Mapletree North Asia Commercial Trust - DBS Research 2020-09-28: Heading To Gangnam In Style


Mapletree North Asia Commercial Trust - Heading To Gangnam In Style

  • Joint acquisition with Sponsor of The Pinnacle Gangnam, Korea for KRW 458.8bn (S$536.4m).
  • Initial yield of 3.2%, with upside if occupancy heads up in the medium term.
  • Debt funded, accretion of 0.4% expected; gearing rises to c.41%.

Maiden transaction in Korea with the acquisition of a 50% stake in a freehold Seoul office

  • Mapletree North Asia Commercial Trust (SGX:RW0U) announced a joint acquisition with sponsor Mapletree Investments (49.95% stake) of office asset ‘The Pinnacle Gangnam’ in Seoul. See Mapletree North Asia Commercial Trust Announcements.
  • The agreed acquisition price is KRW 452bn (c. S$528.4m), representing a 1.5% discount to the asset’s latest valuation by Colliers, at an entry NPI yield of 3.2%.
  • Debt funded acquisition - yield accretion of 0.4% on pro forma FY19/20 basis.
  • Gearing is expected to increase from 39.6% to 41.4% post completion of the deal.
  • The deal will increase the percentage of freehold assets within Mapletree North Asia Commercial Trust’s portfolio to 55.6% and total AUM from S$8.26bn to S$8.53bn.

Freehold 20-storey office building with Grade A specifications

  • The Pinnacle Gangnam is a 9-year old freehold building comprising of 20-storeys of offices and six basement levels; we understand the asset is one of the “youngest” office properties within Gangnam. Total GFA of the asset stands at 44,444 sqm, inclusive of 181 parking lots. Asset WALE stands at 2.8 years by gross rental income with below market occupancy rate of 89.6%.
  • There are currently 34 tenants in the building, with established national and international IT manufacturers and apparel makers within the profile mix. Key tenants include Qualcomm, HUVIS, JustCo, Ralph Lauren and Echo Marketing. 97% of the leases have in-built fixed annual rental escalations of approximately 2-3%.
  • The building has direct access to the subway via Gangnam-gu Office station (Line 7 and Bundang Line) which allows good connectivity to e other major business districts in Seoul. It is also well-served by public transport networks, including bus and rail across the Seoul metropolitan area and regional transportation via high speed KTX train services.

Geographical diversification with a 3% exposure in South Korea (by net property income)

  • The deal will give Mapletree North Asia Commercial Trust access to the expanding South Korea real estate market and a possible pipeline from the Sponsor’s remaining 49.5% stake in the property.
  • South Korea registered the third highest volume of commercial real estate transactions in APAC in 1H20, behind China and Japan.
  • The Gangnam Business District (GBD), where ‘The Pinnacle Gangnam’ is located, stands as a key hub for information technology, digital and pharmaceuticals, and represents one of three key office districts in Seoul. Leasing demand in GBD is driven by high-growth sectors and has the lowest vacancy rate of 4.2% among the three major office submarkets.
  • Apart from two office projects scheduled for completion this year, which will add another 212k sqm of office space to the submarket, there will be no additional large-scale projects until 2024.

Our thoughts

Consistent diversification strategy to be read positively; indexation a medium-term target.

  • The manager of Mapletree North Asia Commercial Trust has consistently looked to diversify the REIT’s earnings base away from the retail sector and Hong Kong (c.65% of NPI as of FY21F to c.60% post completion of the acquisition). Given the recent earnings volatility and uncertainty of the retail scene in Hong Kong, we believe that the addition of more office properties in developed markets of Japan and Korea, where income is more stable, adds to the overall cashflow stability to the REIT in the medium term.
  • Post the completion of this acquisition in Korea, we see a concerted pivot towards more developed markets, which is expected to contribute c.72% as of 1Q21 but will rise to c.78% on a normalised basis (inclusive of Hong Kong, Japan and Korea). Over time, we believe this will set the stage for an eventual consideration for possible indexation into the EPRA NAREIT Developed World Index.

Accretive to earnings with upside on more optimal occupancy levels.

  • While the initial yield of 3.2% appears low, we understand this is due the property’s age which allows it to be competitive in the Gangnam submarket. In addition, we note that the property has
    1. low occupancy rate of 89.6% and
    2. in-place rents which are slightly below market.
  • While there is a major number of tenants renewing in FY22F of c.51.3%, we understand that tenants are looking to renew their leases and are also looking to expand at this property. Assuming that the occupancy is raised to market average of c.95%, yields may rise to c.3.5% based on our estimates. Annual rental escalations of c.2%-3% will drive returns higher in the medium term.

Gearing level heads above 40%.

  • Based on a full debt funding scenario, the Manager expects, on a pro-forma basis, an accretion of c.0.4%. Gearing is estimated to rise to c.41.4% (vs 39.6%) post the deal with the Manager expecting to fund the acquisition through a mix of onshore (KRW) and offshore loans. While gearing appears high at slightly above > 40%, we note that given the REIT’s geographically diversified exposure and chunky office assets, this level is within a financially optimal level.
  • With MAS lifting gearing limits to 50%, there is ample debt capacity and headroom for Mapletree North Asia Commercial Trust even at current levels.

Waiver of performance fees.

Derek TAN DBS Group Research | Singapore Research Team DBS Research | https://www.dbsvickers.com/ 2020-09-28
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