Mapletree North Asia Commercial Trust - DBS Research 2020-05-04: Shaken, Not Stirred

MAPLETREE NORTH ASIA COMM TR (SGX:RW0U)

Mapletree North Asia Commercial Trust - Shaken, Not Stirred

Mapletree North Asia Commercial Trust's FY20 results in line; Festival Walk remains a pillar of strength.
Projected to offer rental rebates to tenants; FY20F earnings cut by c.9%.
Geographical diversity to boost earnings resilience in current trying times.
BUY maintained, Target Price S$1.05.

Mapletree North Asia Commercial Trust (SGX:RW0U)'s FY20 results in line with expectations, DPU of 7.10 Scts in line with our estimates.
Gross revenues and net property income dipped by 13.3% and 15.7% to S$354.5m and S$277.5m respectively mainly due to the impact of
1. rent reliefs granted at Festival Walk of S$17.8m (S$10.3m in 4QFY20) due to social unrest and COVID-19 impact,
2. lower occupancy rate at Gateway Plaza offset by full year contribution from Japan (first tranche acquisition of 6 properties) and
3. one month contribution from the acquisition of MBP and Omori (end Feb 2020).
Stronger currencies (HKD, JPY) vs the SGD also impacted performance, offset by the weaker RMB exchange rate.
Distributable income decreased by 5.3%y-o-y to S$227.9m due to a distribution top-up of S$37.5m for non-rental collection and closure of Festival, translating to a FY20 DPU of 7.1 Scts, down 7.4% y-o-y.

Valuations in SGD terms went up by 2.8% (excluding Omori and MBP) largely due to favourable currency movements (JPY, HKD against the SGD) as cap rates remained largely similar in HK (4.15% gross), China (5.5% gross, -0.25% y-o-y) and Japan (range 4.1% - 4.7%, tightened by 0.1% at the higher end).
In local terms, Festival walk saw a slight dip in valuation (- 0.8%) which implies it is fairly resilient in our view, despite the disruption.
Mapletree North Asia Commercial Trust's balance sheet metrics remain healthy with gearing at 39.3%, with an average term to maturity of 3.35 years with an effective cost of debt of 2.33%.
Interest coverage ratio of 2.8x (4QFY20) and 3.5x (FY20) remain well above covenant levels.

Mapletree North Asia Commercial Trust’s WALE stands at 2.7 years in line with retail REITs. With 22.3% of leases to be renewed in FY21, the manager has pro-actively engaged tenants to renew ahead of expiry and has de-risked 4.7% of expiries (by GRI). We note that a majority of leases coming up for renewal will be from Festival Walk, where negotiations are likely to be tough given the weak operating climate (COVID-19 outbreak) as retailers have not seen good sales since Jun-19 (onset of protests in HK).
The other leases are well spread out across its other properties and we expect retention rates to remain high.

Festival Walk have been doubly hit post the closure due to social unrest and COVID-19 outbreak, which in our view will moderate its path towards normalisation to previous levels. The manager has actively engaged tenants since the re-opening and has continued to extend assistance to tenants (through a combination of rebates and marketing efforts) with an aim to boost sales.
According to Savills, HK landlords have offered rental rebates ranging 30%-50% on a monthly rolling basis.
The mall’s committed occupancy rate dipped slightly to 99.2% due to an early termination of a tenant who has left Hong Kong.
The manager will work with tenants to progressively drive tenant sales through sales & promotions, marketing and if needed, selective rental concessions, on a case by case basis.
In our estimates, we have assumed negative reversions to the tune of -10% in FY21F and occupancy rate decline of 5 percentage points (to 95%) by end of FY21.
We have also assumed an additional 1-month rental relief across the mall (assuming 50% rebate covering April’20- May’20) at the worst of the containment measures undertaken to combat the spread of the virus.

Both properties in China – Gateway Plaza (in Beijing) and Sandhill Plaza (Shanghai) - saw weaker occupancy rates of 91.5% and 98.0% respectively while rental reversions were at -10% (Gateway Plaza) and +10% (Sandhill Plaza) for FY20.
The divergence in performance was due to Gateway Plaza impacted by greater competition (supply) in Beijing while Sandhill continues to attract tenants within its niche technology space given its position as a business park. The impact of work from home initiatives have impacted demand somewhat for now while the manager offered rental incentives (non-material on an overall portfolio basis).

Rental reversions dipped 2 percentage points due to expiry of 6 leases in FY20 to 94.7, including the acquisition of 2 properties (MBP and Omori). The extended split-work arrangements have resulted in slower resumption in operations for Japan and this has dragged operations.
Looking ahead, the manager anticipates occupancy rates to improve sequentially as they back-fill some of the vacated space progressively.

Derek TAN DBS Group Research | Singapore Research Team DBS Research | Rachel TAN DBS Research | https://www.dbsvickers.com/ 2020-05-04

SGX Stock Analyst Report BUY MAINTAIN BUY 1.050 SAME 1.050