First Buy in 2H2024 – Frasers Centrepoint Trust and Mapletree Logistics Trust

The first week for the second half of 2024 is upon us. With REITs continuing to lose favour in the market, I have taken the opportunity to further accumulate units of Frasers Centrepoint Trust (SGX: J69U), or FCT, and Mapletree Logistics Trust (SGX: M44U), MLT.

To be clear, I’m not betting on an imminent interest rate pivot and a short-term price surge. While a price increase would be welcome, it’s not my primary motivation for buying. Looking ahead, I believe both FCT and MLT can offer me sustainable dividends for years to come

FCT’s strong operating performances should mitigate higher finance costs

FCT’s robust operating performance should help mitigate the impact of higher financing costs. Their 1H 2024 earnings report shows a strong committed occupancy rate of 99.9%. Additionally, rental reversion, shopper traffic, and tenant sales all saw year-over-year (YOY) increases.

There was a slight dip in DPU, from 6.130 cents to 6.022 cents. This can be attributed to factors like lower revenue and net property income (NPI) due to the divestment of Changi City Point and asset enhancement initiatives (AEI) at Tampines 1. However, the 16.6% increase in financing costs likely played a more significant role.

The significant rise in financing costs last year is unlikely to repeat this year. Based on the first half results, financing costs in FY 2024 should still rise, but at a much lower rate.

With the expected completion of AEI of Tampines 1 in coming September, increased contribution from NEX, and stabilising finance costs, I believe that FCT can sustain its 12 cents dividends for the next few years.

China’s Logistics Struggles: A Buying Opportunity for MLT?

Mapletree Logistics Trust (MLT), another Singapore-listed Reit, has also been having a difficult time in China. Rents across its 43 properties in the country fell 10 per cent in the first three months of 2024, and some tenants have fallen behind on their rent payments. The trust has maintained the occupancy of its China logistics assets at around 93 per cent.
– The Business Times, 26 June 2024 

A recent article by The Business Times “A US$100 billion bet on China’s economy sours as warehouses empty” highlighted the struggles of the logistics sector in China.

This is a valid concern for REITs like MLT that have exposure to the Chinese market. However, I believe this concern is already reflected in MLT’s current share price.

Here’s why I see this as an opportunity to add to my MLT holdings:

  • Limited China Exposure: While China is a significant contributor to MLT’s portfolio, it represents less than 20%.
  • MLT’s Resilience: Despite the headwinds in China, MLT has maintained a strong occupancy rate of 93%. Rental reversions, though negative, were manageable at -7.9%.
  • Strength in Other Markets: MLT’s performance in its other markets remains positive.

Financial Buffer Protects DPU

Source: MLT 2024 Financial Results Presentation Slide

The recent MLT 2024 Financial Results Presentation Slide provides valuable insights on the impact of interest rates on DPU. MLT estimates a 0.25% increase in base rates would decrease DPU by only 0.01 cents per quarter.

To analyze a worst-case scenario, let’s assume zero contribution from China (20% reduction) and a significant interest rate increase from 2.7% to 3.7% (0.16 cents reduction). Even under these extreme conditions, the next year’s DPU would be around 7 cents (9 cents x 80% – 0.16 cents).

At a purchase price of $1.31, this translates to a yield of approximately 5.3%. Even in this unlikely scenario, the yield remains attractive. While the share price might decline further in the short term, I’m focused on MLT’s long-term ability to generate sustainable dividends.

To manage portfolio risk, I limit my REIT holdings to 30%. With this additional purchase, my REIT allocation remains within this range at approximately 28%.

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