REITs

REIT analysis: A Review of Mapletree Logistic Trust (SGX: M44U)

Mapletree Logistic Trust (MLT) is an Asia Pacific focused real estate investment trust that invests in a diversified portfolio of income-producing logistic real estate. These are warehouses and distribution facilities that are key nodes in the global supply chain.

As investors, we ask if MLT deserves a place in our portfolio. We’ll attempt to answer this question by focusing our analysis around how effective MLT has been, and will be, in delivering absolute returns for shareholders.

In this analysis, we will concentrate on three key areas:
– The sustainability of its distribution
– MLT’s strategy and its growth trajectory
– Current valuation


Is MLT’s distribution sustainable?

Short Answer: Largely, Yes.

This is usually the first question I’ll ask whenever I look at income stocks. Income stocks generate shareholder’s return by paying out most of their earned income in the form of dividends. MLT as a REIT falls neatly into this category.

Illustration of MLT Sources of Cash Income and Cash Expenditure

For REITs and income stocks, in most cases if not all, we want to see a positive figure at financial close.

This means that the total number of cash entering MLT’s account, determined by its operating activities, joint ventures and divestments, is more than the cash exiting MLT’s account, calculated by the payment of distributions, interest and tax.

Looking at MLT’s financial statements, I sieved out the non-cash items to have a feel of how it has managed its cash flow over the years.

In the past 14 years (skipped FY11/12 due to the change in financial years from end-Dec to end-Mar), MLT has been cash flow generative in 11 out of 14 years in operation.

This is a good indicator of MLT’s management commitment to a sustainable distribution payment.

Note: We want to be more cautious in separating cash and non-cash returns for capital intensive, asset-based companies like MLT. One example would be the apartment that you are living in. It may have appreciated in value over the years, but you don’t get to spend it or realised the gains unless you sell it (or take up an equity loan).

How can MLT generate further value for investors?

Short answer: Stable growth in distribution per unit (DPU) and net asset value (NAV)

Next, I’ll look at how can the business grow in the next 5 to 10 years.

But as a REIT, MLT is not exactly built for growth. Nonetheless, there are tools MLT can employ to increase its DPU and NAV to generate further value for investors.

To find out, I examined three areas:

1) MLT’s Strategy
Source: MLT Annual Report 2015/16

Aside from regular distribution, a REIT can also generate shareholder’s return through the appreciation in value of its assets. Think of how as individuals, we can use leverage to flip properties to increase our net worth (if done correctly in the right market conditions).

I looked at MLT’s managers’ vision for the company and observed their track record through its financial statements. Acquisition and re-development continues to be MLT’s primary engine for growth since inception.

Specifically, MLT buys properties in APAC regions where logistic facilities are in demand and growing. They will then nurture or upgrade these facilities and selectively divest the properties when they’ve reached an optimal point in their lifecycle.

Looking at MLT’s track record, we can see that MLT’s manager has been actively buying overseas properties and recording significant capital appreciation. At the same time, older properties found mainly in Singapore are gradually divested.

In fact, MLT would have recorded a higher amount of capital appreciation from its overseas properties, without the drag of the depreciating Singapore assets (blue bars in the above graph).

Overall, MLT has been successful in executing this strategy. Since its inception, MLT has grown its book value and returned dividends to shareholders to the tune of about 8.3% yearly (I have removed market premium for this calculation, meaning I’ve rated the book value to 1.0). Comparatively, the largest logistics REIT Prologis annualised return was about 7.7%.

2) Macro Trends in the Logistic Industry

Second, I looked at the macro environment that MLT is in. The good news is that MLT’s industry is in a growth phase accelerated by the Covid pandemic.

The increased adoption of e-commerce around the world increases the need for more warehouses and distribution centres. Various industry research has projected the global warehousing market to continue growing in the next 5 years.

The problem is that big institutional players are very well tuned in to this trend and has been dumping large amounts of money into this space.

Across the different geographical markets, we have been observing cap rate compression, which bodes well for existing property owners (asset valuation increases). However, this also limits the number of yield accretive opportunities for companies like MLT that grow via acquisitions.

Nonetheless, MLT remains a beneficiary of this secular trend from its existing properties and well-timed expansionary acquisitions (in hindsight) of overseas property since 2017/2018.

MLT has signalled a continuation of this strategy in FY22. Interested investors should monitor MLT’s upcoming acquisitions to have a better appreciation of developing market conditions.

3) Interest rates

Third, a capital-intensive business usually holds a fair amount of debt in its balance sheet. For REITs, monitoring the interest payment against the operating income i.e., the interest coverage ratio is an important snapshot of its capital management ability.

For MLT, the interest coverage ratio of 5.1 is largely comfortable.

The area of concern is that the majority of the borrowings that are secured at relatively low rates are due for renewal in 2023-2025.

The US Federal Reserve’s dot-plot have indicated an increase in interest rates post 2023. This is a space to watch as higher interest payments translates directly into lower distribution.

Is MLT at a good price?

Short answer: No, but bear in mind projecting future valuation is very subjective!

A good investment is about getting a good business at a good price.

My proposition for MLT is that it is a stable distribution generating business with growth potential in the property acquisition space. Accordingly, I will be using its DPU and NAV to value this business.

Valuation

To account for its stable DPU growth, I used the Dividend Discount Model to obtain the present value of MLT distribution over 10 years. MLT’s historical compounded annual growth rate (CAGR) of DPU from 2006 suggests a growth rate of 3.38%.

To account for its growth via acquisition strategy, I used a projection of its NAV in 10 years. The historical compounded annual growth rate (CAGR) of NAV from 2006 suggests a growth rate of 4.08%.

To lend some credence to these assumptions, the logistic industry had gone through both a period of rapid growth (2006~2008) and a down cycle (2009~2014) and the historical CAGR data captures the growth of MLT in both market cycles.

The calculated total return from MLT at the end of 10 years is $2.71. This dollar figure is the present value of the total DPU investors are expected to receive and the NAV of the underlying assets in 10 years.

Sensitivity Analysis

A sensitivity analysis is done below to understand the expected annualised return at the various unit purchase price.

At $1.33 (book value), your expected annualised return is 7.38%

At $2 (market price), your expected annualised return is 3.08%

Final Thoughts – Am I going to buy MLT?

Short answer: No

There are two reasons to this.

MLT’s current valuation is kind of inflated as everyone wants a piece of the e-commerce wave. The return on my capital is thus far too low for the market risk I have to bear.

In addition, the economic principle of supply and demand, and historical MLT data have demonstrated that the warehousing business is very much cyclical in nature. I feel there is limited upside and the risk/reward is not beneficial to retail investors like me at this point.

However, in this prolonged low-interest-rate environment and the ongoing e-commerce boom, anything can happen.


I hope this provides you with another perspective on MLT. Let us know what you think and subscribe to our blog if you wish. Stay safe y’all!

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