Mapletree Pan Asia Commercial Trust (MPACT) (SGX: N2IU) fell 5% after releasing its 2Q FY24/25 earnings. It was a negative financial score card across the board with lower revenue and higher property expenses resulting in lower net property income. Higher finance costs also resulted in a double digit percentage decrease of 11.6% to the distribution per unit (DPU).
MPACT performed an off-cycle valuation exercise on three of its Japan office assets in Makuhari, which resulted in an 18.6% revaluation loss in local currency terms. Typically a valuation is performed at the end of each year, so a mid year off cycle valuation tends to be performed when there are observable indicators of significant and unexpected decline in the market value.
As at 30 September 2024, the valuation of these three properties totalled S$547 million, 17.2% lower when compared to the previous valuation of S$661 million as at 31 March 2024.
The Fujitsu Makuhari Building took the biggest hit, declining 40.9% mainly due to the nonrenewal of the lease by master tenant Fujitsu upon expiry on 31 March 2026. Furthermore, weaker leasing assumptions were applied by the valuers due to current market softness. Besides trying to find replacement tenants, MPACT is currently exploring various mitigating initiatives such as changing the use of the buildings or divesting the properties.
Review of results
Gross revenue and net property income (“NPI”) for 2Q FY24/25 were lower by 6.1% and 8.5% YoY respectively. This largely reflects reduced contribution following Mapletree Anson’s divestment on 31 July 2024, along with lower contributions from overseas assets, further impacted by the strengthening of the Singapore dollar.
The Singapore assets demonstrated strength, with gross revenue (excluding Mapletree Anson) rising 0.7% YoY. This growth was led by the continued robust performance of flagship asset, VivoCity, despite a temporary impact on its contribution due to the Basement 2 asset enhancement initiative (“AEI”). This means there would be further upside from VivoCity after the completion of the AEI.
The 1H FY24/25 results reflect the impact of 2Q FY24/25, which pulled down the overall performance after a somewhat positive set of results in 1Q FY24/25.
A REIT’s daily focus is on managing its portfolio of existing assets, which MPACT does well. For example, MPACT was able to lift Mapletree Anson’s occupancy, increasing its revenue which resulted in a successful divestment. VivoCity has also undergone multiple AEIs in various parts of the mall to boost returns. Despite its efforts, trophy assets such as Mapletree Business City (MBC) which accounts for nearly 25% of the entire portfolio and 50% of the Singapore portfolio has seen occupancy rates fall from what used to be near 100% occupancy to a 7.5% vacancy.
In comparison, CICT’s (SGX:C38U) office portfolio’s occupancy stood at 95.3% at 30 June 2024 and 95.8% at 31 March 2024. Keppel REIT’s (SGX: K71U) Singapore portfolio of prime CBD assets had a 98.9% occupancy over the last two quarters.
Looking at MPACT’s overseas portfolio data from 31 Mar 2022, the China and Hong Kong properties appear to have stabilised after falling from much higher levels at 31 Mar 2022. However, this time, it is the Japan properties that are exhibiting signs of weakness.
Capital management – steady but weakening profile
Looking at the latest profile, while the gearing has decreased due to the divestment of the Anson building, the interest coverage ratio has remained steady while cost of funds have continued to increase.
It is worth noting that as the credit rating has been on a negative outlook, should the credit rating be cut, the cost of funds will correspondingly increase.
The negative outlook could be mitigated by the divestment of Mapletree Anson. The divestment was completed on 31 July 2024 and MPACT noted that the transaction would decrease gearing by 2.9% while interest coverage ratio (ICR) would increase by 0.4 times. However, as shown in the previous chart, the ICR at 30 Sept 2024 remained unchanged from 30 June 2024, which meant that the ICR profile had weakened.
The debt headroom would increase to $3.9 billion which would give the REIT an avenue to make a quick and substantial acquisition with little to no equity fund raising.
Next steps for MPACT
MPACT’s strategic priorities do not currently include any acquisitions; instead, the focus remains on managing its current portfolio as well as refining its portfolio (which we read as potential divestments).
Singapore trophy assets like VivoCity and MBC account for 54% of AUM but contribute a higher share of MPACT’s NPI at 59%. Meanwhile, assets in Hong Kong, Japan and China continue to underperform.
Unlike Mapletree Logistics Trust who has announced that it intends to shrink its China footprint so as to rejuvenate its portfolio and sees opportunities in Vietnam and India, MPACT has not shared what it envisions its portfolio mix to be as it continues to rely on the Singapore trophy assets.
Valuation
MPACT’s net asset value (NAV) is at $1.71 while the latest quarter’s DPU was 1.98 cents. Carrying out a simple extrapolation of the DPU, the annual DPU would be almost 8 cents. At the current price of $1.34, this means that MPACT is trading at a 6% yield with a price to book of 0.8 times.
This is a substantially lower valuation than before the merger where MCT used to trade at a premium to book value and at sub 5% yields.
Looking ahead, investors have to be careful not to assume that the past is indicative of the future as the portfolio mix has changed and accordingly the strength of the portfolio differs from the past.
Closing statements – A strong sponsor is not bulletproof
In past articles, we have always emphasised that a strong sponsor is one key criteria that determines whether a REIT will outperform and deliver strong returns to shareholders. On the flip side, while it is an important criteria, it is also not a sure win factor.
MPACT was formed from the merger of MCT & MNACT. A preferential offering was carried out by the then MCT to fund the merger. Mapletree Investments (MIPL), as the sponsor of MCT and MNACT, had agreed to subscribe for the Preferential Offering Units of up to S$2.2 billion at an issue price of S$2.0039 per Preferential Offering Unit. Due to the low take up rate by minority shareholders, MIPL had to subscribe for nearly all of the excess shares.
Some investors believed that with MIPL willing to pay $2.0039 per share, this was a then base case value of MPACT’s share price. However, the value has likely eroded since the merger in 2022. When the merger was announced, we commented here that there was a risk of geographical fragmentation and dilution in asset quality.
Unfortunately it seems like our worst fears have played out and now it looks like MPACT is really in trouble as occupancies have fallen across the board. Of course it is all about perspective, as the MPACT portfolio is still above 90% occupancy. However just a year ago the portfolio occupancy was at 96.3% and investors are likely clamouring for a better performance from a REIT that used to be trading at a sizeable premium to book value.
Over the last two years, we have seen its assets in China, Hong Kong and Japan deliver substantially poorer results. While the Singapore portfolio is holding things together, with VivoCity continuing to be a bright light in its portfolio, occupancies in MBC has fallen, and should macro trends in Singapore weaken, MBC could be the next shock for the portfolio.
P.S. if you’re invested in REITs but are not sure how to determine if your REITS are safe, join Chris at his next webinar and learn what you must do to protect and maintain your dividend portfolio : Learn More
You can watch Alvin’s video analysis too:
Glad I reduced earlier in the year (into P-Life, CICT and CLINT instead).
I want my MCT back!! 😉