Mapletree Commercial Trust - OCBC Investment 2018-11-28: The Best Of Most Worlds


Mapletree Commercial Trust - The Best Of Most Worlds

  • Diversified portfolio mix.
  • Strong management team and track record.
  • Healthy balance sheet.

Company Background

Diversified operations across various sub-sectors in Singapore

  • Mapletree Commercial Trust (MCT) is a Singapore-focused REIT primarily invested in a diversified portfolio of income-producing real estate which is used for office and/or retail purposes. Its sponsor is Mapletree Investments Pte Ltd (MIPL) and MCT’s current portfolio comprises five properties located in Singapore (as at 31 Mar 2018), namely:
    1. VivoCity, Singapore’s largest mall, located in the HarbourFront Precinct;
    2. Mapletree Business City I (MBC I), a large-scale integrated office and business park complex with Grade-A building specifications, located in the Alexandra Precinct;
    3. PSA Building (PSAB), an integrated development with a 40-storey office block and a three-storey retail centre known as the Alexandra Retail Centre, located in the Alexandra Precinct;
    4. Mapletree Anson, a 19-storey premium office building located in Singapore’s CBD;
    5. Bank of America Merrill Lynch HarbourFront (MLHF), a premium office building located in the HarbourFront Precinct.
  • These properties have an aggregate net lettable area (NLA) of about 3.9m sq ft, and are valued at S$6.68b, as at 31 Mar 2018.

Significant milestones since its IPO in Apr 2011

  • Mapletree Commercial Trust (MCT) was listed on SGX-ST on 27 Apr 2011, with an initial portfolio of three main properties, namely VivoCity, MLHF and PSAB. Since its listing, MCT has embarked on a few enhancements to its portfolio.
  • In Nov 2011, MCT completed its first major asset enhancement initiative (AEI) project at PSAB. Levels one to four of the existing 40-storey office building was converted into a three-storey retail centre named the Alexandra Retail Centre (ARC).
  • In Feb 2013, MCT made its maiden acquisition post-listing, with the purchase of Mapletree Anson, a 19-storey Grade A premium office building strategically located within the CBD.
  • MCT completed its first AEI project at VivoCity basement in Jul 2015, adding ~15k sq ft of retail space after the overhaul of the car park and lower yielding space being converted into prime retail space.
  • MCT completed the acquisition of the office and business park components of MBC I from its sponsor for S$1.78b in Aug 2016. MBC I has an NLA of over 1.7m sq ft, counts many large MNCs as its tenants, and is recognised by many as a best-in-class asset.
  • In Jun 2018, MCT launched the basement 1 extension of VivoCity, adding 24k sq ft of new retail space, while new and larger format concept stores by Zara, Superdry and Pull & Bear were introduced.

VivoCity and MBC I accounted for 73.6% of MCT’s portfolio valuation

  • Among the five properties within MCT’s portfolio, VivoCity, Singapore’s biggest shopping mall, accounts for a sizeable proportion of its total portfolio valuation at 45.3%, followed by MBC I at 28.3%. Together, both properties constitute 73.6% of MCT’s portfolio value.
  • The combined market valuation of MCT’s portfolio was S$6,682m, as at 31 Mar 2018, an improvement of 5.4% as compared to FY17’s S$6,337.0m valuation. This was driven largely by cap rates compression and better operating performance at VivoCity.
  • (Read also: Mapletree Delivered Growth & Value to its REIT UnitholdersMapletree REITs Amongst the Most Defensive Stocks in 2018.)

Investment Merits

Resilient and high quality portfolio anchored by VivoCity and MBC I

  • In our view, Mapletree Commercial Trust (MCT)’s portfolio is made up of high quality assets which are anchored by VivoCity and MBC I, both of which constitute close to 75% of its portfolio valuation.
  • VivoCity is positioned as a family, tourist and lifestyle destination in Singapore, offering visitors a unique waterfront shopping and dining experience. It is also seen as a gateway to Sentosa, housing the Sentosa Express Station monorail on level three. Additionally, the mall is one of a handful of shopping malls in Singapore that has direct connections to two MRT lines, namely the Circle Line and the North-East Line. Hence, its strategic location in the heart of the HarbourFront Precinct and excellent connectivity has attracted consistently high shopper traffic and a strong tenant base. VivoCity is also expected to be a key beneficiary of the recent announcement by the government on reshaping Sentosa and development plans for Pulau Brani to integrate them with the upcoming Greater Southern Waterfront project.
  • For Mapletree Business City I (MBC I), we believe it is one of the best, if not the best business park properties in Singapore, underpinned by
    1. its good location as the closest business park complex to the CBD,
    2. Grade A building specifications, and
    3. having a longer leasehold interest in land tenure (99-year leasehold tenure compared to traditional business parks with a 60-year leasehold tenure).
  • We believe the current robust rental growth trajectory of the core CBD office rents (+11.2% for 9M18) has placed MBC I is in a sweet spot. This is because tenants who are seeking Grade A specification space may now be more inclined to seek alternatives such as at MBC I which offer a more cost competitive solution.

Strong track record of adding value and delivering growth

  • Mapletree Commercial Trust (MCT)’s high quality portfolio of best-in-class assets has been well complemented by its strong management team, who have a firm commitment to add value via active asset management efforts. One clear example is the successful AEIs carried out at VivoCity. MCT completed the conversion of the Basement 1 car park space and lower yielding space into high yielding prime retail space in Jul 2015. The project added 15k sq ft of NLA and achieved an ROI of ~25%.
  • In Feb 2016, MCT embarked on the 2nd AEI project for VivoCity, working on improving the layout of Basement 2 and enhancing space utilisation on the upper levels. The AEI yielded a ROI of ~20%. Currently, there is an ongoing AEI to convert part of Level 3 to a 32k sq ft public library and 24k of bonus GFA (granted under the Community/Sports Facilities Scheme) will also be added on Basement 1. Management expects the entire AEI to generate ROI of ~10% on a stabilised basis.
  • As a result of these initiatives, MCT has also built an enviable track record of having delivered positive growth in its DPU every financial year since its listing. From FY12 (restated to reflect a full year) to FY18, MCT’s DPU grew at a healthy CAGR of 8.2% to 9.04 S cents.

Prudent capital management

  • In our opinion, Mapletree Commercial Trust (MCT) has adopted a prudent capital management approach while delivering consistent growth to its unitholders. It has a strong balance sheet, with a healthy gearing ratio (total borrowings divided by total assets) of 34.8%, as at 30 Sep 2018. This healthy gearing ratio has also been bolstered by a higher valuation uplift of its investment properties.
  • That said, we believe the valuation metrics adopted by the independent valuers remain conservative. For example, VivoCity was valued based on a 4.75% cap rate, versus market transactions such as Westgate (~4.4% based on annualised 1H18 NPI) and Jurong Point (~4.2%).
  • As at 1HFY19, 75.2% of MCT’s debt has been fixed/hedged, thus mitigating it from fluctuations in interest rates in the near-term. Following a recent refinancing exercise in Jul and Aug 2018, MCT’s debt maturity profile has been stretched to 4.1 years, with no more than 20% of its debt due for refinancing in any financial year. Its next refinancing requirement comes only in FY20. This is for a S$50m Medium Term Note.

Pipeline of good ROFR assets which can enhance portfolio proposition

  • Besides organic growth, another key driver of a REIT’s progression stems from inorganic growth opportunities. Hence, having a strong sponsor is one key aspect to achieving these growth objectives. Based on MCT’s investment mandate, there are no restrictions on making acquisitions overseas. However, we believe MCT’s strategy in the near-term remains Singapore-focused. This is partly because MCT has a robust pipeline of good quality assets which are granted a right-of-first-refusal (ROFR) by its sponsor MIPL.
  • There are currently seven properties in the ROFR pipeline with a combined NLA of approximately 2,916,000 sq ft, namely Mapletree Business City II, HarbourFront Centre, HarbourFront Tower One, HarbourFront Tower Two, Proposed Mapletree Lighthouse, St. James Power Station, and PSA Vista.

Financial Analysis and Forecasts

Mild growth in recent 1HFY19 results

  • As highlighted earlier, Mapletree Commercial Trust (MCT) has a good track record of delivering positive DPU growth every financial year since its listing, with a healthy CAGR of 8.2% from 5.66 S cents in FY12 (restated to reflect a full year; actual: 5.27 S cents) to 9.04 S cents in FY18.
  • More recently, it reported a 1.6% and 2.1% increase in its 1HFY19 gross revenue and NPI to S$218.5m and S$172.2m, respectively. This was driven by higher contribution from all its properties with the exception for Mapletree Anson. DPU grew at a smaller magnitude of 0.7% to 4.50 S cents due to higher finance expenses and manager’s management fees.

Operating metrics largely resilient

  • Operationally, MCT’s actual occupancy declined slightly by 0.5 ppt q-o-q to 95.9%, as at 30 Sep 2018, due largely to PSA Building (-1.9 ppt). However, committed occupancy was firm at 98.7%.
  • VivoCity’s ongoing AEI will result in an added public library at Level 3 and bonus GFA deployed to extend Basement 1, both of which are fully committed. Shopper traffic and tenant sales were solid, increasing 5.8% and 2.8% y-o-y in 2QFY19, respectively (1HFY19: +3.1% for shopper traffic but -0.7% for tenant sales due to major fit-outs). VivoCity also recorded robust rental reversions of 4.1% for 1HFY19. We understand that this was largely driven by the replacement of Vivomart with Fairprice which will in turn come up with a new integrated concept by 1HFY20.
  • According to MCT, further potential upside includes the conversion of some recovered space into higher yielding specialty stores. There were negative rental reversions of -5.1% for MCT’s Office/Business Park segment, due largely to peak office market rentals three years ago. Including rent review for a large space (~195k sq ft), we understand that rental reversions came in positive for MBC I.

Forecasting stable DPU growth ahead

  • Looking ahead, we are projecting a slight uptick in gross revenue and NPI by 1.0% and 1.3% to S$437.9m and S$343.3m, respectively, for FY19. This is because it takes time for the higher committed occupancies at VivoCity, PSA Building and Mapletree Anson to begin their contributions.
  • We forecast DPU to increase 0.2% to 9.06 S cents due to an increase in finance expenses and units outstanding.
  • We expect growth to pick up in FY20 due to an improvement in passing rents and higher physical occupancies which would be cash flow generating. Our gross revenue, NPI and DPU growth projections are +2.3%, +2.4% and +1.8% to S$448.0m, S$351.6m and 9.22 S cents, respectively.

Peers Comparison and Valuation 

Unique portfolio mix, with exposure to retail, office and business park properties in Singapore

  • We believe Mapletree Commercial Trust (MCT) has no really close comparables within the S-REITs space, given its unique exposure to the retail, office and business park sub-sectors in Singapore. However, as VivoCity contributes close to 50% of MCT’s NPI (1HFY19: 46.3%; FY18: 46.2%), we would compare MCT to its Singapore-focused retail REIT peers, together with Suntec REIT, which has both retail and office assets, albeit in Singapore and Australia.
  • We opine that CapitaLand Mall Trust (CMT), Frasers Centrepoint Trust (FCT) and Suntec REIT would be the closest peers to MCT. Looking at Exhibit 20 in the PDF file attached, MCT offers a comparable distribution yield to the average of CapitaLand Mall Trust, Frasers Centrepoint Trust and Suntec REIT, while having a more diversified portfolio and strong sponsor in MIPL, in our view.
  • Although its gearing ratio is slightly higher than this peer set, we believe it is still at a comfortable level. We estimate that MCT has a healthy debt headroom of ~S$590m before reaching a gearing ratio of 40%.

Initiate BUY on MCT with a fair value estimate of S$1.79 

  • We value Mapletree Commercial Trust (MCT) using the dividend discount model (DDM) as it is expected to pay out stable rental income (net of expenses) generated from its assets at regular intervals. DDM is also a commonly used metric to value REITs.
  • We derive a fair value estimate of S$1.79 for MCT after inputting our financial forecasts and capital asset pricing model (CAPM) assumptions (risk-free rate: 2.7%, market risk premium: 6.5%, adjusted beta: 0.612, cost of equity: 6.7%, terminal growth rate: 1.8%) in our model.
  • Coupled with a prospective distribution yield of 5.6% for FY19F (as at 27 Nov 2018), we initiate coverage on MCT with a BUY rating, with potential total returns of ~15% (as at 27 Nov 2018).
  • Refer to the attached 20-page PDF report for complete analysis including industry outlook, key risks and valuation details. 

Andy Wong Teck Ching CFA OCBC Investment Research | https://www.iocbc.com/ 2018-11-28
SGX Stock Analyst Report BUY INITIATE BUY 1.79 SAME 1.79