[Case Study] Why I Sold Off My Mapletree Logistics Trust

In this article, I will share with you why I purchased Mapletree Logistic Trust, why I’ve decided to liquidate my position and re-deploy my capital into other REITs after holding it for less than a year and what the lesson that I’ve learned from this investment was.

Why I bought MLT

Mapletree Logistic Trust REIT came onto my radar in November 2023 as part of my quest to cover all the REITs that are currently listed in Singapore.

Back when I first covered the REIT in November 2023, MLT had all the factors that an investor is looking for such as a proven management track record and a healthy balance sheet.

However, I did not start a position in MLT then as the price was trading around the $1.70 range which, based on my models, is only fairly valued.

However, as time passed, the share price of MLT continued to drop. I decided to start a position in MLT at the price of $1.45 around March 2024 as I felt that it was trading in an undervalued territory. I would love to have MLT in my portfolio to provide me with industrial exposure for diversification purposes.

One month later in April 2024, I added more positions in MLT at the price of $1.30 as based on the information available then, my model was pointing towards MLT being undervalued and it wouldn’t make sense for me to not average down my position.

While everything made sense on paper, what I failed to account for is the lagging nature of the property sector which later on showed up in the performance of MLT which brings me to my next point on why did I sell.

Why Did I Sell?

At the point of my investment, MLT’s performance was relatively stable as the negative impact of their China’s property has yet to be reflected in their financial performance.

However, things started to take a different turn slowly after I started my position as the constant negative rental reversion from their China property has resulted in a major drag in the performance of MLT and hence a significant decrease in their distribution from operations.

As of the FY2023/2024 reporting, I’ve adjusted my model to account for the performance of their China properties of which, based on my model then (refer to the table below), MLT was trading at around the fairly valued territory (as of June 2024).

This is if we were to assume that the worst is over and that MLT will slowly recover moving into the future (i.e. a growth rate of 0.5% to 1% in DPU per year).

However, the situation further worsened as the 1st Quarter and 2nd Half reporting for FY2024/2025 showed additional weakness in their performance largely as a result of the continued deterioration in their China properties’ performances.

As a result of the new information, I’ve made further adjustments to my intrinsic value calculation which eventually made me decide to liquidate my position as the REIT went from being undervalued when I first started a position in March 2024 to overvalued when I sold it off at November 2024 at the price of $1.31, right before the US election.

While I made a minor loss on my capital (average price per unit: $1.36), I was lucky that the dividends that I received from the short span of 6 months were able to cover the loss on my capital and I exited the position at a breakeven level on a total return basis.

Even though I believe that the worst may have been over for MLT, the combination of an overvalued indication coupled with the fact that Donald Trump is expected to win the election made me decide to liquidate my position.

This is because I felt that it may not be worthwhile to wait for the fundamentals to recover, which god knows when that may be, especially with the potential headwinds of a Trump presidency for China.

Instead, it would make more economic sense to re-direct my funds to other REITs that trading at a higher yield from operations with a less risky underlying property exposure that may provide me with a better risk-return trade-off as compared to holding on to my position in MLT.

Lessons Learned

This brings me to the most important part of the article, what was the lesson that I’ve learned through this short span of 6 months?

My experience with MLT made me recognise the lagging nature of the property sector. Through this episode, I’ve gained a better understanding of the property cycle and its relationship with the ongoing business cycle.

In the case of MLT, the headwinds in China should come as no surprise to any investors who have been paying attention to the market as China’s economy had already shown visible signs of cracking way back in 2021 following the impact of their COVID lockdowns, residential property bust and worsening trade tensions which sparked the trends of friendshoring.

However, the commercial property cycle in China has only begun to experience the impact of a slowing economy 1 to 2 years following the business cycle.

My hypothesis for the lagging nature of the property sector is due to the behaviour of tenants.

Logically speaking, tenants – regardless of industry – will tend to be more cautious with their decisions when it comes to downsizing or expanding their operations.

What this means is that in times of economic downturn, it is unlikely that a tenant will immediately downsize or cease their operations but instead, they are more likely to try to weather through the headwinds.

I believe this is what we’ve seen in the case of MLT as businesses tried to weather through the economic downturn in hopes that it is temporary. As a result, while China’s economy showed visible signs of a slowdown back in 2021, its commercial property sector did not immediately follow.

However, as the economic headwinds persisted longer than what most would have expected, more and more businesses decided to downsize or cease their operations which increased the vacancy rate which then led to a case of oversupply that resulted in negative rent reversion as we’ve seen starting from 2023.

On the flip side, this also means that for the commercial property sector in China to experience a sustainable recovery, the Chinese economy must first exhibit a steady recovery as tenants will once again be more cautious in their decision to expand their operations.

As a result, I suspect that MLT’s China property performances will only recover perhaps a year or two after the Chinese economy and markets have recovered. Ironically, it is also the recognition of this lagging nature that made me decide that it may not be worthwhile holding to my MLT position and sitting through a recovery that may not materialize so soon.

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