Monetising balance sheets to provide liquidity is likely to command a better cost of capital as property sales at or above valuation underline the valuations in the balance sheet.
Recycling plans, in particular divestments, were articulated by the managers of all three Mapletree REITs. The most surprising was Mapletree Pan Asia Commercial Trust N2IU ’s (MPACT) announcement that the only core properties in its portfolio not for divestment are VivoCity and Mapletree Business City (Phases I and II).
Elsewhere, both Mapletree Logistics Trust M44U (MLT) and Mapletree Industrial Trust ME8U (MIT) are prepared to divest up to $500 million each, subject to pricing and market conditions. Market watchers think this could be due to the stubbornly high cost of debt, higher interest expense on refinancing, and investor feedback on issues such as capital management, interest coverage ratios and aggregate leverage.
To take a step back, interest rate trends have led to a sea change in how investors view REITs. Interest rates affect S-REITs in three main ways and the Mapletree REITs were no exception. First off, the yield spread between risk-free rates and the distribution per unit (DPU) yield of the REIT causes the unit price of the REIT to rise and fall. Often to maintain the yield spread as risk-free rates rise, REIT prices are likely to fall. Year to end of April, MLT’s unit price is down 21.6%; MPACT is down 17.5% and MIT has lost 10%.
More importantly, interest rates affect the cost of debt. Inevitably, interest costs present the highest costs for S-REITs and they have a direct impact on DPU. Third, the prevailing interest rate environment impacts capitalisation rates and discount rates which are used in discounted cash flow models. In the absence of transactions, investment properties are valued based on their rental and occupancy trends, cash flow and discount rates.
The pace of the Federal Reserve’s rate hike cycle for its Federal Funds Rate (FFR) has been unprecedented. The FFR rose 11 times between December 2021 and July 2023, from 0%–25% to 5.25%–5.5% to a 24-year high, in the fastest rate hike in living memory.
For instance, discount rates have moved up significantly in the US, and this has affected the valuation of MIT’s US data centre portfolio, although valuations were partially offset by stable and rising rentals.
MIT’s manager has divested its older Singapore assets from time to time and recycled the proceeds into data centres. On March 27, MIT completed the divestment of its Tanglin Halt Cluster for $50.6 million, above the valuation of $48.7 million.
MIT to divest up to $500 mil of assets
See also: Changes in ICR, leverage to come into effect immediately, with additional disclosures in March
This year, MIT may divest more than it did in FY2024. Tham Kuo Wei, CEO of MIT’s manager, explains: “In the last quarter our guidance was $200 million to $300 million, Now it is $200 million to $500 million. These are figures in a band of simulations we are looking at, and we have some basis built up from the valuers’ candidates in our portfolio, with reasonable lower and higher probability of divestment. While we like our assets, we don’t form emotional attachment to them when we’re looking at the economic outcome.” He adds, “For the US data centres, we will try to divest ones that are less relevant to us, whether financially or operationally or from the attributes perspective.”
For example, MIT owns a data centre in San Diego. It is rented to AT&T, which extended its lease for a slightly higher rent. However, Tham says if MIT cannot get a replacement tenant when the lease expires by December, he would look to divest it. “This asset is adjacent to a vibrant Biotech-Life Science market in San Diego, which is one of the largest life sciences markets in the US, so that might appeal to different groups of developers or end users,” Tham says.
MIT has been particularly successful in converting flatted factories into high-tech facilities. In 1Q2023, MIT completed its Mapletree Hi-Tech Park @ Kallang Way. Back in 2017, MIT completed a build-to-suit for HP at Depot Road, turning former flatted factories into a hi-tech building.
With Mapletree Hi-Tech Park @ Kallang Way, MIT turned a bunch of flatted factories at the “Kolam Ayer Cluster” into a state-of-the-art hi-tech building whose valuation as at the end of March stood at $291 million compared with the original valuation of $68 million.
Tham says that the uplift in Singapore valuations offset declines in the REIT’s US data centre portfolio. “[In Singapore], cap rates are generally the same except for Singapore data centres because of the very high demand. We saw a 50 bps cap rate compression. The cap rate being the same for the rest of the sectors is the indication of the stability of the Singapore market,” Tham says. He points out though, that the REIT switched valuers in FY2024.
Unsurprisingly, US capitalisation rates expanded across MIT’s US portfolio with a couple of exceptions such as 180 Peachtree in Atlanta which has a long weighted average lease expiry and high occupancy rates. On the other hand, the valuation of 5000 South Bowen Road, Arlington, Texas, fell to US$4.1 million ($5.6 million) in FY2024 compared to US$23.2 million in FY2023. “We had a high cap rate in Arlington because of the tenant leaving and no re-leasing yet,” Tham says.
When asked if he sees cap rates continuing to expand, which is negative for valuations, Tham says, “We think we are near the bottom because cap rates are quite sensitive to funding costs and the interest rate environment, and we could be about to turn the corner. If the market is exuberant for data centre assets, we should see some improvement.”
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All in, MIT’s portfolio was valued at $8.8 billion as at the end of March compared to $8.7 billion a year earlier, despite a decline of almost US$200 million in the North American data centre portfolio.
MPACT’s priorities
Against changing trends and geopolitical headwinds, Janica Tan, CFO of MPACT’s manager, outlined three strategic priorities. “We expect ongoing headwinds in the broader market, especially in the new era of higher interest rates. Our strategic objective is to position MPACT effectively for future opportunities. As we navigate this landscape, we have three strategic priorities,” she confirms.
“The first is to strengthen MPACT’s capital structure and redefine our portfolio mix,” Tan says. “We are actively pursuing opportunities to recategorise our capital structure and this involves an agile portfolio management strategy that responds to current market conditions. We will also undertake initiatives to enhance unitholders’ value,” she adds.
Secondly, the manager will continue proactive asset management efforts. For instance, although MPACT’s Chinese assets underperformed when compared on a historical basis, they performed at par or better than their comparables in the market. The key is maintaining healthy occupancies at above-market occupancies, and “ensuring” stable rental income.
“We aim to stay ahead of the market changes, ensuring that our assets survive volatile conditions,” Tan says. “Singapore will continue to be a key component of our portfolio providing a stable foundation as we navigate through cycles.”
When pressed, Sharon Lim, CEO of MPACT’s manager, confirmed that the Singapore portfolio will continue to be at the REIT’s “core”. In FY2024, Singapore accounted for 59% of MPACT’s revenue and 60% of its net property income (NPI).
The portfolio will be reviewed every year and all assets are up for divestment consideration except VivoCity and Mapletree Business City (MBC Phases I and II). “In terms of recycling anything that is not core which is VivoCity and MBC, if it makes sense we will consider [divesting] based on the balance sheet, book value and DPU,” Lim says.
Both VivoCity and MBC have longevity in terms of sustainable numbers and being able to sail through long periods, she adds. In FY2024, these two properties accounted for 54% of MPACT’s NPI.
“Despite a challenging environment, we believe MPACT would be able to divest Mapletree Anson as expectations of further interest rate hikes ease. This would help address concerns on elevated gearing for MPACT and would also be yield-accretive, given that divestment yield would likely be below the cost of funds,” notes JP Morgan, on MPACT’s potential recycling plans.
MLT’s focus on rejuvenation
Like MIT, MLT is also looking to divest $200 million to $500 million of assets this year. In FY2024, MLT acquired $1.1 billion of assets. This was because the market was favourable for an equity fundraising which MLT undertook in March 2023. This year, with more challenging market conditions, MLT will rely on a recycling strategy.
Ng Kiat, CEO of MLT’s manager, says: “We have to rely on a recycling strategy, divesting lower-yielding assets to [buy] higher-yielding assets. We will divest in Malaysia, China, Hong Kong and Singapore, and some from Japan. We are looking at $200 million to $500 million of divestments.”
“We will continue with our recycling strategy and look to sell poorer spec properties in China. In Hong Kong, we are keen to divest lower spec strata title units,” Ng says. Some properties in China’s tier 1 cities have short land leases, and they could be candidates for divestment.
China appears to be suffering from overcapacity and MLT is not the only S-REIT facing challenges in China. Indeed, MLT’s operating statistics look a lot better than its peers. CapitaLand China Trust AU8U ’s logistics portfolio has an occupancy rate of just 67.6%. The tenant in its Shanghai logistics park vacated because of business closure.
Ng indicated that MLT could either redevelop one of its properties in China or it could be rezoned to commercial use and acceded that there would be divestment gains on change of use. She readily acknowledges that tier 2 cities are oversupplied with logistics assets. “Some of the older properties where the specs are not so good will see negative rental reversion pressure,” Ng confirms.
Sponsor support
For the oft-repeated criticism that S-REITs are only interested in growing AUM, here are three S-REITs which are prepared to divest properties focusing instead on growing DPU. The performance fees of MIT and MPACT are tied to DPU growth.
Mapletree Investments has always been supportive of its REITs. With MIT, Mapletree provided support in the form of a joint venture to acquire MIT’s two data centre portfolios. Eventually, MIT was able to acquire Mapletree’s stake in the 2017 joint venture. Mapletree also supported MPACT in its merger by offering an all-cash option to Mapletree North Asia Commercial Trust’s unitholders.
A sponsor’s role is not just to provide a pipeline of assets to its REITs, but to support them financially. Mapletree owns 25.9% of MIT (as at Apr 9), 27% of MLT and 49% of MPACT, showing alignment between sponsor and REIT unitholders.
