On 27 October 2022, Mapletree Pan Asia Commercial Trust (“MPACT”) have announced their 2023 half year result. As the merger was completed on 21st July 2022, this will be the first announcement for the enlarged entity I do not have the previous data available given that they were 2 separate entities on 30 June 2022. Will include the comparison with historical results in the future.
The enlarged portfolio does seem to be healthy. However there are a few metrics we need to consider that seems to be risky as detailed in my blog.
Website: Financial Statements And Related Announcement::Half Yearly Results
Background
MPACT is a real estate investment trust (“REIT”) positioned to be the proxy to key gateway markets of Asia. Listed on the Singapore Exchange Securities Limited (“SGX-ST”), it made its public market debut as Mapletree Commercial Trust on 27 April 2011 and was renamed MPACT on 3 August 2022 following the merger with Mapletree North Asia Commercial Trust.
Its principal investment objective is to invest on a long-term basis, directly or indirectly, in a diversified portfolio of income-producing real estate used primarily for office and/or retail purposes, as well as real estate-related assets, in the key gateway markets of Asia (including but not limited to Singapore, China, Hong Kong, Japan and South Korea).
MPACT’s portfolio comprises 18 commercial properties across five key gateway markets of Asia – five in Singapore, one in Hong Kong, two in China, nine in Japan and one in South Korea. They have a total NLA of 11.0 million square feet and valued at SGD17.1 billion.
MPACT is managed by MPACT Management Ltd. (“MPACTM” or the “Manager”), a wholly-owned subsidiary of MIPL. The Manager aims to provide unitholders of MPACT (“Unitholders”) with a relatively attractive rate of return on their investment through regular and steady distributions, and to achieve long-term stability in Distribution per Unit (“DPU”) and Net Asset Value (“NAV”) per Unit, while maintaining an appropriate capital structure for MPACT.
Key Metrics
Distribution Per Unit (“DPU”)
Based on the announcement on 27 October 2022, it was noted that DPU for the first half of FY2023 have increased by 12.5% to SGD0.0494 from SGD0.0439 in the first half of FY2022. This was boosted by contribution from properties acquired through the merger, higher contribution from VivoCity and MBC, partially offset by higher finance costs.
This metric is Favorable.
Occupancy
Occupancy rate as at 30 September 2022 stands at 96.9%. This is Favorable as it is above my expected healthy occupancy rate of 95% and MPACT have been able to fully utilize their assets, which in turn contributed to the increase in gross revenue.
Gearing ratio
Gearing ratio stands at 40.1% as at 30 September 2022 . This to me is Unfavorable, as it is substantially high and close to the MAS limit of 50% when compared to other REITs. There may be difficulty for them to fund any new acquisitions using debt.
Interest coverage
The interest coverage stands at 4.4 times as at 30 September 2022. The metric is Unfavorable as the interest coverage is lower than my preference of 5.0 times and seems to be worsening. This is a concern as interest rates continue to rise as the world looks to tackle inflation. The Federal Reserve on 14th December 2022 has hiked interest rates by another 0.5% to 4.5%, the highest level in 15 years, and is looking to to keep rates higher through next year with no reductions until 2024.
Website: Fed raises interest rates half a point to highest level in 15 years
As the interest rate may potentially increase further, MPACT may be subjected to significant change in their cost of debt in the near future. In their presentation they have mentioned that 73% of their debt is also on fixed rates.
I have thus performed a sensitivity analysis using the information as at 30 September 2022:
For distributable income FY2022, I have taken the combination of Mapletree Commercial Trust SGD301 million and Mapletree North Asia Commercial Trust SGD210 million.
Interest rate sensitivity analysis as below:
Do note the above is my estimation which may be different from management’s estimation. Nonetheless, if the interest rates were to increase by the basis points above, MPACT may experience a fall in DPU accordingly.
Debt maturity profile
Weighted average term to maturity of their debt stands at 3.0 years as at 30 September 2022. This is Favorable and it allows them sufficient time to refinance their debts as they fall due.
Price to Book Ratio
The Price to Book (“P/B”) ratio currently stands at 0.92. This is computed using the closing share price of SGD1.67 on 16 December 2022 and the net asset value per share of SGD1.81 as at 30 September 2022.
The metric is Neutral as although we are paying below book value for its assets, the reason it is trading at a discount can be seen with its lower dividend yield. Furthermore, Mapletree REITs usually command a premium due to their strong reputation, and there is potential that if the results become more unfavorable, they may experience a larger decrease in price.
Dividend yield
As the merger was just completed, there is no historical data of dividend available. For 2023Q2, MPACT have declared a dividend of SGD0.019 per share for the quarter ending 30 September 2022. If extrapolated for the full financial year (ie 4 quarters), expected total dividend payout would be SGD0.076 per share.
With a closing share price of SGD1.67 as at 16 December 2022 and expected dividend payout of SGD0.076, this translates to a dividend yield of 4.55%. For my REIT’s benchmark, a general reasonable range would be around an average of 6.0% to 7.0% in the current environment. MPACT’s dividend yield is way below my benchmark.
Furthermore, interest rates have been continuously increasing the last few months. This have prompted for multiple safer assets to increase their bond and interest rates to more than 3%, causing the previous yields of MPACT to become unfavorable.
Website: Reasonable Dividend Yield Changes
If using dividend yield of 6% as a benchmark for a more premium REIT, based on the dividend of SGD0.076 there is potential for MPACT to see its share price drop by another 24.2% to SGD1.27. Investors will thus need to be mentally prepared that the share price might further fall if interest rates for safe assets in Singapore approaches to cross 4%.
The dividend yield is Unfavorable.
Other metrics
Tenant profile
MPACT has an enlarged portfolio covering multiple trade sectors. The high quality and diverse tenant base provides resilience to the MPACT portfolio across challenging events, as evidenced during the ongoing COVID-19 pandemic. The top-10 tenants accounted for only 22.6% of MPACT’s portfolio with no single tenant accounting for more than 5.8% during the period, providing income diversity to the portfolio.
Summary
Overall, the metrics indicate that it is neutral to invest in MPACT. The recent market conditions present opportunities for entry as the share price continues to face downward pressure.
Despite the relatively stable results, investors need to take note that their lower dividend yield, may not necessary be worth the risk especially as safe assets have seen their yield rise considerably with rising interest rates, the appeal of MPACT may take a turn for the worse and further downside may happen.
Disclaimer: Not financial advice. All data and information provided on this site is for informational purposes only.
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