Mapletree North Asia Commercial Trust - DBS Research 2018-06-26: Climbing To The Next Summit

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MAPLETREE NORTH ASIA COMM TR SGX: RW0U

Mapletree North Asia Commercial Trust - Climbing To The Next Summit

• 4Q18 DPU of1.904 Scts (-2.8% y-o-y) in line with expectations with soft DPU due to prior year reversal of property taxes.
• Guiding for potentially stronger rental reversions at Festival Walk. 
• Executes its Japan expansion with the purchase of six office buildings for JPY63bn on 4.8% NPI yield.

Rally to resume.

• We maintain our BUY call with a revised Target Price of S$1.45 for Mapletree North Asia Commercial Trust (MAGIC).
• Mapletree North Asia Commercial Trust (MAGIC)’s share price has fallen year to date, largely due to uncertainty over a potential equity raising to fund an acquisition following the expansion of its investment mandate to include Japan. 
• With the overhang from an equity raising over, we believe the rally in MAGIC’s share price should resume given the improving macro conditions in HK, its valuation discount to its HK peers, and boost to DPU from the Japan expansion.

Where we differ – Yield to compress further.

• Consensus has a BUY call on MAGIC but the average Target Price of S$1.33 is at a discount to its book value and implied yield is significantly higher than its HK peers.
• While acknowledging that some of MAGIC’s HK listed peers have a lower gearing, we believe MAGIC should re-rate closer to the low-mid 5% forward yield that its peers are trading at, from its current 6.5% yield given its strong record of DPU performance and having a portfolio with well-located assets.
• Moreover, we believe MAGIC’s expansion to Japan, kick starting its inorganic strategy, should accelerate its DPU growth. This also justifies a lower trading yield.

Improving HK retail scene.

• Historically MAGIC’s share price lagged during periods when HK retail sales were sluggish, resulting in concerns over the ability of Festival Walk (c.70% of NPI) to increase rents. However, with HK retail scene on an upturn, we believe the positive news flow from improving retail sales should be a tailwind to MAGIC’s share price.

Valuation:

• After incorporating the recent Japan acquisition and equity raising, we raised our DCF-based Target Price to S$1.45 from S$1.40.

Key Risks to Our View:

• The key risk to our view is a significant downturn in the HK and Chinese economies, causing a decline in rents.

WHAT’S NEW: Solid end to the year

4Q18 results in line with expectations

• Mapletree North Asia Commercial Trust (MAGIC) delivered 4Q18 DPU of 1.904 Scts which was down 2.8% y-o-y but in line with our expectations. The y-o-y fall in DPU was largely caused by 4Q17 DPU being boosted by the reversal of previously accrued property tax at Gateway Plaza. Nevertheless, FY18 DPU increased 1.9% y-o-y to 7.481 Scts. 
• MAGIC had a decent year after considering the headwinds from a depreciating HKD versus SGD.
• Owing to the depreciation of the HKD and the absence of the property tax reversal, 4Q18 revenue and NPI fell 5.5% and 6% respectively.

Healthy Festival Walk contribution in a constant currency basis with Sandhill Plaza affected by lower effective occupancies

• On an individual property basis, Festival Walk’s 4Q18 revenue and NPI fell 4.7% and 4.3% y-o-y respectively. However, NPI in HKD terms would have been up 3.7% y-o-y. The increase was largely attributed to the prior quarters positive rental reversions and the property being fully occupied.
• Sandhill Plaza had a weak quarter with 4Q18 revenue and NPI falling 3.1% and 1.7% y-o-y respectively. While committed occupancy now stands at 100.0%, up from 98.3% at end 3Q18, the performance of Sandhill Plaza was affected by some tenants having not physically moved into the property.
• Gateway Plaza also had a soft quarter owing to the absence of reversal of the property tax as mentioned earlier. 4Q18 revenue and NPI fell 3.1% and 11.5% y-o-y respectively. The decline was also affected by a dip in occupancy from 96.9% in 4Q17 versus 96.5% in 4Q18, albeit an improvement from the 94% level in 3Q18.
• Due to sequential improvement, overall portfolio committed occupancy rose to 98.5% from 96.9% in 3Q18 but marginally down from 98.6% in 4Q17.

Prospects for stronger rental reversions at Festival Walk in FY19 underscored by strong tenant sales and foot traffic

• Festival Walk’s retail segment had a strong end to the yea,r achieving 11% positive rental reversions for whole of FY18, up from 10% achieved for 9M18.Thus, passing rents for Festival Walk now stand at HKD150 psf/mth versus HK$149 psf/mth.
• For FY18, due to expiry of some anchor tenants, MAGIC guided that there is potential for stronger rental reversions at Festival Walk retail compared to that achieved in FY18. The better prospects ahead is also underscored by strong tenant sales and foot traffic which grew by 18.1% and 5.0% in 4Q18 and 7.4% and 3.2% y-o-y respectively for FY18.
• Meanwhile, for the office component at Festival Walk, an 11% increase in rents was also reported for leases renewed in FY18.
• As expected, due to the high base effect, rental reversions at Gateway Plaza moderated to 8% for FY18, down from 9% reported for 9M18 and 10% for FY17. Passing rents now stand at RMB345 psm/mth.
• With Sandhill Plaza still under rented, it achieved 15% positive rental reversions for FY18, slightly down from 16% reported in 9M18 and FY17. Passing rents for Sandhill Plaza is now reported to be at RMB5.45 psm/day up from RMB5.41 psm/day in 3Q18. This compares to asking rents of between RMB5.50-6.00 psm/day.
• Over the next couple of years, 24.0% and 25.6% of leases are up or renewal in FY19 and FY20 respectively. For FY18, MAGIC has already forward renewed or re-let 4.6% of leases.

Increase in property values

• Over the quarter, MAGIC reported a 1.1% y-o-y increase in property values in SGD terms on the back of a 25bps compression in gross cap rates. However, in constant currency terms, the increase in valuation was stronger.
• Festival Walk is now valued on a cap rate of 4.25% versus 4.5% in the prior yea,r translating to a 7.9% increase in value to HK$26.8bn.
• Meanwhile, Gateway Plaza and Sandhill Plaza are now valued at RMB6.4bn (+5.3% y-o-y) and RMB2.1bn (+3.1% y-o-y) respectively, based on a cap rate of 6.25% (6.5% in FY17) and 5.50% (5.75% in FY17).
• As a consequence of the higher property values, gearing fell to 36.2% from 39.2% at end 4Q17 and 39.3% at end 3Q18. Average costs of debt inched up to 2.72% from 2.69% at end 3Q18. While there is upward pressure on MAGIC’s borrowing costs, this is partially mitigated by having 78% of its debt on fixed rates. 
• NAV per unit jumped to S$1.376, mainly attributed to the increase in property values but also the depreciation of HKD which reduced the value of MAGIC’s HKD debt in SGD terms.

Larger than expected Japan acquisition at a higher yield

• Following MAGIC’s announcement that it was expanding its investment mandate to include Japan, we had incorporated a S$250m acquisition on a 4.25% yield partially in the middle of FY19, funded with a S$150 equity placement at S$1.20.
• However, MAGIC subsequently spent S$735.8m (including acquisition fees and transaction costs) to acquire a 98.47% interest in a portfolio of six freehold commercial offices in Tokyo, Chiba and Yokohama from one of its sponsor’s private funds. Initial NPI yield for the portfolio was 4.8%. The acquisition was funded through a S$330.3m equity placement (311.6m units at S$1.06 per unit) and debt (borrowing costs of 1% or less). The acquisition was completed on 25 May 2018. Post the acquisition, we expect gearing to settle at around 38% level.
• On the back of a larger acquisition at a higher yield and earlier completion, partially offset by a weaker assumed SGDHKD for FY19F of 4.80 versus 4.70 previously, we raised our FY19-21F DPU by 1-2%. On the back of higher earnings, we also raised our DCF- based Target Price to S$1.45.

Japan office portfolio overview

• The Japan office portfolio consists of
  • 3 Tokyo properties - IXINAL Monzen- nakacho Building (MON), Higashi- nihonbashi 1-chome Building (HNB), and TS Ikebukuro Building (TSI)
  • 1 Yokohama property - ABAS Shin- Yokohama Building (ASY)
  • 2 Chiba properties - SII Makuhari Building (SMB) and Fujitsu Makuhari Building (FJM).
• The buildings are either fully or close to fully occupied and are leased to a single tenant with the exception of HNB and ASY which are multi-tenanted buildings. Overall portfolio occupancy as at 31 December 2017 was at 99.9%.
• Total net lettable area (NLA) stands at 1.6m sqft.
• In terms of earnings contribution, the two Chiba properties, SMB and FJM contribute c.73.5% of the gross rental income for the portfolio.
• Overall income from the portfolio is relatively stable given the 5.8 year weighted average lease expiry (WALE) by NLA and 75% of leases only expiring from FY25 and beyond. Near term, there are minimal expiries with 1.2% of leases due to expire in FY19 and another 14.3% and 1.2% in FY20 and FY21 respectively.
• While rents in the locations where the portfolio is located are expected to be stable or inch up modestly, the portfolio is generally under rented which provides opportunity to achieve positive rental reversions as MAGIC renews the leases. For recent renewals (c.7.9% leases), we understand MAGIC was able to achieve mid-single digit rental reversions.
• Resiliency in the portfolio is also underpinned by many of key tenants being companies or part of companies with good credit ratings and/or listed on the Tokyo Stock Exchange and Nasdaq. The top 4 tenants contributed 92.5% of overall monthly GRI and include Seiko Instruments Inc, Fujistsu, Japan Information Processing Services and PERSOL.

Maintain BUY with revised Target Price of S$1.45

• The transformative transaction to enter Japan would boost MAGIC’s near term DPU outlook and together with prospects for better rental reversions ahead at Festival Walk, we maintain our BUY call with a revised Target Price of S$1.45.
• Please note MAGIC has been renamed from Mapletree Greater China Commercial Trust to Mapletree North Asia Commercial Trust following the change of its mandate to include Japan.

Mervin SONG CFA DBS Vickers | Derek TAN DBS Vickers | https://www.dbsvickers.com/ 2018-06-26

SGX Stock Analyst Report BUY Maintain BUY 1.45 Up 1.40