I downgrade my rating on Singapore-listed commercial REIT Mapletree Commercial Trust (OTCPK:MPCMF) [MCT:SP] from Bullish to Neutral, as my expectations of the REIT’s inorganic growth in the short term are low.
This is an update of my prior article on Mapletree Commercial Trust published on April 27, 2020. Mapletree Commercial Trust’s unit price increased by +23% from S$1.76 as of April 24, 2020, to a six-month high of S$2.17 on June 10, 2020 since my last update, before declining to S$1.77 as of October 29, 2020. The REIT trades at 1.04 times P/B, and it offers a consensus forward FY 2022 (YE March) distribution yield of 5.4%.
Mapletree Commercial Trust is expected to deliver positive DPU growth for FY 2021, thanks to the release of distributable income previously retained and the recovery in tenant sales and shopper traffic for its flagship retail mall VivoCity.
However, acquisitions are likely to take a backseat for now, as the company continues to focus on its home market Singapore, and there is a lack of attractive targets at reasonable valuations. I prefer to see more visibility on future acquisitions before turning Bullish on the name again.
Readers have the option of trading in Mapletree Commercial Trust units listed either on the Over-The-Counter Bulletin Board/OTCBB as ADRs with the ticker MPCMF or on the Singapore Stock Exchange with the ticker MCT:SP. For those units listed as ADRs on the OTCBB, note that liquidity is low, and bid/ask spreads are wide.
For those units listed in Singapore, there are limited risks associated with buying or selling the shares in terms of trade execution, given that the Singapore Stock Exchange is one of the major stock exchanges that is internationally recognized, and there is sufficient trading liquidity. Average daily trading value for the past three months exceeds $10 million, and market capitalization is above $4.4 billion, which is comparable to the majority of stocks traded on the US stock exchanges.
Institutional investors who own Mapletree Commercial Trust units listed in Singapore include Schroder Investment Management, BlackRock, The Vanguard Group, Columbia Wanger Asset Management, and State Street Global Advisors, among others. Investors can invest in key Asian stock markets either using U.S. brokers with international coverage such as Interactive Brokers or Fidelity or international brokers with Asian coverage like Hong Kong’s Monex Boom Securities and Singapore’s OCBC Securities.
No Surprises With 1H FY 2021 Results
Mapletree Commercial Trust reported its financial results for the first half of FY 2021 on October 22, 2020, and there were no major surprises.
The REIT’s distribution per unit, or DPU, only decreased by -9.9% YoY from S$0.0463 in 1H FY2020 to S$0.0417 in 1H FY2021 despite challenging market conditions due to Covid-19, as 1H FY2021 DPU was boosted by the release of S$15.0 million in distributable income that was previously retained. In my prior article on Mapletree Commercial Trust published on April 27, 2020, I had noted that the REIT earlier retained S$43.7 million of distributable income in 4Q FY2020 in the name of prudence.
Mapletree Commercial Trust’s gross revenue declined by -2.5% YoY from S$224.2 million in 1H FY2020 to S$218.7 million in 1H FY2021, while the REIT’s net property income decreased by -2.6% YoY from S$176.1 million to S$171.5 million over the same period. The lower gross revenue and net property income for Mapletree Commercial Trust on a YoY basis in the first half of FY 2021 was mainly attributable to rental rebates offered to certain tenants to help them tide through the difficult period during Covid-19. This was partly offset by increased revenue and net property income contribution from Mapletree Business City (Phase 2) or MBC II (business park property adjacent to its existing MBC I property), which was acquired on November 1, 2019.
The REIT’s operating metrics for 1H FY2021 were poor, but not surprising considering the negative impact of Covid-19 with certain tenants having to temporarily close their businesses as part of measures to contain Covid-19. Mapletree Commercial Trust’s committed occupancy rate and actual occupancy rate decreased by -0.5 percentage points QoQ and -1.8 percentage points QoQ to 97.7% and 95.3% respectively as at the end of 2Q FY2021.
Also, the REIT registered a negative rental reversion of -3.7% for its overall portfolio in 1H FY2021. Specifically, the rental reversions for Mapletree Commercial Trust’s retail and business park & office properties were -8.9% and -1.6%, respectively in the first half of this current fiscal year. Notably, the business park & office segment has been far more resilient (as compared to the retail segment) and would have achieved a positive rental reversion of +2.9%, adjusting for “the expiry of a major tenant’s short-term lease at PSA Building on 31 August 2020” as per its results presentation.
Outlook For 2H FY 2021 And Beyond
Market consensus expects Mapletree Commercial Trust’s DPU to increase by +5.7% YoY and +12.2% YoY to S$0.0846 and S$0.0949 in FY 2021 and FY 2022, respectively. This compares favorably to the REIT’s -9.9% YoY DPU decrease for the first half of FY 2021, and it reflects market expectations that Mapletree Commercial Trust will release the distributable income it retained as distributions, and the worst is already over for the Singapore retail market.
As highlighted earlier, Mapletree Commercial Trust released S$15.0 million in distributable income that was previously retained, but there is still S$28.7 million of distributable income remaining from what was earlier retained in 4Q FY2020.
As per the April 2020 announcement by the Monetary Authority of Singapore , Mapletree Commercial Trust has “to distribute to their unitholders at least 90% of their taxable income derived in” FY 2020 by December 31, 2021, at the latest to avoid being “taxed on its income that is distributed to its unitholders.”
At the REIT’s 1H FY2021 earnings call on October 23, 2020, Mapletree Commercial Trust stressed that “as and when we find stability”, the REIT “would definitely release it (the remainder of the retained distributable income) along the way.”
Separately, the worst should be over for Singapore’s retail market, with the country moving into Phase Two of its partial lock-down (or Circuit Breaker as it is referred to) since mid-June 2020 with social distancing measures eased significantly. VivoCity, Mapletree Commercial Trust’s flagship retail mall, is on the way to recovery and normalization. Tenant sales and shopper traffic at VivoCity in September 2020 were already at 78% and 49% of normalized levels a year ago.
On the flip side, Mapletree Commercial Trust still expects a negative rental reversion in the single digit for its retail property segment in 2H FY2021 as maintaining a healthy occupancy rate remains a key priority.
Acquisitions Likely To Be Put On The Backseat In The Near Term
Mapletree Commercial Trust has a very comfortable gross borrowings-to-total assets ratio or gearing of 33.8% as of September 30, 2020. The REIT’s gearing is significantly below the statutory limit of 45% for Singapore REITs, which implies significant debt headroom.
Although there are expectations that Mapletree Commercial Trust could possibly capitalize on inorganic growth opportunities with its strong financial position, this is unlikely to be the case anytime soon. This is because Mapletree Commercial Trust intends to be remain focused on its home market, Singapore, and attractive acquisition targets available at reasonable valuations are hard to come by.
Mapletree Commercial Trust noted at its 1H FY2021 earnings call on October 23, 2020, that “our mandate now is looking at Singapore.” The REIT also highlighted that “the market is still quite flushed with cash” with “all these deals (recent purchases and sales of commercial properties in Singapore) are like in the high S$3,000 per square foot (valuation level)” and “I don’t know how to buy properties like these.”
Mapletree Commercial Trust trades at 1.04 times P/B based on the REIT’s net asset value per unit of S$1.71 as of September 30, 2020, and its unit price of S$1.77 as of October 29, 2020. This represents a discount to its three-year and five-year average P/B multiples of 1.20 times and 1.17 times, respectively.
It is noteworthy that Mapletree Commercial Trust’s net asset value per unit declined slightly from S$1.75 as of March 31, 2020, to S$1.71 as of September 30, 2020. This was mainly attributable to a -S$203 million decrease in the valuation of Mapletree Commercial Trust’s property portfolio. Mapletree Commercial Trust disclosed at its 1H FY2021 earnings call that lower market rents & growth rates and longer vacancy downtime were the key assumptions that led to a reduced property portfolio valuation for the REIT, despite the fact that capitalization rate assumptions for the portfolio valuation remain unchanged.
Mapletree Commercial Trust’s Property Portfolio Valuation
Source: Mapletree Commercial Trust’s 1H FY2021 Results Presentation Slides
Mapletree Commercial Trust offers consensus forward FY 2021 and FY 2022 distribution yields of 4.8% and 5.4%, respectively. In comparison, the REIT’s mean distribution yield since its 2011 listing was approximately 5.6%.
The key risk factors for Mapletree Commercial Trust include weakness in the Singapore retail & office property markets which leads to lower-than-expected distributions going forward, a longer-than-expected time taken to find and acquire new properties that are reasonably valued, and a further decline in the REIT’s property portfolio valuation.
Note that readers who choose to trade in Mapletree Commercial Trust units listed as ADRs on the OTCBB (rather than shares listed in Singapore) could potentially suffer from lower liquidity and wider bid/ask spreads.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.