MAPLETREE Industrial Trust : ME8U +4.63% posted a 3.2 per cent loss in distribution per unit (DPU) to 3.36 Singapore cents in the second quarter of its financial year (FY) ended on Sep 30, from 3.47 cents a year ago, said its manager via a bourse filing on Wednesday (Oct 26).

 

On a quarter-on-quarter basis, the DPU also fell from 3.49 cents in the previous quarter.

 

The total DPU of 6.85 cents for the first half of its FY, however, is a slight 0.4 per cent increase from the 6.82 cents over the same period last year.

 

Net property income rose 8.3 per cent to S$130.3 million in Q2, from S$120.3 million a year ago.

 

Gross revenue grew 12.8 per cent to S$175.5 million from S$155.6 million over the same period.

 

The amount available for distribution to unitholders for the quarter increased by 0.7 per cent year-on-year to S$89 million.

 

Contribution from the acquisition of 29 data centres in the United States, partially offset by higher property operating expenses and borrowing costs., drove this quarter&rsquo s performance.

 

Tham Kuo Wei, chief executive officer of Mapletree&rsquo s manager, said that its financial performance has been affected by headwinds from higher property operating expenses and borrowing costs.

 

&ldquo Such cost pressures arising from rising energy prices and interest rates amid a deteriorating macroeconomic environment are expected to continue for the coming quarters... Our focus remains on prudent cost management while exploring opportunities to improve the portfolio quality and operating performance,&rdquo he added.

 

The release of the S$6.6 million of tax-exempt income, which were withheld in the fourth quarter of FY2019/2020, will be released from next quarter to mitigate rising operating and borrowing costs.   This amount came out of distributions declared by joint ventures.

 

The occupancy of the overall portfolio increased to 95.6 per cent from 95.3 per cent in the previous quarter. Total assets under management is at S$8.9 billion, split almost evenly between Singapore (48.7 per cent) and North America (51.3 per cent).

 

As at Sep 30, the weighted average lease expiry across the entire portfolio is 4 years.

 

Mapletree reported positive rental revisions across key property segments in Singapore, including hi-tech buildings, business park buildings, as well as flatted factories.

 

With a total outstanding debt of close to S$3 billion, that works out to an aggregate leverage ratio of 37.8 per cent, a decrease from 38.4 per cent from the previous quarter.

 

This was a result of the redemption of S$45 million worth of 10-year medium term notes, which have a fixed interest rate of 3.65% per annum, with cash that matured on Sept 7 this year.

 

More than 74 per cent of the Group&rsquo s gross borrowings had been hedged through interest rate swaps and fixed rate borrowings, which will reduce the impact of interest rate fluctuations on distributions. 

 

Mapletree&rsquo s manager also raised proceeds of S$40.2 million from the distribution reinvestment plan for the previous quarter, which represented a take-up rate of 42.9 per cent.

 

The plan will continue to be applied for this quarter&rsquo s distribution to finance progressive funding needs of the redevelopment project at Kallang Way.

 

Mapletree also said in its filing that the global economy is experiencing challenges across multiple fronts that weigh heavily on the outlook. This includes higher inflation, tighter financial conditions, Russia&rsquo s invasion of Ukraine, as well as the lingering effects of the Covid-19 pandemic.

 

Global growth is expected to slow, and numerous risks, such as geopolitical fragmentation, inflation, and debt distress induced by tighter financial conditions, could cause growth forecast to decline even further.

 

&ldquo Against the backdrop of an uncertain global outlook, the increasing concern of an oncoming recession has dampened business confidence. At the same time, increasing property operating expenses and borrowing costs continue to exert pressure on distributions. The manager will adopt cost-mitigating measures while focusing on tenant retention to maintain a stable portfolio occupancy,&rdquo read the filing.

 

REAL estate investment trusts (Reits) in the logistics and industrial spaces are the most resilient against rising inflation and interest rates amid an expected economic slowdown in 2023, according to Fitch Ratings.

 

In a report issued Thursday (Sep 1), the credit ratings agency said logistics Reits such as Mapletree Logistics Trust : M44U +1.2% (MLT) would continue to benefit from industry tailwinds such as rising e-commerce adoption, the reshoring of supply chains and inventory stockpiling. 

 

&ldquo MLT has a lower exposure to rising electricity costs compared with most rated peers as the tenants bear a large part of the utility costs, while warehouses generally have lower energy usage than most other commercial-property types,&rdquo noted the analysts. 

 

The agency forecast the trust to undertake about S$2 billion worth of acquisitions in FY2023. It is also expected to maintain an occupancy of around 95 per cent in the next 12 to 18 months. 

 

Analysts of Fitch Ratings said industrial Reits with exposure to high-tech buildings and data centres will be &ldquo somewhat shielded&rdquo against an environment of slowing economic growth, due to their long leases to large corporate tenants. 

 

&ldquo Occupancy and rental reversion for industrial assets leased to SME (small and medium-sized enterprises) tenants will come under pressure from slowing economic growth, but the impact on rated Reits is mitigated by their modest exposure to these properties,&rdquo they stated. 

 

One such example is Mapletree Industrial Trust : ME8U +0.4% (MIT), as Fitch Ratings expects it to maintain the majority of its exposure to powered-shell assets. According to its analysts, such assets would help to mitigate risks associated with the limited alternative uses of fitted and hyperscale data centres, especially in the event where its tenants could face technology obsolescence over the long term. 

 

Although MIT&rsquo s Ebitda (earnings before interest, taxes, depreciation and amortisation) margins are forecast to narrow in FY2023 and FY2024 on rising electricity costs, Fitch Ratings believes the trust will be able to mitigate this impact and maintain a &ldquo solid financial profile&rdquo . Its analysts continue to like the trust for its manageable exposure to rising interest rates and limited debt maturities in the next 12 months. 

 

On the other hand, Fitch Ratings believes hospitality Reits are most at risk to an economic slowdown due to their low rating headroom and still-recovering credit profiles. 

 

The agency however expects their operating cash flows and balance-sheet buffers to improve in the near term from pent-up travel demand as Singapore continues to reopen progressively. 

 

It has highlighted Ascott Reit : HMN -0.92%as a potential beneficiary of the anticipated industry recovery given its rapid diversification into longer-stay assets that would boost the trust&rsquo s cash flow diversity, in Fitch Ratings&rsquo view. 

 

&ldquo We believe the Reit&rsquo s Ebitda interest cover will remain healthy, recovering to about 4 times in 2022 and 4.3 times in 2023 on rising cash flows (compared to 2.8 times in 2021), notwithstanding the rising interest-rate environment,&rdquo said its analysts.

 

While the agency is projecting a &ldquo sharp recovery&rdquo for retail-focused Reits, it cautioned that those with exposure to prime retail malls - such as Starhill Global Reit : P40U 0% - will take longer to reach pre-pandemic earnings than its suburban peers. This comes as the number of visitors from the industry&rsquo s key inbound market, China, remains low.

 

Reits whose retail assets are undergoing significant asset enhancement initiatives are also expected to face muted operating cash flow growth in the near term.

UOB Kay Hian&rsquo s Jonathan Koh has maintained his &ldquo buy&rdquo call on both Mapletree Industrial Trust (MINT) and Digital Core REIT (DCR), with target prices of $3.36 and 98 US cents ($1.37) respectively.

 

This is in contrast to the position of US hedge fund manager Jim Chamos, who was reported by the Financial Times on June 29 to be raising hundreds of millions for a new fund that takes short positions on REITs listed in the US.

 

Chamos&rsquo reasoning was that cloud service providers such as Amazon Web Services, Google Cloud Platform and Microsoft Azure, prefer to build their own hyperscale data centres based on their own design, rather than lease space from data centres.

 

Chamos thinks that the three cloud service providers above, which are Digital Realty, Equinix and Iron Mountain&rsquo s largest customers, will then become their biggest competitors.

 

However, Koh points out that the share prices of Digital Realty, Equinix and Iron Mountain were relatively unchanged on June 29 and 30, although trading volume was exceptionally high during these two days.

&ldquo Investors in the US did not fall prey to Chanos&rsquo marketing ploy to raise funds for his new fund,&rdquo Koh says.

 

Koh instead thinks that cloud service providers are a source of growth, adding that many companies are shutting down their standalone data centres, which are costly and inefficient to operate, and switching to cloud service providers instead.

 

Specifically, cloud service providers and social media companies are key drivers of demand for colocation data centre capacity, with Koh saying that they are likely to sign leases for purpose-built hyperscale data centres of more than 100 megawatts (MW) on a single-tenant basis.

 

Furthermore, cloud service providers adopt an asset-light business model by leveraging on outsourced data centres provided by Digital Realty, Equinix and Iron Mountain so as to generate higher ROE.

 

They also sign long-term leases with their data centre landlords to ensure their outsourced data centre capacity is locked in.

 

Koh highlighted that companies are adopting a multi-cloud strategy by tapping several public and private clouds provided by cloud service providers for different workloads, sometimes in addition to their in-house data centres.

 

Several software companies, such as Snowflake, have developed new tools to manage applications across various public and private clouds, which facilitate the migration to a multi-cloud strategy, and companies prefer to use multiple cloud service providers to avoid being locked into one external vendor.

 

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With the fundamentals for data centres remaining positive, Koh has zoomed in on Digital Core REIT (DCR) and Mapletree Industrial Trust (MINT) as his &ldquo buy&rdquo picks within the sector.

 

For DCR, Koh says that its portfolio remains resilient, and the occupancy rate for all 10 of its data centres remains at 100%.

 

DCR has a long WALE of 5.5 years and all its leases contain cash rental escalation of 1-3%.

 

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Its holdings are also insulated from electricity price variations, as all lease contracts are structured with energy costs 100% reimbursed by customers.

 

63% of DCR&rsquo s leases by net rentable sq ft (NRSF) are on a triple net structure, whereby real estate taxes and property expenses are absorbed by tenants.

 

However, Koh expects its cost of debt to increase from the current 2.1% to 3.6% in 2023, assuming the US Fed Funds rate hits 3.25% by end-2022. DCR has maintained the proportion of borrowings hedged to fixed rates at 50%, and aggregate leverage remains low at 26%.

 

For MINT, Koh says the REIT is committed to its goal of allocating two-thirds of assets under management (AUM) to data centres, Data centres have expanded by 12.9 percentage points to account for 54.1% of AUM in FY2022 ended March.

 

MINT also will benefit from a full-year contribution from its acquisition of 29 US data centres in FY2023. As such, it plans to release tax-exempt income of $6.6million withheld in 4QFY2020 to unitholders during FY2023.

 

Koh calls MINT&rsquo s portfolio &ldquo resilient&rdquo , with occupancy for its data centres in North America standing at 94.2% as of March.

 

MINT has a long WALE of 6.1 years, and provides an average rental escalation of 2-2.5%.

 

Electricity prices will also have a minimal impact on MINT, as triple net leases account for all leases for data centres in Singapore and 90.2% of leases for data centres in North America, where the increase in the cost of electricity is less dramatic due to diversified sources of energy.

 

A catalyst for the data centre sector are continued growth from cloud service providers and social media companies. Land and power constraints are also another catalyst, as they restrict the supply of future data centres.

 

However, a risk that Koh identifies is that continued capitalisation rates reduce opportunities for yield-accretive acquisitions for the REITs.