Mapletree North Asia Commercial Trust - DBS Research 2019-09-30: Resilience Is The Name Of The Game


Mapletree North Asia Commercial Trust - Resilience Is The Name Of The Game

  • Positive investor response seen from Mapletree North Asia Commercial Trust's non-deal roadshow in Korea.
  • Worries over impact of Hong Kong protests on Festival Walk seems overdone, in our view.
  • Asset positioning towards more F&B and limited exposure to tenant sales volatility key reasons for Festival Walk’s relative resilience, in our view.
  • Looking for more acquisitions to grow and diversify its earnings base.

Climbing the “wall of worry”.

  • We maintain our BUY call and Target Price of S$1.65 for MAPLETREE NORTH ASIA COMMERCIAL TRUST (SGX:RW0U).
  • We believe that concerns over its exposure to Hong Kong (c.62% of net property income or NPI) are overdone and priced in. Its valuations are attractive at 0.9x P/NAV and its yield of 6.0% is 50bps higher than the S-REIT average. Thus, we advise investors to accumulate Mapletree North Asia Commercial Trust’s shares.

Where we differ: Festival Walk to show its mettle.

  • With its fortunes tied closely to the outlook for its key asset – Festival Walk (62% of net property income), we believe that the mall should be able to hold its fort in the wake of weaker retail sentiment in Hong Kong.
  • We see the mall demonstrating resilience against expectations of a fall in revenues, as seen in other retail malls in Hong Kong This is on the back of
    1. positioning towards more resilience trade sectors (F&B, entertainment and supermarket),
    2. limited exposure to tenant sales volatility as the gross turnover (GTO) contribution to topline is < 3% of portfolio revenues, limiting the impact of an expected drop in retail sales.

Offering income diversity:

  • Mapletree North Asia Commercial Trust currently offers investors a diversified exposure in prime properties in Hong Kong (c.62% of NPI), China (c.27% of NPI) and Japan (c.11% of NPI). It’s portfolio weighted average lease expiry (WALE) of 2.9 years enables the manager to actively manage is portfolio to optimise returns for investors.

The key questions on most investors’ minds are:

1. Impact of the on-going protest in Hong Kong on operations?

  • Festival Walk has been a key driver of growth for Mapletree North Asia Commercial Trust. Given that Festival Walk (FW) contributes the lion’s share of the REIT’s NPI, the performance of the mall will be key driver for the growth prospects of Mapletree North Asia Commercial Trust. Operating metrics have been strong with its properties consistently reporting c.100% occupancy while rental reversions were positive at +12% in 1QFY20. Looking ahead, the manager expects the asset to continue to deliver a resilient performance.
  • Positioned to delivered resilience. While there are anecdotal evidences that other landlords in Hong Kong have been giving incentives to tenants whose businesses are affected by the protests, we note that Mapletree North Asia Commercial Trust has not been impacted materially at this moment and the FW mall have not suffered from any disruptions. Footfall has been rather persistent (40m traffic per year though we saw 1QFY19 traffic dip 1.8% y-o-y, tenant sales at -3.2% y-o-y) and has proven to be less volatile compared to overall retail sales in Hong Kong over time.
  • We believe that this is due to the mall’s location within a residential district with minimal tourist exposure (at c.10% of traffic or less). Given its positioning as a mall that caters to its daily needs (a strong food & beverage (F&B) catchment, activity-based entertainment offerings like Cinema, Ice Rink and supermarket), the mall’s performance is likely to be fairly resistant when compared to its peers.
  • Impact likely to be more modest than expectations. That said, we believe that some degree of impact should be expected given the more subdued, overall operating sentiment in Hong Kong, especially when there is news of landlords offering rental rebates/cuts to keep tenants. While we do not anticipate a significant drop in rental reversions yet, we believe that there may be near-term downside risk to rental growth momentum. Tenancy risk, at this moment, seems low given the FW mall’s positioning is mainly in the mid-range segment of the retail market with strong anchors in the F&B sector, as well as a cinema and a supermarket.
  • In the near term, we see potential risk in its gross turnover component (GTO) which contributes c.3-4% of the property’s topline on an annual basis (or < 2% on a portfolio basis) and therefore, the mall is not exposed to tenant sales volatility.
  • That said, the manager believes that as sales are weighted towards Christmas (FY3Q) and the Chinese New Year festivities (FY4Q), the impact should be marginal for now.

2. Performance of its other markets China – outlook remain mixed

  • Gateway Plaza in Beijing – more competitive environment given the introduction of new supply . Gateway Plaza’s rental reversionary trends have moderated over time as the manager has marked to market its asset’s passing rents (c.RMB346 psm/mth) close to its micro-market comparable level (c.RMB320-350 psm/pm) while supply completions within the city centre and other submarkets may depress the rental growth prospects for Gateway Plaza in the near term. The manager also noted that tenant enquiries have been slowing given the uncertainties brought about by the on-going trade war as most tenants remain cautious and prefer to not commit ahead or are uncertain about expanding. The strategy is to target to keep a high retention rate within the property rather than pushing rents significantly higher.
  • Sandhill Plaza in Shanghai – a robust growth story. Sandhill Plaza offer strong specifications within its micro-market and is positioned in the IT/Hi-tech sector and somewhat enjoy a clustering effect from tenants (mainly in the online gaming and electronics sectors) who like to be located near peers within the same industry. The manager is confident to still deliver steady rental reversions for the property. This is driven by its relative attractiveness given its lower rents of RMB5- 7psm/day compared to rates within the central business district which are more than double its rents.
  • Japan – offering attractive spreads. The six properties in Japan offer additional income visibility to the REIT. With a portfolio NPI yield of 4.8%, most of its space leased to quality multinational companies (MNCs) and an attractive cost of funds of < 1%, Mapletree North Asia Commercial Trust enjoys an attractive and stable yield spread from its Japan properties. Supported by relatively long WALE and with positive rentals of up to 6% (albeit for a smaller footprint) for leases expiring in 1QFY20, we remain confident that Japan will continue to offer resilience to Mapletree North Asia Commercial Trust in the longer term. In terms of currency, the strength of the JPY currency may present upside surprises to its distribution.

3. Acquisitions and growth

  • Ambitions to continue to grow inorganically. The manager of Mapletree North Asia Commercial Trust continues to look for opportunities in Japan and China and look to deepen its exposure there over time through acquisitions. The strategy is to keep Japan within 20% of its expanded portfolio (currently at 11% of NPI, 10% of asset value currently).
  • In China, the manager is keen to look at Tier 1 (Beijing, Shanghai) and even selected cities like Chengdu, Hangzhou as possible targets to gain an exposure and ride on the growth that these cities offer. Other countries that may be of interest include cities in North Asia like Korea, although such plans are still quite preliminary.

4. Financial metrics

  • Prudent risk management policy: The manager employs a conservative capital management strategy, with its gearing remaining stable at c.36.9% and an average debt tenure of c.3.5 years. 87% of the debt is hedged into fixed rates while the manager has hedged a high level of 69% of its distributable income into SGD (four rolling quarter forward contracts), reducing income volatility for the REIT.
  • With a gearing of c.37%, Mapletree North Asia Commercial Trust has a debt headroom of close to S$680m to take on opportunistic acquisitions.

Derek TAN DBS Group Research | Rachel TAN DBS Research | https://www.dbsvickers.com/ 2019-09-30
SGX Stock Analyst Report BUY MAINTAIN BUY 1.650 SAME 1.650