Mapletree Commercial Trust - DBS Research 2018-07-27: Powering Through Short-term Disruptions

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MAPLETREE COMMERCIAL TRUST SGX:N2IU

Mapletree Commercial Trust - Powering Through Short-term Disruptions

• MCT's 1Q19 DPU of 2.23 Scts (flat y-o-y) in line with expectations.
• Steady performance despite temporary fall in effective occupancy at Vivocity owing to current AEIs.
• Sequential improvement ahead as Vivocity’s occupancy hits the 99.2% committed level from 94.2% previously.
• Maintain BUY, Target Price of S$1.80.

What’s New

Transitionary quarter

• Mapletree Commercial Trust (MCT) delivered 1Q19 DPU of 2.23 Scts (flat y-o-y) which represented c.24% of our FY19F DPU and was in line with our expectations.
• 1Q19 can be described as a transitionary quarter as the results were impacted by a dip in effective occupancy at Vivocity as tenants had to make way for the construction of a new library on Level 3 as well as AEIs at Basement 1 and Level 1.
• Nevertheless, overall revenue and NPI were still up 0.7% and 2.1% y-o-y respectively, primarily due to steady performance at Vivocity (impact from prior positive rental reversions, NPI up 2.3% y-o-y) and MBC 1 (benefitting from annual step-up in rents offsetting the impact from lower effective occupancy of 98.6% versus 99.2% in 1Q18, NPI up 0.5% y-o-y).

Lower effective occupancy at Vivocity

• Owing to the AEI being conducted at Vivocity, temporary closure of stores and shifting of tenants, effective occupancy came in at 94.2%. However, this was up from 93.1% at end-4Q18. Over the next 1-2 quarters, we expect effective occupancy to climb towards the 99.2% committed occupancy level as tenants move into their new stores and fit out periods end.
• Due to the disruption arising from the AEI works, tenant sales also fell 4.1% y-o-y. We understand, excluding these disruptions, tenant sales would have been flattish.
• Shopper traffic remains at an encouragingly healthy level of 13.5m, up 0.4% y-o-y.
• The strength of the mall continues to be on display, with 2.1% positive rental reversions achieved over the quarter, marginally up from the 1.5% reported for FY18.

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Headline negative rental reversions in the office/business park belie the strong market positioning of MCT’s properties

• In 2Q18, MCT reported 5.3% negative rental reversions for its office/business park properties. This continues the trend over the last four quarters where signing rents have been below expiring rents (-3.3% to -9.5%). MBC 1 also remains the main factor behind the negative rental reversions. We understand MCT’s other office buildings also reported negative rental reversions but less than 5% fall.
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• However, as mentioned in our previous reports, despite the negative rental reversions, due to the inbuilt annual escalations for many leases at MBC 1, underlying cashflows remained resilient with NPI for MBC 1 up 0.5% y-o-y.
• In addition, including the effect of a rent review for a key tenant at MBC 1 for c.195,000 sqft of space, rental reversions for the office/business park would have been -0.1% versus reported the headline-5.3%. This would have also resulted in rental reversions for the overall MCT portfolio rising from 0.3% to 1.2%. This highlights again the strong market positioning of MBC 1.

Mixed performance for office portfolio excluding MBC 1.

• Excluding MBC 1, MCT’s office portfolio had a mixed quarter.
• NPI for MLHF and PSA Building rose 16.7% and 2.4% y-o-y respectively. MLHF benefitted from higher effective occupancies (100% versus 91.6% in 1Q18) while PSA Building saw better margins despite occupancy being stable around 95.4%.
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• Mapletree Anson had a soft quarter with NPI dropping 0.6% y-o-y which was a respectable performance given effective occupancy fell to 90.8% versus 99.2% in 1Q18.

Higher borrowing costs

• As expected, borrowing costs for MCT rose, hitting 2.91% from 2.75% at end-March 2018, on the back of the increase in benchmark interest rates and impact from recent refinancings.
• The proportion of fixed rate debt dipped slightly to 75.3% from 78.9% while gearing remained relatively stable at 34.7%.
• NAV per unit was also steady at S$1.49.

Maintain BUY, Target Price of S$1.80

• With 1Q19 results largely in line with expectations, we retain our BUY call and Target Price of S$1.80.
• We believe 1Q19 is a transitory quarter and as Vivocity benefits from its recent AEI and effective occupancy recovers, we should see an improvement in DPU over the next few quarters.

Mervin SONG CFA DBS Group Research Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2018-07-27

SGX Stock Analyst Report BUY Maintain BUY 1.80 Up 1.750