Mapletree North Asia Commercial Trust - DBS Research 2020-01-21: Victory Against All Odds; Worst Could Be Over

MAPLETREE NORTH ASIA COMM TR (SGX:RW0U)

Mapletree North Asia Commercial Trust - Victory Against All Odds; Worst Could Be Over

We maintain our BUY call on MAPLETREE NORTH ASIA COMMERCIAL TRUST (SGX:RW0U) with a higher target price given better-than-expected performance for Festival Walk. With the mall re-opened earlier than expected, we believe that the worst is over for the stock.

At 0.9x P/NAV with forward prospective yields of 6.1% (FY21) vs sector average of 5.5%, we believe returns are attractive at current levels. Target price is revised higher given the stronger cashflows for its key asset.

Mapletree North Asia Commercial Trust's 3QFY20 results were impacted by the closure and rent relief given for tenants for its key asset, Festival Walk since 12 November 2019. This is according to expectations. See Mapletree North Asia Commercial Trust Announcements; Mapletree North Asia Commercial Trust Latest News.
Gross revenues and net property income dipped by 36.3% and 40.0% to S$105.6m and S$84.6m respectively due to the above reason, a conversion of a property in Japan from a single tenancy to multi-tenancy due to a non-expiry and lower occupancy rates at Gateway Plaza.
Weaker currencies (HKD, RMB) vs the SGD also impacted performance, offset by the higher JPY:SGD exchange rate.
Distributable income however only dipped by 12.5% (y-o-y) to S$53.3m due to a distribution top-up of S$25.8m during the quarter for the non-rental collection and closure of Festival Walk. This translates into a DPU of 1.671 Scts (-13.3% y-o-y).
On a YTD basis, DPU dipped slightly to 5.558 Scts (vs 5.734 Scts). YTD performance is ahead of our estimates. See Mapletree North Asia Commercial Trust Dividend History.

Festival Walk has since started operating from 16 January 2020 (closed for 64 days and in time for the Chinese Lunar New Year festivities, earlier than previously envisaged (vs 139 days previously guided, till end of March 2019).
The mall’s committed occupancy rate remains at a robust 100% as of end-December 2019 and rental reversions for the mall remain high at 12% (retail) and 6% (office).
With management and its property team tirelessly working to minimise disruptions to tenants and shoppers at the mall, we remain confident that these actions will prove to be invaluable to tenants which should be even stickier going forward given a pro-active landlord that has their interest at heart.
Rental collection is noted to have started since the mall re-opened, while we believe that it will likely take a couple of months more before operations stabilise (and hopefully no more further disruptions), the worst might be over for Mapletree North Asia Commercial Trust as operational performance takes a sequential step up.
In view that rent collection for Festival Walk has started, the manager believes that the previously announced disruption top-ups (up to 40% of Festival Walk’s rental income), are no longer needed from the next quarter onwards.
Awaiting receipt of insurance proceeds, the manager is expected to pay back (loan taken to pay out the interim distribution top-ups) with the remainder paid to unitholders in the form of a dividend.

Both properties in China – Gateway Plaza (in Beijing) and Sandhill Plaza (Shanghai) saw weaker occupancy rates of 91.6% and 98.3% respectively while rental reversions were at -3% (Gateway Plaza) and +9% (Sandhill Plaza).
The divergence in performance seen was due to Gateway Plaza being impacted by greater competition (supply) in Beijing while Sandhill continued to attract tenants within its niche technology space given its position as a business park. The slower economic growth is expected to remain a drag for leasing activities for its properties in China.

Rental reversions dipped -2% due to expiry of six leases YTD FY20, the dip in occupancy rate to 97.1% was due to a non-expiry of a single tenanted property in Japan and the manager is actively marketing the vacated space.
Looking ahead, Mapletree North Asia Commercial Trust is expected to see incremental income from Japan, post the contribution from the proposed acquisition of two Japan properties (EGM on 20 January 2020). This is expected to pull income even higher in the medium term and add further stability to the REIT going forward.

As we had previously conservatively assumed that Festival Walk remain closed till the end of March 2020 and given the earlier-than-expected opening of Festival Walk, our estimates are conservative vs actual performance. Our estimates are tweaked higher in anticipation of the latest operational update for Festival Walk.
See Mapletree North Asia Commercial Trust Target Price.

Derek TAN DBS Group Research | Rachel TAN DBS Research | Singapore Research Team DBS Research | https://www.dbsvickers.com/ 2020-01-21

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