Hey savvy investors! Followers of ‘The Dividend Uncle’ website and YouTube channel will know that I talk a lot about Mapletree Logistics Trust, or MLT, and for good reason. It’s a fascinating REIT: growth-oriented thanks to the booming logistics sector, with a proactive management team that’s consistently recycling capital into better quality assets. Yet, despite all this growth potential, MLT has managed to maintain a relatively attractive dividend yield, which keeps it appealing for income-focused investors.

But let me be clear: I’m never overly attached to any REIT and am always prepared to let go of those that no longer align with my long-term goals. So, when I noticed recently, of signs that risks within MLT’s portfolio might be spreading, it definitely caught my attention! While we’ve known about the ongoing challenges in China, it now seems that Hong Kong is also showing signs of weakness. This raises questions about the stability of MLT’s portfolio and its ability to withstand these pressures over the long term.

So, the big question I’m exploring today: Is this the start of a wider weakness across MLT’s portfolio? Or can management’s strategy of diversification and capital recycling help MLT weather these challenges? I’ll be sharing my views on these.

Before we dive in, I must let you know that this content is for informational and educational purposes only and does not constitute financial advice. The opinions expressed are based on publicly available information and personal analysis, and they are not tailored to your specific financial situation. The REITs and institutions mentioned are cited purely as examples. While I have no affiliations, sponsorships, or financial relationships with any of them, I may personally hold positions in some of the investments discussed. Before making any investment decisions, you are strongly encouraged to consult a licensed financial adviser.

Okay, let’s dive into today’s post and see if MLT still deserves a spot in a buy-and-hold portfolio.

Overview of Q3 2024 Results

Now, I’ll quickly touch on the Q3 2024 results. Many analysts and fellow YouTubers have already dissected this in detail, so I won’t go too deep. Instead, I want to focus our discussion on the actionable investment insights that I see for my portfolio, based on the risks and opportunities.

That said, here’s what you need to know from the latest quarter: MLT reported a distribution per unit or DPU of 2.027 cents for the second quarter of FY2025. This represents a year-on-year drop of around 10.6%. For the first half of the year, DPU stands at 4.095 cents, which is close to a 10% decline. While some of us might have anticipated a bit of a dip, it’s still disappointing news for income-focused investors.

One major factor behind this drop is currency headwinds. With a portfolio spread across several countries, MLT’s income is exposed to currency movements, and the strengthening Singapore dollar has been a headwind. Markets like Japan and South Korea, where local currencies have weakened against the SGD, have seen their contributions trimmed. Analysts point out that while the underlying assets in those regions are still performing fairly well, this foreign exchange effect has taken a toll on reported earnings. It’s a reminder that currency risks can add a layer of volatility to REITs with international exposure like MLT.

The last thing I want to highlight is their debt cost and financial position. Rising interest rates are hitting all REITs, including MLT, and the cost of debt is expected to rise to around 2.8% by year-end. MLT’s management has been proactive, refinancing some loans into currencies with lower interest rates and issuing lower-rate perpetual securities to replace older, higher-cost debt. These moves should help mitigate some of the rate impact, though management has admitted that higher debt costs will continue to be a headwind in the near term.

Spreading Weakness in the Property Portfolio: Hong Kong Under Pressure

Now, let’s dive into the key idiosyncratic weakness: MLT’s portfolio in specific countries. You know I’m referring to its China exposure, where the logistics sector has been under serious pressure, which have been a key factor in its underperformance. MLT’s Q3 2024 results show that rental reversions in China dropped by 12.2%, pulling the overall portfolio reversion down to -0.6%. In fact, if we exclude China, MLT’s rental reversion would actually be positive at around 3.6%. This stark contrast highlights just how much of a drag the China properties are on MLT’s broader portfolio performance. The challenges in China stem from an oversupply in certain logistics markets and a slowing economy, which has weighed on demand. Vacancy rates in major cities like Shanghai have also risen, reaching new highs and adding further pressure on rental income.

But here’s where things get more concerning: it appears that MLT’s risk exposure may be spreading beyond China. Let’s talk about why Hong Kong has started to raise red flags. Recent data points to a slowdown in rental reversions in MLT’s Hong Kong properties, driven by softening demand and cautious spending trends, particularly in logistics spaces impacted by the ongoing challenges in regional trade and sentiment around Cainiao Smart Gateway. According to JLL’s recent report, Hong Kong logistics rents fell by 1.8% quarter-on-quarter and 4.8% year-on-year in Q3 2024. Vacancies are also rising, with Hong Kong’s logistics vacancy rate reaching 8.2%—a concerning trend that mirrors what we’ve seen in China’s logistics sector. In Beijing and Shanghai, logistics rents dropped by 1.6% and 2.4% quarter-on-quarter, respectively, while vacancy rates climbed to 17.5% in Beijing and 25.5% in Shanghai.

For an investor like me, this is concerning because it suggests that the weaknesses in MLT’s portfolio may not be isolated to China; they could be spreading to other regions. This shift is prompting me to re-evaluate whether MLT can continue delivering stable returns or if these risks will weigh down its performance across multiple markets.

MLT’s management has acknowledged these challenges and is keeping a close watch on the situation. They’ve suggested that a recovery in China’s logistics market might take some time, possibly extending over the next few quarters.

With both China and Hong Kong under pressure, it’s crucial to assess whether MLT’s diversification strategy and capital recycling efforts can effectively mitigate these risks. And that brings us to the next section, evaluating the potential of MLT’s diversification strategy as it pivots towards other, potentially stronger markets.

The Potential of Diversification and Capital Recycling

One of the key strengths of MLT has always been its proactive approach to capital recycling: selling off assets that no longer align with its strategy and reinvesting in higher-quality properties. This approach allows MLT to continually upgrade its portfolio, enhancing its long-term growth potential while staying aligned with the latest industry trends.

According to MLT’s CEO, the REIT is planning a significant $1 billion divestment pipeline. As of September 30, MLT’s portfolio was valued at $13.37 billion, so this is a considerable move, aimed at streamlining and strengthening its asset base. Roughly half of these planned divestments will come from China and Hong Kong, which have shown some operational challenges in recent quarters. The other half will include assets from countries like Malaysia, Singapore, Japan, Australia, and Korea.

Importantly, any acquisitions moving forward are intended to be funded primarily by these recycled proceeds, reducing the need for further equity fundraising in the near term. MLT’s CEO highlighted that there are no plans for equity fundraising for at least this financial year, which is reassuring for investors concerned about dilution.

This strategy of active portfolio management shows that MLT is not just sitting back and waiting for market conditions to improve. Instead, it’s taking a proactive stance to exit underperforming markets and reinvest in regions and assets that align with its growth objectives. By carefully recycling capital in this way, MLT aims to maintain its competitive edge and potentially mitigate some of the risks associated with its China and Hong Kong exposure.

The Dividend Uncle’s Take

Looking at MLT, the REIT is undoubtedly facing significant risks head-on. The weaknesses in China and Hong Kong highlight the regional risks even for a resilient logistics REIT like MLT.

For this financial year, MLT had already divested about $130 million worth of assets in the first half, compared to a full-year target of $300 million. While this demonstrates MLT’s commitment to its capital recycling strategy, the slower progress suggests selling assets in these pressured markets isn’t easy, especially when buyers know the challenges. However, MLT’s connection to its parent, Mapletree Investments, provides access to a broader network, which could help facilitate sales at reasonable prices.

Now, it’s essential to remember why MLT has a place in a well-diversified portfolio. We can’t be rushing to sell off our entire stake in a REIT just because a small part, or even a more significant part, of its business is facing temporary pressures. As long-term investors, we need to look beyond the current situation and the issues that are currently in the media spotlight. Logistics remains a growing sector globally, and MLT’s exposure to China, while notable at 18%, is far from the whole story.

MLT’s strategy of recycling capital, disposing of weaker assets and redeploying into higher-quality logistics properties, has always been in its DNA, and I see this as a key strength, especially now. If management can continue executing this plan well, MLT could emerge stronger from this period.

In the long run, I’m holding on to MLT. I believe that the underlying growth potential and MLT’s strategic approach justify a place in my portfolio. But I’ll be watching closely to see how management navigates these evolving challenges, ensuring that MLT continues to be a value-adding part of a diversified, income-focused portfolio.

Alright, that’s all for today. In summary, while MLT is facing pressures from its China and Hong Kong portfolios, the REIT’s proactive approach in capital recycling and diversification provides a pathway to navigate these challenges. As investors, it’s crucial to stay level-headed and focus on the bigger picture. For those of us who believe in the long-term potential of logistics, MLT remains a solid hold in a diversified portfolio. And as always, be prepared for some bumps along the way. Okay, see you guys next time!