Mapletree North Asia Commercial Trust - DBS Research 2019-12-06: A Christmas Lost


Mapletree North Asia Commercial Trust - A Christmas Lost

  • Festival Walk to be closed for repairs with loss of rental income in the interim (up to Jun’21).
  • Insurance covers a substantial part of repairs and loss of income.
  • Acquisition of two Japan properties to stabilise portfolio; diversifying its earnings source away from HK.

Festival Walk: Will it be the same again?

Closed till CY1Q20; manager plans to top up capital in the interim

  • Festival walk will be closed for extensive repairs and is scheduled to reopen partially or fully in CY1Q20 (FY4Q20), subject to approvals to be obtained from authorities. During the period of mall closure, rents will not be collected from its retail tenants.
  • The office tower was closed from the 13 - 25 November 2019 and has since been reopened to tenants. During the period of closure, rents were not collected from retail tenants. Since the tower has reopened, rental collection has resumed. See Mapletree North Asia Commercial Trust Announcements dated 04-Dec-2019.

Insurance coverage for repairs and loss of income to mitigate impact

  • We understand that the insurance coverage for Festival Walk includes property damage and loss of revenue due to business interruption.
  • The loss of rental income from its retail and office tower as well as property damage are covered by insurance but the timing of the collection of these insurance proceeds are not firm at this point.

Distribution top-up to somewhat negated the fall in income

  • Given the mall contributes close to 65% of Mapletree North Asia Commercial Trust’s quarterly income, the closure of the mall has a significant impact on distributions.
  • During the period of the mall closure and non-collection of rental income and receipt of insurance proceeds, distributions are expected to be significantly lower, especially in 2HFY20 vs 2HFY19 and1HFY19.
  • In the interim, the manager will implement adistribution top-up of up to 40% of the retail revenue which will be included in the capital component of Mapletree North Asia Commercial Trust’s distributable income; to mitigate the drop in DPU to unitholders.
  • These distributions are projected to be funded by debt and once insurance proceeds are received, will be utilised to pay off such debt facilities taken to fund their distribution payments in the near term.
  • Gearing is not expected to rise significantly in the interim period of such distribution payout.

Sponsor to inject 2 Japan properties into MNACT to diversify its income base

Proposed acquisition of two properties to bring Mapletree North Asia Commercial Trust’s income (EBITDA) to “developed markets” to > 75%

  • As part of the manager’s strategy to diversify itssources of income from Hong Kong, the manager has announced the proposed acquisitions of a 98.47%interest in two multi-tenanted properties in Japan. See Mapletree North Asia Commercial Trust Announcements dated 04-Dec-2019.
  • The properties are mBbay Point Makuhari Building (“MBP”) in Chiba and Omori Prime Building (“OPB”) in Tokyo, currently held under a fund managed by sponsor, Mapletree Investments. These properties are located within the same business area and wards that the initial Japan portfolio acquired by Mapletree North Asia Commercial Trust a while ago.
  • The agreed property valuation of 100% interest in the property of JPY38.11m or S$485.1m is at a 3.1% and1.8% discount to the independent valuations. Mapletree North Asia Commercial Trust’s share is S$477.1m for its 98.47% interest. Inclusive of fees, the total consideration is estimated tobe S$482.5m.
  • The manager has waived its acquisition fee of 0.75% in support of the accelerated diversification of management’s strategy to diversify its sources of income away from Hong Kong.
  • The initial yield of 4.5% is at an attractive 470-bp spread to the 10-year bond yield of 0.7%.

Under-rented properties with quality tenants

  • The properties have a weighted average lease expiry of 4.5 years and occupancy rate of 85.7%. Top 2 tenants are NTT UD and AEON credit service, which have a strong credit rating and are listed on the Tokyo stock exchange.
  • The properties’ in-place passing rents are 6.8% (OPB) and 15.9% (MBP) below the range of market rent comparables which implies potential positive rental reversions when 22.7% of the lease becomes due in FY20 and FY21.
  • In addition, the opportunity to lease up the vacancy at MBP which has an occupancy rate of 84.8%, implying upside to initial yields when the property is leased up.

Funding – Sponsor to take consideration units in support of the REIT

  • Mapletree Investments is proposing to take 30% of the acquisition price in the form of transaction units, with the remainder being onshore debt which will likely cost < 1.0%. The manager will be seeking a whitewash waiver at an EGM.
  • The pricing of these transaction units will be based on10-day VWAP prior to completion of the transaction, which is subject to an EGM.
  • Post-deal gearing is estimated to rise from 37% to 39% which is still within the manager’s longer-term gearing target.
  • Based on pro-forma figures provided by the manager, the deal is projected to be 1.8% accretive to distributions and will come in handy to help mitigate the impact on the closure of Festival Walk.

EPRA Nareit Indexation potential in the medium term.

Impact and our revised estimates

  • Our DPU estimates are reduced by 23% and 8% respectively (see Mapletree North Asia Commercial Trust Target Price) to account for the
    • disruption in rental income from Festival Walk, and
    • additional rental income from its Japan acquisitions, assumed from FY21 onwards:
      1. Festival Walk income disruption. We have broughtour estimates to account for the mall closure andhave assumed that Festival Walk is closed till the end of Mar’20; with rental only kicking in from the end of 1QFY20 onwards. During the interim, we have assumed that 40% of Festival Walk’s 2QFY20 rental income of S$65.5m (or S$26.2m) will be paid in the form of top-up over the next three quarters.
      2. At an initial yield of 4.5% and assumed funding cost of 1.0%, the spread of 3.5% will come in handy to partially offset the interim loss of income and set Mapletree North Asia Commercial Trust on a firmer footing when income stabilises. We have assumed 110 units issued at S$1.15/unit amounting to S$126.5m will be raised through consideration units to the sponsor.
  • See attached PDF report for details of revised estimates and complete analysis.

BUY, Target Price cut to S$1.30.

Derek TAN DBS Group Research | Rachel TAN DBS Research | Singapore Research Team DBS Research | https://www.dbsvickers.com/ 2019-12-06
SGX Stock Analyst Report BUY MAINTAIN BUY 1.30 DOWN 1.600