Mapletree Commercial Trust - DBS Research 2018-10-26: Strong And Resilient


Mapletree Commercial Trust - Strong And Resilient

  • Mapletree Commercial Trust's 2Q19 DPU of 2.27 Scts (+1.3% y-o-y) in line with expectations.
  • Vivocity reports 4% positive rental reversions with tenant sales improving 2% y-o-y.
  • Leveraged to upturn in office market and bottoming of retail sector.
  • Best-in-class assets provide resiliency in period of stock market uncertainty.

Confounding the critics.

  • We maintain our BUY call on Mapletree Commercial Trust (MCT) with a Target Price of S$1.80.
  • Mapletree Commercial Trust’s detractors believe Mapletree Commercial Trust is due for a de-rating given the threat from e-commerce affecting earnings at its key asset VivoCity. However, this ignores the capability of management to undertake asset enhancement initiatives (AEIs) to partially future-proof the mall against competition from other malls and the online space. Evidence of this value-add is 10-29% ROI that will be achieved from recent/upcoming refurbishments as well as the bonus 24,000 sqft of GFA Mapletree Commercial Trust has obtained by adding a library to the mall. We believe these proactive decisions will underpin the 2% DPU CAGR over the coming two years.

Where We Differ: Best in class.

  • Consensus is in agreement that Mapletree Commercial Trust owns best-in-class retail/business park assets. However, we believe is too low considering VivoCity is higher than less-dominant malls.
  • We believe as ability to deliver consistent highlighting the quality of its market will reward Mapletree Commercial Trust 1.2x as implied by our Target Price of S$1.

Improving office and retail market.

  • While investors may be distracted by the rise in interest rates in the near term, we believe improving Singapore office rents and retail sentiment or sales should allay fears that Mapletree Commercial Trust does not have levers to counter the impact of higher interest rates. 
  • As investors acknowledge this fact, Mapletree Commercial Trust’s share price should outperform.

Key Risks to Our View:

  • A key risk to our positive view is a slowdown in retail sales affecting VivoCity’s ability to increase rents and slower-than- expected pick-up in office/business park rents.

WHAT’S NEW - Consistent performers deliver again

Resilient performance in the midst of stock market volatility

  • As expected, Mapletree Commercial Trust delivered 2.27 Scts, translating into 1H19. The results were in our FY19F DPU.
  • Underpinning the results were a 2.5% and 2.2% y-o-y increase in 2Q19 revenue and NPI to S$11086.3m respectively. The increase in PSA Building and Mapletree Anson for PSA Building fell 1.3% y-o-y owing to lower to physical. Nevertheless, contribution for the property stands at 99.2%.
  • Mapletree Anson also suffered 92.9% in 2Q18. Similarly, with high at 98.7% positive rental reversions.

VivoCity still firing

  • Despite detractors who have been suggesting that earnings at Mapletree Commercial Trust’s key asset VivoCity have peaked (c.47% of 2Q19 NPI), earnings for the mall continues to rise. 2Q19 revenue and NPI grew by 2.8% and 2.2% y-o-y respectively on the back of the positive rental reversions over the past few quarters as well as boost from AEI conducted on Level 1 and Basement 1 that were completed in FY18 and June 2018 respectively. Earnings were also enhanced by bonus GFA of c.24,000 sqft on Basement 1 which were added in exchange for the establishment of a public library on Level 3.
  • The results were strong considering physical occupancy was only 94.7% versus 99.7% in 2Q18. Committed occupancy remains healthy at 99.9%.
  • Indicators of the health of the mall namely foot traffic and tenant sales saw a noticeable improvement in 2Q19. Foot traffic rose an estimated 5.9% y-o-y following soft numbers over the past four quarters (+0.4% to -6.2% y-o-y). During the quarter, Mapletree Commercial Trust hosted a lantern festival event involving Disney’s Tsum Tsum characters which drew strong crowds to the mall. The stronger traffic also contributed to 2Q19 tenant sales recovering, increasing 2.7% y-o-y from a 4.1% y-o-y fall in 1Q19. The prior quarter's foot traffic, tenant sales and occupancy were affected by spaces that were vacated to make way for a public library and concept stores on Level 1.
  • Over the quarter, VivoCity also achieved strong rental reversions, resulting in 1H19 signing rents being 4.1% higher than expiring rents, up from +2.1% recorded in 1Q19. The healthy rental reversions were attributed to a combination of changes in trade mix and tenant mix, as well as optimisation of shop space. Furthermore, we understand the new Fairprice lease has been captured in this quarter’s rental reversions number.
  • Going forward, we expect the opening of the public library in 2HFY19 to further strengthen VivoCity’s market position, which should translate into higher foot traffic and tenant sales.
  • The ongoing strengthening of VivoCity’s value proposition is expected to continue into 1HFY20 when FairPrice, the largest supermarket in Singapore, opens a new integrated concept. We understand the new hypermarket is expected to take up most of the space currently occupied by Giant and Cold Storage with another 20,000 sqft of space to be relocated for other tenants which should result in positive rental reversions. We understand during the fit-out period of c.3 months, there will likely be some impact on foot traffic and tenants’ sales. However, we understand that to manage MCT’s cashflows, Fairprice will be paying rent during the fit-out period.

Positive contribution from MBC 1 despite impact from another quarter of negative rental reversions

  • Similar to prior quarters, Mapletree Business City 1 (MBC1), Mapletree Commercial Trust’s second largest asset (c.31% of 2Q19 NPI) suffered from negative rental reversions, resulting in signing rents for the Office/Business Park portfolio falling 5.1% for 1H19 versus 5.3% recorded in 1Q19. However, adjusting for rent reviews, negative reversion in 1H19 would have come in at -1.1% versus -0.1% reported in 1Q19.
  • Despite this headwind and actual occupancy for MBC1 being lower y-o-y (97.8% versus 99.2% in 2Q18) due to the inbuilt rental step-ups, 2Q19 revenue and NPI rose 4.3% and 4.4% respectively.
  • The Bank of America Merrill Lynch HarbourFront (MLHF) also had a strong quarter, with 2Q19 NPI jumping 7.2% y-o-y helping temper the weakness from the PSA Building (1.3% y-o-y drop in 2Q19 NPI) and Mapletree Anson (4.5% y-o-y fall in 2Q19 NPI). MLHF benefitted from the building being physically full as compared to 91.6% occupancy in 2Q18. Committed occupancy for MLHF remains at 100%.

Minimal lease expiries for remainder of FY19

  • For the remainder of the year, Mapletree Commercial Trust has minimal vacancy risk with only 1.8% and 2.6% of retail and office/business park leases up for renewal, down from 7.5% and 5.1% respectively at end-1Q19. For FY20, 13.4% and 5.4% of retail and office/business park leases will be effectively due.
  • On account of the leases signed over the quarter, overall portfolio WALE was extended slightly to 2.8 years from 2.6 years previously. WALE for retail and office/business parks stands at 2.6 years (2.3 years in 1Q19) and 3.0 years (3.0 years in 1Q19) respectively.

Strong balance sheet

  • Mapletree Commercial Trust remains in a strong financial position with gearing stable at 93% from 2.91% in 1Q19 and 2.70% in 2Q18. The proportion of fixed rate debt to mitigate rising interest rates was steady at c.5%.
  • With Mapletree Commercial Trust’s portfolio not subject to an annual valuation exercise, net asset value per unit was maintained at S$1.

Maintain BUY, Target Price of S$1.80

  • 2Q19 was another quarter of Mapletree Commercial Trust demonstrating its resilience and the benefits of having two best-in-class asset, VivoCity and MBC 1.
  • In the midst of the current stock market volatility, we expect Mapletree Commercial Trust to continue to deliver steady growth in DPU ahead as it benefits from the expected improvement in spot office rents, positive rental reversions at VivoCity and improvement in physical occupancy across several buildings.
  • Thus, we reiterate our BUY call and Target Price of S$1.80. At the current level, Mapletree Commercial Trust is trading on a 5.7% distribution yield.

Mervin SONG CFA DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2018-10-26
SGX Stock Analyst Report BUY MAINTAIN BUY 1.800 SAME 1.800