A Little Bargain Buy 1: Mapletree Logistics Trust

Last week was an interesting week for Singapore investors buying the Singapore stock market.  I’m not sure if I’d call it a market correction but Singapore stocks, especially the REIT counters, took a severe beating.  When several of my targeted REITs got hammered last week, I took action immediately to secure for myself some rather decent bargains.  The share prices of most REITs have since returned to their longer-term trend this week.

I was glad that I was able to sell all my Zoom stocks that very same week, and made a 45% profit before Zoom’s share price dropped by 11% from my selling price.  It was a lesson on taking advantage of price volatility.  I had only held on to Zoom for just 56 days.  I put that realised gain and principal sum, plus some from my warchest into the local REIT market.

I bought 4 REITs in total (one in 2 tranches) over a 2-day period.  

I locked in on Mapletree Logistics first when the opportunity presented itself.  So now I have Mapletree Commercial Trust, Mapletree Industrial Trust, and Mapletree Logistics Trust in my portfolio.  Yeah!

What about Mapletree North Asia Commercial Trust?  I’m not interested in it because I don’t have much confidence in Hong Kong’s recovery in the short term.  The Covid situation there is not exactly under control, retrenchment is on the rise, the government is weak and broken, the people are divided along political lines … Hong Kong is really in some deep trouble right now.  Maybe I will buy some if MNACT’s share price dropped below 80 cents, if I have extra cash to spare, and/or when a more capable individual with fortitude in his/her backbone takes over Carrie Lam as the next Chief Executive of HK.  My top losers are 60% HK stocks.  Urgh!

But I digress.

To get back to what I was saying, my purchase of MLT reflects my confidence in it being a long time winner.

MLT is no stranger to anyone who is familiar with the Singapore REITs market.  In fact, there is a slew of information on Singapore REITs by both professionals and financial bloggers.  My research on any Singapore REIT starts often with Reitscreener (paid service: https://app.reitscreener.com/). Tam Ging Wien is my go-to guy when it comes to any information on SG REITs.  Next, I go to Yahoo Finance (or Dr Wealth) for some comprehensive ratios, data and key financials.

For some nicely compiled relevant background, ratios, data and charts on MLT, please take a look at:

  1. Vince: https://www.reit-tirement.com/2020/10/mapletree-logistics-trust-analysis-19.html
  2. Lim Jun Yuan: https://www.thesingaporeaninvestor.sg/2020/09/24/mapletree-logistics-trust-sgxm44u-why-is-the-logistics-reit-in-my-shopping-list/#comment-491

These 2 gentlemen do some very decent research on REITs … save me the trouble of having to reinvent the wheel.  Nevertheless, here are some key highlights:

Key Highlights (the Good)

1. A diversified portfolio: Diversified by geography [Singapore, HK SAR, Japan, China, Australia, South Korea, Malaysia, Vietnam]; diversified by tenant [total 696 tenants with top 10 customers such as CWT (SG), Equinix (USA) and Coles Group (AUS) accounting for about 27% of total gross revenue].  The more diversified its tenant base, the better MLT can withstand sudden, unexpected shocks.

Annual Report FY19/20

2. Gross revenue: UP 8.3% YoY to SGD131.9 million (2Q FY20/21). 

3. Net property income: UP 8.9% YoY to SGD118.9 million (2Q FY20/21).

4. Distribution per unit: UP 1.2% YoY to SGD0.041 (1H FY20/21).  

5. Interest coverage ratio: 4.9x

6. Weighted average interest cost: 2.2% per annum

7. Debt Maturity Profile: Well-staggered, average debt duration of 3.8 years.

8. WALE: 4.2 years.

9. Occupancy rate: 97.5%. 

10. Free Cash Flow: UP 31% YoY to SGD441.6m (2Q FY20/21) from SGD335.9m (2Q FY19/20).  Most recent quarter FCF is SGD460.6m which is just excellent.

11. NAV per unit: SGD1.20 (remains consistent since the start of 2020) UP from an average of SGD1.17 in 2019 and an average of SGD1.10 in 2018.

1Q Fy20/21 Financial Results

Key Highlights (the Not-so-Good)

1. Gearing ratio: 39.5% as at 30 Sep 2020, UP from 39.3% (FY19/20) and 37.7% (FY18/19).  Getting closer to the MAS-set limit of 50% gearing ratio. In the latest AGM, the management didn’t appear to be overly concerned about MLT’s high gearing ratio of almost 40%.  So MLT has another 10%  headroom to take on more debt to finance future acquisitions … or does it?

2. Perpetual Securities: Based on FY19/20 annual report (ending 31 March), MLT’s gearing ratio was 39.3%.  Perps, in general accounting practice, are treated as equities.  However, I’d rather call a spade a spade, and since perps have the element of debt, they should be classified as liabilities rather than equities.* Anyway, with perps “properly” accounted as part of borrowing, then MLT’s gearing becomes 43.97%!  Whether it is borrowing from a bank or issuing perps, if the REIT’s purpose is to raise funds to finance acquisitions to grow the business, and it has the prudence to manage all debt instruments judiciously, then all well and good by me.  Nevertheless, this is a space (extended gearing ratio) that I will watch closely. 

3. Current yield distribution: 3.67% vs 10-year average yield distribution of 6.8%.

4. Current PB Ratio: 1.75 vs 4-year average of 1.15 (2016-2019).  Definitely overvalued.  I bought MLT at SGD1.93, after a dip of 12.67% from its 52-week high of SGD2.21.  At that price, the PB ratio is 1.61, still overvalued.  I wish I had bought MLT at its 52-week low in March.  Based on DCF, I reckoned the fair value of MLT to be SGD1.27, not too far from its current book value.  Unless something truly catastrophic happens, maybe another pathogen outbreak, God forbid, I don’t think MLT will trade close to this estimated intrinsic value or its book value again.  

Why did I buy MapleTree Logistics Trust?

1. More Growth in the Pipeline

MLT has a diversified portfolio of quality, well-located, income-producing logistics properties spread out in some 8 Asian countries.  It has grown its NAV and DPU over the years.  Its properties are optimally occupied.  It boasts a strong balance sheet, a strong sponsor, a fine management, and has a diversified base of funding sources.  It even has a credit rating of Baa2 (9th highest rating) by Moody’s which testifies to MLT’s financial strength and resilience.   All these are reasons why I bought MLT.

But the one thing I like most about MLT that pushed me to press the “buy” button in spite of its high valuation is its growth potential.  Like most industrial REITs, MLT has weathered the economic fallout of the COVID-19 pandemic extremely well.  In addition, it looks set to grow by filling its shopping cart with more properties.

MLT is purchasing a total of 25 logistics properties of which 22 are located in China (buying the remaining 50% interest in 15 properties plus 7 new properties).  MLT will acquire one property each in Malaysia, Vietnam and Brisbane, Australia.  All these properties, except the Australian one, are all high quality facilities that are rated Grade A (such properties are rated A based on their location, superior infrastructure, load-bearing capacity, etc).  These properties, having a total of 1.22 million sqm of net lettable area and a committed occupancy of 94.7%, come with an implied net yield of 5.2%

A modern logistics facility has a big floor plate with fewer pillars than traditional warehouses, thus allowing the storage of equipment, facilitating work flow and enhancing productivity. A modern warehouse also has a floor loading to store heavy equipment and a high ceiling to store goods.

It is a wonderful thing to know that such modern facilities usually command an average rent premium of 20% over traditional warehouses.

In this time and age where e-commerce flourishes, Grade A warehousing is in demand as the better facilities aid fast and accurate delivery. 

In its FY19/20 annual report on page 15, MLT elucidates: The growing e-commerce market, a key demand driver for modern logistics space, has gained more prominence as COVID-19 spurs a major uptick in online shopping, which is likely to persist even when the pandemic is contained. This translates to higher demand for modern logistics space, in particular facilities located in close proximity to consumers. Supply chain disruptions during the COVID-19 situation have also forced businesses to re-assess supply chain contingency plans and resilience. The diversification of supply chains to alternative locations in Southeast Asia, a trend witnessed during the U.S.-China trade war, is expected to intensify. This will benefit the logistics markets in Vietnam and Malaysia where MLT also has a strong presence. In addition, firms are likely to explore a partial reversion of existing lean supply chain models and increase safety-stock levels, leading to greater demand for warehouse space. 

In February this year, MLT announced an acquisition of a logistics property which has a net lettable are of 84,783 sqm in Kobe, Japan.  This acquisition comes with an occupancy rate of 99.7% with a WALE of 4.2 years, and an implied net property income yield of 4.0%.

All said, these acquisitions promise to provide attractive growth catalysts that take advantage of higher e-commerce adoption and rising consumption levels here in Asia, and demand and supply chain diversification. MLT’s AUM will grow by 13% to SGD10.1 billion.  Post-acquisition, MLT’s already extensive portfolio will grow even more diversified, and MLT’s exposure to Singapore, its largest market, will reduce from 34% to 30%.

After these acquisitions the management expects proforma DPU and book net asset value to increase by 1.3% and 6.6% respectively.  

In short, these acquisitions are accretive.

2. In Spite of Slightly Expensive Valuation

Mapletree Logistics Trust has been displaying its ability to grow and delivering very healthy financial metrics over the years.  That it is now trading at a slightly expensive valuation does not bother me very much.  As the saying goes, focus on the company not the share price.

MLT’s potential for growth with its super network of logistics facilities in the region gives me a positive outlook.  E-commerce growth is on the up-and-up, and MLT is well-positioned to benefit from global e-commerce growth.

Yes, MLT is slightly on the expensive side considering the PB or calculated intrinsic value.  Even so, it is worth investing in because I see and value the  long-term growth that it has.

I bought MLT when the share price dipped 12.67% from its peak.  I guess I didn’t want to miss the train then.

I have had several bitter experiences of waiting for the dip that never came, or for a dip to appear at a time when I didn’t have the wherewithal to “pull the trigger”. I’ve also had the painful experience of falling in love with a price, what I thought was the intrinsic value, and never took action because the dip was not close enough to this “beloved” price.  What happened next was the share price ended up rising and never stopped rising and I missed the boat!

Conclusion

I buy stocks in tranches.  I like MLT and what it is doing, and after accessing my risk tolerance, I buy my first tranche.  Should the share price drop from my last buying price, I’ll just average down.  No biggie at all.

With this purchase of MLT, I’m a step closer to completing my Forever Portfolio, my own personal version of a Singapore Index.

* https://www.theedgesingapore.com/news/perpetual-securities-are-debts-not-equity-heres-why

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Disclaimer: I am only an amateur investor and nothing you read here on my blog constitutes financial advice.  I write here to detail my investments, strategies, and analyses.  Feel free to read at your own risk.  Should you need financial advice, consult a licensed financial advisor.