Mapletree North Asia Commercial Trust - OCBC Investment 2020-09-28: Seoul Coming


Mapletree North Asia Commercial Trust - Seoul Coming

  • Maiden entry in Seoul office market with proposed acquisition.
  • Estimated initial NPI yield of 3.2%, with potential future upside.
  • Waiving performance fee until DPU threshold is reached.

Maiden penetration into Seoul, South Korea

  • Mapletree North Asia Commercial Trust (SGX:RW0U) announced on 25 Sep its proposed acquisition of a 50.0% stake in an office building known as “The Pinnacle Gangnam” which is located in Seoul, Korea. This marks Mapletree North Asia Commercial Trust’s maiden penetration into the South Korean market.
  • Mapletree Investments Pte Ltd, Mapletree North Asia Commercial Trust’s sponsor, will co-invest in the property for a 49.95% stake, while the remaining 0.05% will be held by an unrelated third-party investor.
  • The Pinnacle Gangnam is a freehold 20-storey Grade A office building with six basement levels and 181 parking lots, with a total GFA of 44,444 sqm. The top five tenants are Qualcomm, Huvis, JustCo, Ralph Lauren and Echo Marketing. The property is located in Seoul’s Gangnam business district (GBD).
  • The agreed property value (100% basis) is KRW452b (~S$528.4m), which comes in at a slight 1.5% discount to an independent valuation, translates to an initial NPI yield of 3.2%.
  • The estimated total acquisition cost for Mapletree North Asia Commercial Trust works out to be KRW228.9b, or ~S$267.6m. Mapletree North Asia Commercial Trust intends to fund this acquisition solely with debt, and we believe it could potentially achieve a borrowing cost which is slightly lower than its HKD cost of funds.
  • DPU accretion on a FY20 pro forma basis is expected to be +0.4%.

Positive on diversification and co-investment with sponsor but risks to be addressed

  • We like the fact that Mapletree North Asia Commercial Trust is diversifying its income streams to a new market which is still seeing healthy fundamentals despite the COVID-19 impact, while approaching it as a co-investment with its sponsor does help to mitigate risks associated with entering a new market. However, there are some risks which we are concerned about.
  • There is a large expiring tower of leases in FY22 amounting to 51.3% of the building’s monthly gross rental income. Furthermore, while management highlighted that it was confident of bringing up the property’s occupancy rate (89.6% as at 31 Jul 2020), it remains to be seen on how fast Mapletree North Asia Commercial Trust can ramp this up.
  • We do note that vacancies in the GBD remain low at 4.2% as at end- 2Q20 and the property is slightly under-rented, which would provide some support on management’s drive to improve the operating metrics. Approximately 97% of the property’s leases have fixed annual rental escalations of ~2-3%.
  • If management is able to bring up the occupancy and passing rent of the property, there would be further upside to its entry NPI yield of 3.2% as mentioned earlier.

Waiver of performance fee reaffirms management’s commitment to unitholders

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2020-09-28
SGX Stock Analyst Report BUY MAINTAIN BUY 1.090 SAME 1.090