On 26 July 2023, Mapletree Industrial Trust (“MIT”) have announced first quarter results for FY2024. MIT have shown that there have been deterioration of their fundamentals this quarter, which is not surprising given the current interest rate climate and it is consistent with other REITs across the board. MIT seems to have the sufficient financial resources to handle the increases for the next few years until interest rate starts to taper off.
Nonetheless, under my “Key things to note”, there is a need to consider the potential impact of a extended period of higher interest rate environment not just on MIT, but also their tenants. Combined with the continued decrease in occupancy, there may be further fundamental impact investors will need to assess their risk profile accordingly.
Website: Financial Statements And Related Announcement::First Quarter Results
Photo source: https://fifthperson.com/2021-mapletree-industrial-trust-agm/
Background
MIT is a real estate investment trust listed on the Main Board of Singapore Exchange. The principal activity of MIT and its subsidiaries (the “Group”) is to invest in income-producing real estate used primarily for industrial purposes in Singapore and as data centres worldwide beyond Singapore, as well as real estate-related assets, with the primary objective of achieving sustainable returns from rental income and long-term capital growth.
MIT’s property portfolio includes Data Centres (Singapore), Data Centres (North America), Hi-Tech Buildings, Business Park Buildings, Flatted Factories, Stack-up/Ramp-up Buildings and Light Industrial Buildings.
MIT’s property portfolio comprised properties in Singapore and North America (including data centres held through the joint venture with MIPL).
MIT’s distribution policy is to distribute at least 90.0% of its taxable income, comprising substantially rental income from the letting of its properties and related property services income after deduction of allowable expenses, as well as interest income from the periodic placement of cash surpluses in bank deposits.
MIT is managed by Mapletree Industrial Trust Management Ltd. and sponsored by Mapletree Investments Pte Ltd.
Key Metrics
Distribution Per Unit (“DPU”)
| Metrics | Current | Previous |
|---|---|---|
| Distribution Per Unit | -2.9% | -1.7% |
DPU for the first quarter of FY2024 decreased by 2.9% when compared to the same quarter of the prior year. This is mainly due to the significant increase in borrowings costs. If comparing with 2023Q4, there is a decrease in borrowing costs instead which may be a better indicator moving forward.
Nonetheless, give nthat the DPU is relatively unchanged, this metric is Neutral.
Occupancy
| Metrics | Current | Previous |
|---|---|---|
| Occupancy | 93.3% | 94.9% |
Occupancy rate as at 30 June 2023 have decreased to 93.3% as compared to 94.9% at 31 March 2023. There has been generally decreases in portfolio occupancies for all the segments, and while Light Industrial Buildings decreased the most, it is not the largret segment. This metric is Unfavorable as it is slightly below my expected healthy occupancy rate of 95%.
Gearing ratio
| Metrics | Current | Previous |
|---|---|---|
| Gearing Ratio | 38.2% | 37.4% |
Gearing ratio stands at 38.2% as at 30 June 2023, an increase from 37.4% as at 31 March 2023. This to me is Neutral, as the increase is in this high interest rate environment although it is a distance away from the MAS limit of 50%. There may not be sufficient buffer should gearing increase significantly.
Interest coverage
| Metrics | Current | Previous |
|---|---|---|
| Interest Coverage | 4.4x | 4.5x |
The adjusted interest coverage for the trailing 12 months stands at 4.4 times as at 30 June 2023. This is Unfavorable in my opinion as the coverage ratio is slightly below my preferred coverage of 5.0 times. It is likely that the cost of debt will continue to increase as MIT refinance their debts in the current interest rate climate.
The Federal Reserve on 25 August 2023 have announced that they may need to raise interest rates further to cool the still-too-high inflation, despite having increased the interest rates to a range between 5.00% and 5.25% on 26 July 2023, the highest level in 22 years.
Website: Fed’s Powell: higher rates may be needed, will move ‘carefully’
MIT have provided the interest rate sensitivity analysis as below. Should the interest rate increase by another 1.0%, using distribution per quarter as a base, distribution is expected to decrease by 1.4%. Together with other cost pressures, DPU may be negatively affected moving forward and investors should keep a keen eye out for the interest coverage.
| Change in Interest Rates | Impact on amount available for distribution per quarter (SGD’000) | Impact on DPU (%) |
|---|---|---|
| + 50 bps | -$700 | -0.7% |
| + 100 bps | -$1,400 | -1.4% |
| + 150 bps | -$2,100 | -2.1% |
| + 200 bps | -$2,700 | -2.9% |
Debt maturity profile
| Metrics | Current | Previous |
|---|---|---|
| Debt Maturity Profile | 3.7 years | 3.7 years |
Weighted average term to maturity of their debt stands at 3.7 years on 30 June 2023. This is Favorable and it allows them sufficient time to refinance their debts as they fall due.
Price to Book Ratio
| Metrics | Current | Previous |
|---|---|---|
| Price to Book Ratio | 1.21 | 1.27 |
The Price to Book (“P/B”) ratio currently stands at 1.21. This is computed using the closing share price of SGD2.23 on 25 August 2023 and the net asset value per share of SGD1.85 as at 30 June 2023. Despite the share price falling since my previous article, the P/B ratio is still on a higher side compared to other REITs. The metric is Neutral.
Dividend yield
| Year | Yield | Total |
|---|---|---|
| 2023 | 4.53% | SGD 0.101 |
| 2022 | 6.20% | SGD 0.138 |
| 2021 | 6.01% | SGD 0.134 |
| 2020 | 5.46% | SGD 0.122 |
| 2019 | 5.41% | SGD 0.121 |
| 2018 | 4.87% | SGD 0.109 |
For the first three quarters of the calendar year 2023, MIT have declared a dividend of SGD0.101 per share. If extrapolated to a full calendar year, this will mean an expected dividend payout of SGD0.134 per share, slightly below when compared with 2022. With a closing share price of SGD2.23 as at 25 August 2023, this translates to a dividend yield of 6.01%. For my benchmark, a general reasonable range would be around an average of 5.5% to 6.5%. The dividend yield is thus Favorable.
Website: Reasonable Dividend Yield 2023Q3
Other metrics
Tenant profile
MIT has an enlarged portfolio covering multiple trade sectors, with a well diversified tenant profile of over 2,000 tenants and the top 10 customers as at 30 June 2023 accounted for only 29.6% of MIT’s portfolio with no single tenant accounting for more than 6.1% during the period, providing income diversity to the portfolio.
Key things to note
The high interest rates not only have an impact to MIT directly, but will also have an impact indirectly as their tenants bottom lines are being affected. In June 2023, Digital Core REIT have announced that their second-largest tenant filed for Chapter 11 bankruptcy. While the name have not been disclosed, speculation has indicated that it may be one of MIT’s top 10 tenants as well.
Website: Digital Core Reit manager warns DPU could be halved as second-largest tenant goes bust
This situation is an example of what may happen to other tenants as well should the interest rates continue to remain higher over the next few quarters and they are unable to fund operations, which includes rental to MIT. Investors should therefore keep an eye out for any similar news and assess their risk profile on a frequent basis.
Summary
| Metrics | Financials | Rating |
|---|---|---|
| Distribution Per Unit | -2.9% | Unfavorable |
| Occupancy | 93.3% | Unfavorable |
| Gearing Ratio | 38.2% | Neutral |
| Interest Coverage | 4.4x | Unfavorable |
| Debt Maturity Profile | 3.7 years | Favorable |
| Price to Book Ratio | 1.21 | Neutral |
| Overall | | Unfavorable |
Overall, the metrics indicate that it is unfavorable to invest in MIT. Multiple metrics have seen a deterioration this quarter. Given that the interest rates are likely to remain at these levels over the next few quarters, it is possible for further DPU impacts as the borrowing costs will affect not only MIT but also their tenants, which may cause the share price to face some further downward pressure.
Investors will need to assess their risk profile and determine when is a good opportunity to enter as there may be further share price depreciation while waiting for interest rates to decrease over the next few years. Given MIT stable track record, it should provide some ease to investors that the REIT will be able to ride out the uncertainties ahead.
Disclaimer: Not financial advice. All data and information provided on this site is for informational purposes only.
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