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Mapletree’s group of REITs are a ‘great place to be in’, says DBS

DBS believes that all three REITs' ICRs are able to provide ample buffers even if interest rates remain elevated.

DBS Group Research analysts Derek Tan, Dale Lai, Rachel Tan and Geraldine Wong like the group of REITs by the Mapletree group, calling them a “great place to be in”.

‘’We featured Mapletree Logistics Trust (MLT) M44U, Mapletree Industrial Trust Me8u (MINT) and Mapletree Pan Asia Commercial Trust (MPACT) N2IU in a themed conference in Bangkok, meeting with existing and new investors,” say the analysts in their Sept 25 report.

“Overall, conversations focused on the sustainability of returns (i.e. any bright spots in the operating and demand outlook) given the slowing economic outlook, financial management given an extended period of high-interest rates impacting distributions,” they add.

Amid the more hawkish posture from the US Federal Reserve, with markets now adjusting to two rate cuts from three in 2024, the analysts are advising investors to “add” their positions selectively.

MINT and MLT, which are industrial REITs, are preferred due to the resiliency of their income streams. At the same time, MPACT’s valuation at 0.85x of its P/B and forward yields of over 6% and in excess of -1 standard deviation, is “starting to look interesting for investors”.

“In addition, we note that recent encouraging signs of China’s macros bottoming out (industrial production and retail sales in August 2023 picked up steam) could be a key catalyst for investors to add more convincingly if these improvements are sustained,” say the analysts.

Furthermore, the REITs’ financial metrics – referring to MLT, MINT and MPACT’s interest coverage ratios at 3.2x to 4.4x – are able to provide ample buffers even if interest rates remain elevated.

“A well-positioned debt expiry profile and hedge ratios in excess of 75% shield the Singapore REITs or S-REITs although those levels could come off towards the 70% level in the interim as the managers trade off taking ‘insurance’ by fixing interest rates at near-peak interest rates levels,” they add.

Operationally, MLT’s reversions are generally expected to remain positive for most of its cities given the tight supply of properties. Its occupancy rate is also expected to be resilient in most countries with overall rates to remain between 97% to 98%.

“Key market to watch is China ([at] 20% of exposure) where [its] outlook remains mixed with close to 45% of China (9% of overall portfolio) are in the Tier 2/3 cities which are seeing weak demand due to uncertain macro coupled with competitive supply,” say the analysts.

MINT’s occupancy rates are also likely to remain stable despite the weaker q-o-q numbers in the 1QFY2024 ended June. Competition for space in Singapore is not likely to impact the REIT’s overall returns given that the REIT’s flatted factory portfolio remains price competitive in the current landscape with still-positive reversions.

However, the analysts warn that the REIT may see some weakness in the near-term for its US data centres due to the phased return of space from AT&T’s lease.

“Of note, is a near-term expiry in Milwaukee (0.9% of revenues) and expected to be empty) while the manager is looking to re-let space in Tennessee (1.8% of revenue in November) to a new tenant in the healthcare industry while the medium-term opportunity for its San Diego (2.6%) in December 2024 could be re-positioned,” say the analysts.

Finally, MPACT’s rental reversions are estimated to remain stable with the positive rental uplifts seen, led by Singapore. While the REIT’s Festival Walk property in Hong Kong is still negative, the mall should continue to see lower negative reversions heading forward.

“The return of China tourists could lift overall retail sales in Hong Kong, driving an improvement in overall retail sentiment,” say the analysts.

Overall, the analysts believe that the managers of all three REITs are able to deliver distribution per unit (DPU) growths of 0% to 1% in this new period of “red hot” interest rates as most of its property exposures are seeing improving cashflow profiles due to them remaining “anchored in a landlord’s market”.

As at 2.45pm, units in MLT, MINT and MPACT are trading at $1.67, $2.25 and $1.41 respectively.

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