Mapletree Logistics Trust held its 13th AGM (Annual General Meeting) on 18th July 2022. This is prior to the release of their first quarter FY23/22 financial results this Thursday, 21st July 2022.
At the AGM, they shared the FY21/FY22 financial results. I wrote about this before when Mapletree Logistics Trust announced their 4QFY21/22 financial results and thus I shall not repeat here.
What I am keen here are the questions raised by investors during the AGM. The manager of Mapletree Logistics Trust had published their response to the queries.
The manager had categorise the questions into Economy/Strategy, Performance and Others.
Economy/Strategy
- Can the Board show us a strategic road map for growth?
- Can you share the future organic and inorganic growth plans for the REIT in the next 3 to 5 years?
Response
In line with our objective to provide Unitholders with competitive total returns through regular distributions and growth in asset value, we consistently pursued a “Yield + Growth” strategy.This strategy comprises a three-pronged approach:
- Yield optimisation on existing portfolio refers to the proactive leasing and asset management of MLT’s portfolio (organic growth). This includes plans to maintain high and stable occupancy rates and a well-staggered lease expiry profile. In addition, we review our asset plans to identify potential candidates for redevelopment to rejuvenate our portfolio and generate further value. In FY22/23, we will be embarking on the redevelopment of 51 Benoi Road in Singapore that will generate a 2.3 times increase in gross floor area post redevelopment in three years’ time. We are also looking to divest certain older properties with little redevelopment potential and re-deploy the capital released into investment of higher yielding, modern assets.
- Growth via acquisitions (inorganic growth). We aim to deepen MLT’s network connectivity in Asia Pacific through the addition of modern, well-located assets in key logistics hubs. A growing network enables MLT to offer customers a variety of leasing options in multiple cities, which enhances MLT’s competitive advantage. We will remain disciplined and selective in our investment decisions to ensure they are yield-accretive and value enhancing; and
- Prudent capital management to maintain a strong balance sheet and well-spread debt expiry profile with diverse funding sources, while managing exposure to interest rate and forex volatilities through appropriate hedging strategies.
In addition, we have stepped up our efforts to build a sustainable, climate-resilient portfolio. To bring focus to this commitment, we target to achieve carbon neutrality for Scope 1 and 2 emissions by 2030. We are establishing a green roadmap that includes action plans to increase green building certifications for both old and new buildings, and expand MLT’s solar energy generating capacity over time. We believe that these efforts will not only benefit the environment, but will also enhance the attractiveness and resilience of our portfolio.
The responses are self explanatory. In summary, the manager will continue to renew expiring leases, redevelop their property at 51 Benoi Road and divest their existing properties to recycle their capital for further acquisitions.
Like other REITs, Mapletree Logistics Trust is also embarking on green initiatives such as expansion of their solar energy panels to their other buildings in their portfolio. This can probably save them some cost since electricity prices are soaring. At this point in time, I am still not confident whether Green initiatives can directly translate into cost savings.
- Specific measures that management is taking to reduce the impact from the inflation and rising interest rates
- What are the effects thus far to MLT since the Feds started hiking the Feds funds rate?
- In this increasing interest rate environment and high inflationary cost, how will this impact DPU payment and is the current DPU payment sustainable
- With the rising interest rate, how does it affect DPU in 2022 and 2023?
Response
We manage our exposure to interest rate volatilities through hedging. As at 31 March 2022, about 79% of our debt has been hedged into fixed rates. In terms of sensitivity of MLT’s distributable income to interest rate hikes, a 0.25% increase in base rate would result in an estimated 0.05 SGD cent reduction in MLT’s DPU per annum.As for the impact of rising energy price, we expect the impact on MLT’s utility costs will be minimal as a large part of utility costs from operations are recoverable from tenants. In addition, over 70% of MLT’s revenue base have built-in rental escalations that will help mitigate rising costs.
Nevertheless, we will continue to focus on cost management and reduce energy consumption and other non-critical expenses where feasible.
We are unable to provide a forecast or guidance for DPU outlook.
Like most REITs, the manager hedged their borrowings at fixed rate. The rising interest rates should still impact them slightly.
Whether the future DPU will be impacted will be dependent on their divestment and acquisition strategy. In my opinion, the rising interest rates will still impact their DPU slightly.
- Impact of recession, cost of money, and economic slowdown on the Trust’s performance. Mitigation factors in place?
- In the event of stagflation, how will the management tackle this?
Response
In the near term, we anticipate the business environment to remain volatile and uncertain due to the confluence of multiple negative factors, including rising interest rate, inflation and the ongoing war in Ukraine. Where feasible, we will deploy appropriate strategies to mitigate these risks, such as interest rate hedging as explained in the response to question 2.Over the longer term, we are positive on the outlook for the logistics property market and the significant market opportunities in the Asia Pacific region. The structural drivers of demand in the logistics sector such as e-commerce growth, urbanisation and strategic shifts to “just in case” inventory management are likely to keep the logistics property market resilient.
We will continue to execute the growth strategy outlined above to stay competitive and drive revenue growth. In particular, adopting active asset management to maintain stable occupancy rates and a diversified tenant base, and undertake selective redevelopment projects to drive organic growth. We will also continue to maintain a prudent capital management approach and a strong balance sheet. We believe MLT’s diversified portfolio across geographic markets and tenant trade sectors will offer some resilience for the Trust to ride through economic cycles.
- With the onshoring or reshoring of supply chains, does the Manager see risks to the Trust’s existing portfolio? Does the Manager have plans to diversify the portfolio or strategies to mitigate the risks?
Response
The pandemic, which created huge supply chain bottlenecks and high freight costs, had underscored the importance of supply chain diversification and resiliency. The ongoing Russia Ukraine conflict, which led to rising sanctions and export controls, has added further impetus to the need for supply chain security and near-shoring of manufacturing bases.Consequently, we are seeing a regionalisation of supply chains, under which businesses are establishing supply networks closer to end-consumer markets. Southeast Asia has emerged as an attractive market to businesses looking for an alternative manufacturing base. For instance, we see strong leasing demand for warehouse space in Vietnam as manufacturers expand production capacity. Based on our tenants’ businesses, we have not seen much anecdotal evidence of businesses withdrawing from the region and moving manufacturing back to the USA i.e. reshoring.
In addition, the “just in time” rationale to save costs has been replaced with “just in case” to create buffers against future disruptions. These strategic shifts have generally benefitted the logistics property markets in the region.
- Can MLT continue to make DPU accretive acquisitions under the current rising interest rate environment?
Response
Indeed, it will get harder for us to make DPU accretive acquisitions in a rising interest rate environment. To overcome this, we will continue to leverage our market network and relationships to seek out off-market investment opportunities which are less widely marketed and hence more attractively priced. A good number of the third-party acquisitions we closed in FY21/22 were transacted off-market.Our teams also actively look for investment opportunities that offer the potential for redevelopment or intensification of land use to create greater value. For instance, MLT recently completed the acquisition of two prime land parcels in Subang Jaya, Selangor, Malaysia, which are adjacent to MLT’s existing Subang 3 and 4 assets. The amalgamation of these properties into an enlarged land site will enable the development of the first mega modern warehouse in Subang Jaya, an established logistics hub close to Kuala Lumpur city centre. The plot ratio of Subang 3 and 4 will increase five-fold through redevelopment, enabling us to realise greater value from these assets.
- Given that China government can change rules on a whim, is it risky to have such a high percentage of portfolio in China?
Response
We believe the long-term fundamentals of the Chinese logistics sector remain compelling, underpinned by demand growth from urbanisation and domestic consumption, including ecommerce growth.In addition, infrastructure and logistics hubs development are top priorities on the national agenda of the Chinese government. They receive strong government support as they help promote economic growth and urbanisation, especially for the less developed areas.
Nevertheless, we will strive to maintain a balanced exposure to both developed and developing markets. Developed markets such as Australia and Japan are mature and offer stability, while developing markets like China and Vietnam offer higher growth prospects and complement our exposure to developed markets.
Performance
- Is the company’s business affected by recent China lockdown?
Response
During mid-March to May 2022 when stringent Covid-19 lockdowns were implemented across numerous cities in China to contain the spread of the virus, a number of our tenants, especially those located in Shanghai, were unable to operate at full capacity for intermittent periods. This was mainly due to staff shortage as a result of home quarantines, and restrictions on inbound/outbound distribution. The lockdown in Shanghai was lifted in early June 2022 and all tenants have since resumed full operations.
- Even though there is strong demand for logistics space, investors do not seem to have confidence in Mapletree Logistics Trust as can be seen in the share price. Could you explain why?
Response
Since the start of 2022, global equity markets have been rattled by concerns of high inflation, rising interest rates and slowing economic growth. It was also observed that industrial S-REITs such as MLT, which performed well during the pandemic years of 2020 to 2021, have been relative underperformers in recent months due to “rotational trades” as investors switched from the pandemic-resilient industrial sector to sectors that benefit from the economic reopening, such as offices and hotels.Over a longer time horizon, MLT has outperformed both the FTSE REIT Index and STI as measured by its unit price performance over periods of 3-year, 5-year and since listing (refer to FY21/22 Annual Report page 29). The Manager will continue to execute on its “Yield + Growth” strategy and strive to continue delivering stable and consistent returns to Unitholders.
Others
- Are there any plans to merge Mapletree Logistics Trust (MLT) and Mapletree Industrial Trust (MIT)?
Response
We believe that there is sufficient differentiation between MLT and MIT in terms of asset type, geography and tenant profile, and they are both operating at a meaningful scale individually with promising growth prospects in their respective sectors. Hence, there is no compelling reason to merge.