Mapletree Logistics Trust (MLT) is a major player in the Asian logistics REIT market, with a diverse portfolio of 187 properties across nine countries. Their latest earnings transcript highlights operational strength, but a closer look uncovers a hidden danger – a potential currency crisis that could severely impact DPU in the future.

The transcript stresses the significant effect of currency swings on MLT's revenue. In Q4 2024, FX losses, despite hedging gains, accounted for a more than 50% reduction in revenue growth. MLT has meticulously hedged its Japanese Yen exposure for up to eight years, creating a short-term cushion. However, the transcript discloses a critical detail: this extensive hedging plan only applies to the Yen. Other currencies, such as the Chinese Yuan, Vietnamese Dong, and Malaysian Ringgit, which have also fallen against the Singapore Dollar, are not as well protected.

Here's the silent danger: as current hedges for these other currencies expire and new, more expensive hedges are put in place, the actual impact of FX swings will be felt more strongly. This, along with rising interest rates and persistent weakness in the Chinese market, casts doubt on future DPU growth.

"Let's look at the figures. The transcript shows that the Japanese Yen has fallen by 11% year on year versus the Singapore Dollar. While other currencies have not depreciated as much, their combined effect should not be overlooked. Notably, the transcript states that every single currency in MLT's portfolio weakened against the Singapore Dollar in FY 2023-2024. This suggests that, without the Yen's extensive hedging, the overall FX impact on revenue would be much greater."

Consider this scenario: assuming an average depreciation of 5% across all non-Yen currencies and a steady reduction in hedge effectiveness, MLT could face a potential FX loss of S$40-50 million per year over the next few years. This represents a sizable portion of their yearly distributable income, which could readily result in a 2-3% drop in DPU.

Currency Depreciation Against the Singapore Dollar

This chart depicts the hypothetical depreciation of various currencies in MLT's portfolio against the Singapore Dollar.

MLT, recognized for its cautious capital management, has historically underweighted Chinese Yuan borrowings, depending largely on equity for Chinese transactions. However, the transcript reveals a change in approach. They are actively expanding Chinese Yuan debt to profit from cheaper interest costs and match their capital hedge with Chinese Yuan exposure.

While this strategic action makes sense in the current climate, it unintentionally raises their vulnerability to future Chinese Yuan swings. If the Yuan falls further, it might exacerbate the FX effect on MLT's distributable income, potentially pushing DPU down more than the anticipated 2-3%.

The transcript also emphasizes the difficult China market. While MLT is optimistic about retaining occupancy levels, they anticipate negative rental reversions in the high single-digit to low double-digit range over the next 12 months. This continuous weakness in their second-largest revenue generator puts further strain on DPU.

Furthermore, the transcript reveals an intriguing fact concerning divestment gains. While these gains have helped DPU in previous quarters, MLT claims that their primary goal is portfolio rejuvenation, not profit maximization. They underline the need of adjusting to the changing logistics environment, admitting that older, less efficient assets must be replaced.

This emphasis on long-term competitiveness, while strategically sound, indicates that divestment gains should not be seen as a reliable source of DPU. It means that as MLT sells more of its older assets, the chances of generating comparable gains will dwindle, highlighting the need of organic growth in their remaining portfolio.

Despite the transcript's emphasis on operational resilience, the potential currency crisis lurking within MLT's portfolio necessitates careful examination. While their broad hedging plan for the Japanese Yen provides temporary protection, the absence of equal protection for other currencies, together with the strategic move towards Chinese Yuan borrowings, creates considerable uncertainty for future DPU growth.

This potential vulnerability is worsened by the China market's continued difficulties and the unpredictable course of divestment gains. This quiet danger to MLT's DPU necessitates close monitoring and careful study as investors traverse the volatile global economic environment.

"Fun Fact: Mapletree Investments Pte Ltd, the sponsor of MLT, is a renowned real estate development, investment, and capital management firm based in Singapore. They manage four Singapore-listed REITs and six private equity real estate funds with assets exceeding S$80 billion."