for the next 12 months and maybe beyond, and 19.2% of our revenue is from China. The other emerging markets contribute 10%, so we are looking at the 70% of revenue coming from Singapore, Japan, Hong Kong, South Korea and Australia to stabilise the portfolio,” Ng continues.
According to her, the next few quarters are likely to remain uncertain for China with no signs of a recovery. Rental reversions are likely to be negative teens in tier 2 cities. The silver lining is occupancy rates which are unlikely to go below 90%.
“We are entering a negative DPU zone. Hedges are going to come off and new loans are going to come in at higher rates. And 80% of the portfolio has to be generating substantial power to funnel the growth we want to see versus the decline we are seeing,” Ng cautions. Her warnings could apply to almost all the S-REITs.
Looking further ahead, MPACT could turn into a Southern Waterfront play while MLT, with its Asian footprint, could be the proxy for China+1. Of course, MIT has the future before it if its data centres are able to clinch some of the AI business. But these long-term positives are for another day.
