Mapletree North Asia Commercial Trust - DBS Research 2019-01-28: Powering Ahead


Mapletree North Asia Commercial Trust - Powering Ahead

  • MNACT’s 3Q19 DPU of 1.927 Scts (+3.2% y-o-y) slightly ahead of expectations
  • High occupancies and higher rentals offset headwinds from weaker RMB
  • Positive rental reversions of 6-32% across portfolio to drive earnings in the coming year
  • Maintain BUY, TP of S$1.45

What’s New

Healthy uplift in DPU continues

  • MAPLETREE NORTH ASIA COMMERCIAL TRUST (SGX:RW0U, MNACT) delivered 3Q19 DPU of 1.927 Scts which was up 3.2% y-o-y. This is a continuation of the healthy y-o-y uplift seen over the last few quarters, and we note that 3Q19 was strong considering the 5.1% y-o-y increase recorded in 3Q18.
  • For 9M19, DPU came in at 5.734 Scts (+2.6% y-o-y), which is slightly ahead of expectations, representing c.77% of our FY19F DPU estimate of 7.61 Scts.
  • The solid set of results, which saw 3Q19 revenue and NPI jumping 19.4% and 18.5% y-o-y to S$105.6m and S$84.6m respectively, was largely due to the acquisition of a portfolio of Japan office buildings in May 2018.
  • Stripping out this impact, MNACT’s existing properties - Festival Walk, Gateway Plaza and Sandhill Plaza - also had a robust quarter, with 3Q19 NPI for MNACT’s original portfolio increasing by 5.0% y-o-y.
  • Partly offsetting the better operating performance was a 10% jump in interest expenses and larger issued share base arising from the placement in 1Q19.

Income from Festival Walk surged 5% y-o-y

  • With occupancy maintained at 100% and Festival Walk benefiting from healthy growth in rents as well as depreciation of the SGD versus HKD, 3Q19 revenue and NPI jumped 5.9% and 5.1% y-o-y. On a constant currency basis, 3Q19 revenue and NPI was also strong, increasing by 4.5% and 3.7% y-o-y respectively.
  • In 3Q19, we understand the retail component of Festival Walk achieved rental reversions in the 12-13% range, resulting in 9M19 rental reversions for the retail component at Festival Walk dropping to 32% from 40% in 1H19. In 2Q19, rental reversion was boosted by the lease renewal of an anchor tenant. Post the positive rental reversions over the past year, passing rents for the retail component of Festival Walk has risen to HK$157.60 from HK$149.10 psf/month in 3Q18.
  • Tenant sales and foot traffic in 3Q19 also softened, dropping 1.0% and 3.4% y-o-y respectively. The drop was due to a high base effect (tenant sales growth of 6-18% y-o-y in the last four quarters) and the impact of recent market volatility and softer residential property market which affected consumer sentiment. Furthermore, we understand tenant sales were affected by weaker performance from the apparel/fashion categories and renovations for the supermarket and a mini-anchor tenant.
  • Going forward, while there is some risk that tenant sales may be soft in the next couple of quarters, with occupancy cost still relatively healthy at 19.4% (below the 23-24% level where pressure on rents mount) and Festival Walk positioned as a lifestyle mall catering to nearby residents and students, MNACT remains confident that Festival Walk can still achieve positive rental reversions in the high single to low double digit range.

Strong earnings growth from Chinese properties despite currency headwinds

  • Despite the depreciation of the RMB versus SGD, MNACT’s two Chinese properties Gateway Plaza and Sandhill Plaza delivered 4.8% and 5.5% y-oy growth in 3Q19 NPI. In RMB terms, NPI for Gateway Plaza and Sandhill Plaza would have increased by 7.9% and 8.5% respectively.
  • Gateway Plaza benefited from occupancy increasing to 99.3% from 94.0% in 3Q18 and impact of higher rents. Rental reversion for the property was maintained at 8% for 9M19 (8% in 1H19). However, going forward with passing rents for Gateway Plaza now at RMB349 psm/month compared to asking rents of RMB320-350 psm/month, it is expected that rental reversions will fall to the low single digit range especially with overall Beijing office market softening on the back of the current macro uncertainties.
  • Meanwhile, income at Sandhill Plaza was boosted by a rise in occupancy to 99.2% from 98.3% in 3Q18. Passing rents have also increased to RMB5.60 psm/day from RMB5.41 psm/day in 3Q18 due to 14% positive rental reversions for 9M19 and 15% uplift in FY18.

Stable Japanese contribution

  • As expected, the contribution was stable at S$9.6m, marginally up from S$9.5m in 2Q19.
  • For 9M19, rental reversion was 6%, similar to 1H19 as no renewals or new leases were done over the quarter.

Stable gearing

  • Gearing and average effective interest remained stable at c.39% and 2.5% respectively.
  • To manage its interest rate risk, MNACT increased the proportion of fixed rate debt to 85% from 78% in 3Q18.
  • Despite volatility in FX rates, NAV per unit was maintained around S$1.32.

Chinese acquisitions the next growth engine

  • We understand that following MNACT’s maiden acquisition in Japan last year, the REIT is now targeting acquisitions in China for its next leg of growth.
  • Given the tight yields in its core markets of Beijing and Shanghai, MNACT will be targeting Tier 1.5-2.0 cities, which have demonstrated declining vacancies and good growth led by the emerging TMT sector. We understand cap rates for these types of offices range between 4.5% to high 4%.

Maintain BUY and TP of S$1.45

  • With 3Q19 results slightly ahead of expectations, we maintain our BUY call and TP of S$1.45.
  • We continue to like MNACT for its attractive 6.2% yield and ability to consistently deliver steady DPU growth despite potential short-term headwinds in HK.

Mervin SONG CFA DBS Group Research | Derek TAN CFA DBS Research | https://www.dbsvickers.com/ 2019-01-28
SGX Stock Analyst Report BUY MAINTAIN BUY 1.450 SAME 1.450