Work arrangement changes, inflation continue to put pressure on Mapletree Industrial Trust

MAPLETREE Industrial Trust's (MIT) manager expects to see continued pressure on the real estate investment trust's (Reit) topline as tenants usage patterns change due to the pandemic.

Additionally, inflation is also expected to have a material impact on MIT's operating expenditure and margins.

The Reit manager's executive director and chief executive Tham Kuo Wei said in an earnings call on Wednesday (Oct 27) that MIT's business park segment will continue to come under pressure as hybrid work models take hold during the pandemic.

"We think this kind of adjustment will continue to be there, at least until the end of 2022, because many of the tenants and corporates are responding to this new norm, and now that the pandemic situation is not entirely resolved, we are not out of the woods yet so there's still quite a bit of uncertainty," he said.

As an example, he highlighted a tenant in the chemicals industry that downsized its space requirements by about half after renewing its rent as it no longer required space for its backroom support functions that did not need to be physically present and have instead adopted hybrid work arrangements.

As for when the segment could see its outlook improving, Tham said mid-2022 would be a fairly optimistic prediction, assuming the economy opens sooner rather than later, and that constraints and restrictions to curb the spread of Covid-19 are lifted.

Aside from business parks, MIT also saw its average occupancy rate for its portfolio decline to 93.9 per cent from 97.8 per cent in Q2 following the acquisition of 29 data centres in North America, which had a lower average occupancy rate of 87.8 per cent.

In particular, the 250 Williams Street NW, Atlanta, Georgia, had an occupancy of 63.5 per cent at the time of acquisition.

Regarding how it would fill the vacant space, Tham said the Reit's manager is doing a more detailed analysis on the market and is also appointing external leasing firms to reach out to the market.

It hopes to score quick wins first by leasing out 50,000 to 100,000 square feet of commercial space first before looking at longer term conversion of part of the space for data centre usage.

Because many corporate tenants have not decided on their work arrangements, Tham foresees some uncertainty in the near term, although he is hopeful the market will gradually improve by next year.

Aside from changing usage patterns, the Reit's manager also expects inflation to squeeze MIT's margins as operating expenditure rises.

These cost increases will come from rising energy prices, which the manager is charged at a discounted rate on Singapore Power's (SP) regulated tariff from power generation companies. Going into 2022, the Reit's manager expects both the discount rate offered to fall and SP's regulated tariff to rise on the back of global fuel price increases.

Tham said he expects operating expenditure to increase by about S$200,000 per month, which he said was "manageable". MIT posted property operating expenses of about S$35.2 million in its second quarter ended Sep 30, 2021.

In particular, he said the Reit's manager has seen an increase of 5 to 10 per cent in costs from service contracts that are being renewed. This is despite efficiency gains from the use of technology, Tham said.

The Reit's manager also said that it will increase the interest rate hedge ratio to minimise the impact of the rising interest rate environment on distributions.

It attributed the fall in interest rate hedge ratio quarter on quarter from 95.8 per cent to 57.7 per cent as at Sep 30, 2021 to the drawdown of floating-rate loans for its US$1.32 billion acquisition of 29 data centres in the United States. Over the same period, its aggregate leverage ratio has risen from 31 per cent to 39.6 per cent, also due to additional loans drawn for the acquisition.

MIT will continue to focus on raising the proportion of data centres within its portfolio to between half and two-thirds. As at Q2 FY2022, data centres accounted for 52.9 per cent of its portfolio by book value.

In answer to a question on whether the Reit's manager had a target proportion of MIT's US data centres in the next 1 to 2 years, Tham said that there would not be such a cap.

"The likelihood of us being able to crystallise transactions in the US on a relative basis is higher because of the size and depth of the market. Also, our presence there has been helpful," Tham said.

"While I do not want to set a limit, I would say that all things being equal, we would want to have the representation in the other markets for more balance and a more diversified kind of portfolio."

MIT's distribution per unit for the quarter ended Sep 30, 2021 rose to 3.47 Singapore cents, from 3.1 cents a year ago.

Net property income also grew 47.4 per cent to S$120.3 million as gross revenue also rose 50.5 per cent to S$155.6 million.

Following a boost in revenue from assets in the US, income distributable to unitholders grew 21.3 per cent to S$88.4 million.

The increase came on the consolidation of revenue from 14 US data centres previously held by joint venture Mapletree Redwood Data Centre Trust, 29 data centres in the US acquired for US$1.32 billion, and a data centre in Virginia.

MIT units rose one cent to S$2.74 on Oct 27 when market closed.