Mapletree Greater China Commercial Trust (SGX: RW0U) (MGCCT) is a REIT that invests in income-producing properties in the Greater China region. It currently has three properties in its portfolio: Festival Walk, a retail mall with an office component located in Hong Kong; Gateway Plaza, a premier Grade-A office building located in Beijing; and Sandhill Plaza, a premium business park located in Shanghai.
Reports of China’s slowing economy hit the news the past year with the country’s GDP growth rate falling from 7.5% in 2012 to 6.7% in 2016. With MGCCT specifically focused on the greater China region, how will China’s slowdown affect the REIT’s performance and what is the management’s plan to navigate the trickier times ahead? I attended the FY2016 annual general meeting to find out more.
The first thing I learned was that Chairman Frank Wong would be stepping down from his role and be replaced by Paul Ma, a director of Mapletree Investments Pte. Ltd., and who will leave his role as Chairman of Mapletree Logistics Trust Management. Personally, I think this is a loss to MGCCT as Frank Wong brings a wealth of insight about China and Hong Kong due to his years of experience holding various senior regional positions in DBS, JP Morgan, Citibank, Industrial and Commercial Bank of China among others. His answers to some of the questions unitholders asked at the AGM were backed with a perceptive understanding of Hong Kong and China as you will read below.
Here’s the rest of what I learned from Mapletree Greater China Commercial Trust’s FY2016 AGM:
- Gross revenue grew 19.7% y-o-y to $336.6 million. Net property income (NPI) grew 21.0% y-o-y to $255.5 million. The growth was mainly due to the accretive acquisition of Sandhill Plaza and positive rental reversions in Festival Walk and Gateway Plaza.
- Distributable income grew 12.3% y-o-y to $199.9 million. Distribution per income (DPU) grew 10.8% year-on-year to 7.248 cents. MGCCT’s yield as at 24 August 2016 is 6.47%.
- MGCCT’s portfolio grew 10.7% y-o-y to $5.92 billion. This was mainly due to the acquisition of Sandhill Plaza to the portfolio.
- MGCCT’s overall occupancy rate is 98.6%. Both Festival Walk and Sandhill Plaza have 100% occupancy rates while Gateway Plaza has an occupancy rate of 96.8%.
- The strong overall demand meant that Festival Walk and Gateway Plaza saw 37% and 25% increase in rental reversions. MGCCT’s overall weight average lease expiry (WALE) is 2.6 years.
- MGCCT’s gearing ratio is 39.5% — up from 36.2% the previous year. The increase in debt is mainly due to the additional borrowings used to acquire Sandhill Plaza. 77% of total debt are at fixed interest rates and the average term to maturity is 3.01 years.
- Hong Kong’s retail environment remains challenging with total retail sales falling 6.4% y-o-y. Likewise, Festival Walk saw tenant sales fall 5.3% for the year. However, the property’s gross revenue and NPI actually grew 14.6% and 15.5% y-o-y. While that is good news for MGCCT, the weakening retail scene will no doubt put downward pressure on rents.
- Gateway Plaza is a premier Grade-A office building located at the Lufthansa Area in Beijing. The area is one of the capital’s most well-known international commercial zones and home to a burgeoning expatriate population. Gateway Plaza’s gross revenue and NPI grew 10.2% and 9.8% y-o-y.
- Sandhill Plaza is MGCCT’s latest acquisition and expanded the REIT’s footprint to Shanghai. The property is a business park located at the Zhangjiang Hitech Park, a free trade zone in Shanghai’s Pudong New Area. Sandhill Plaza contributes 5% and 6% to MGCCT’s gross revenue and NPI respectively and the REIT expects strong organic growth from the property moving forward.
- A unitholder voiced concerns about Hong Kong and China’s slowing economies. He mentioned that China’s economy has slowed tremendously from double-digit growth in its heyday. He also mentioned the tensions between Hong Kong and China’s governments and more political problems would arise if the ‘one country, two systems’ concept fails. He then asked how the management planned to sustain growth in the light of these developments and whether MGCCT planned to head west to cities like Chengdu and Chongqing. Chairman Frank Wong agreed with the unitholder’s views and replied that we ultimately cannot control political policies and economic developments. What we can do instead is to live through the ups and downs of economic cycles and manage risk prudently. That even in a case of a downturn, that investors will continue to recognize that MGCCT is a good company and the board will continue to maintain its discipline in managing a portfolio of good assets and deliver sustainable income to all unitholders – as it has done over the last three years. The chairman also reminded that he’s a shareholder of MGCCT himself and he has every confidence that the board will continue to do well.
- Chairman Frank Wong then carried on to explain that even though Hong Kong’s growth might be slowing, it is still major export centre and a gateway to China for many international companies. The demand for office space from companies will remain strong. He then pointed out that China’s GDP is over US$10 trillion and it can no longer grow at 10% every year. Even if China’s economy ‘only’ grows at 6%, it is still US$600 billion in absolute growth – which is similar to China growing at 10% when its GDP was US$6 trillion in 2010. He shared how the China’s urbanization rate has increased from 23% to 53% in the last 20 years and that the government will spend US$6.7 trillion to continue its urbanization of China. (Yes, he plucked all these figures from memory!) He admitted that some Tier 2 cities in China have empty buildings and malls but MGCCT is currently focused on Hong Kong and Tier 1 cities in China.
- CEO Cindy Chow also followed up with her own insights and shared that Festival Walk has always outperformed the overall retail environment in Hong Kong. The mall is literally connected to every part of Hong Kong and sits atop two train lines – one of the which is the MTR subway and another which is a direct line to Shenzhen. This easy accessibility means that the locals and tourists alike will continue to patronize the mall. Even with the slowdown in Chinese tourists recently, Festival Walk remains relatively unaffected due to the fact that only 15% of retails sales come from mainland Chinese. She added that the mall sits in a good catchment area surrounded by upper-middle income neighborhoods and, while the board will continue to monitor the situation, Festival Walk has been largely very resilient and should still perform better than comparable malls in Hong Kong.
- CEO Cindy Chow then moved on China and reassured unitholders that even with a weakening Chinese (and global) economy, the lowest vacancy rates in China are still found in Beijing and Shanghai. She pointed out that MGCCT’s assets in the two cities have high occupancy rates — Gateway Plaza in Beijing is 96.8% and Sandhill Plaza is 100%. She also revealed that the management is also careful in selecting tenants from industries that are more resilient and less risky. She said that MGCCT is still focused on Beijing and Shanghai but would be mindful of opportunities in the west of China. To end it off, Chairman Frank Wong reassured unitholders and said that the board knows what we’re doing and we’ll look after your money which received a round of applause around the room.
- The next unitholder then complimented the chairman and was impressed with how he answered the questions posed. He then said that MGCCT has posted impressive rental uplifts the last three years and asked the board if they expected this to continue and also how the REIT planned to fund future acquisitions since there is limited headroom with the current gearing ratio at 39.5%. Chairman Frank Wong replied that future acquisitions could be funded through new equity, bank borrowings, bonds, etc. and the role of the board is to decide the most optimal capital structure for MGCCT moving forward. CEO Cindy Chow said she expected rental growth to continue as the demand is still strong for all three assets. She highlighted that it is difficult to find Grade-A office space in Beijing as supply is limited. CFO Jean Low then took over and revealed that MGCCT can borrow another $500 million before it hits its 45% debt ceiling but the board will not go anywhere that close it. At the moment, the 40% gearing ratio is comfortable because MGCCT owns good assets that generate high amounts of cash flow.
- A unitholder (presumably from Hong Kong) then quipped that even though all his friends know about Festival Walk, they have no idea about Mapletree Greater China Commercial Trust. He then asked if the board is planning a dual listing in Hong Kong so that his friends can invest in the REIT. Chairman Frank Wong agreed wholeheartedly and said that Festival Walk is indeed a great asset and recommended unitholders to go to Hong Kong and see for yourself. He then cheekily said that he might be slightly biased but he believes that Festival Walk is a better version of VivoCity to which the room responded with laughter. He then said that MGCCT is not exploring a dual listing at this point in time and recommend that the unitholder’s friend invest in the Singapore dollar and MGCCT.
- The next unitholder asked if e-commerce and its structural impact has affected MGCCT’s retail exposure. CEO Cindy Chow replied that Hong Kong is a compact city and very accessible, and locals, in general, like to travel out of their homes. The centralized location of Festival Walk also means that commuters have to pass through the mall every day to get to work and home and that it is a natural stop for many people. According to statistics shared by the CEO, e-commerce growth in Hong Kong is also growing relatively slow – 5% in 2014 to 6% in 2015. China, however, is much bigger in scale and the cities itself are just as large. Because of this, online shopping is very convenient and popular – evident in the 40% growth rates seen in e-commerce China the last few years. Overall, e-commerce is still only 11% of total retail spending in China according to the CEO and the board will continue to monitor the trend.
- A unitholder congratulated the board on the past year’s good results and asked about plans to grow MGCCT’s DPU. He also asked if the REIT will acquire more assets in the next few years to reduce its concentration in Festival Walk. The CEO replied that the board is actively looking for acquisitions with the latest one being Sandhill Plaza last year. MGCCT’s sponsor could also divest new properties that have stabilized to MGCCT. She revealed that the board is ok with an acquisition not being accretive immediately as long as long-term sustainable growth is there. The management also plans to grow DPU by continuing asset enhancement initiatives in its existing properties.
- A unitholder questioned the board’s remuneration and asked if it was in line with industry benchmarks. The CEO explained that management fees, both base and performance, are paid in units ever since IPO. Where MGCCT differs is that instead of being paid a fee based on a percentage of assets under management, the fee is paid as a percentage of distributable income. For the management to increase their fee, they must improve distributable income. Similarly, for acquisitions, instead of being paid a percentage of the value of the acquisition, the management is only paid a fee if the acquisition brings a growth in DPU. If the acquisition doesn’t increase DPU, no fee is paid. When matched with other REITs that typically pay 0.5% of AUM in fees to management, MGCCT’s management is paid 0.3-0.5% in comparable terms. The CEO believes the management is very aligned with unitholders with how they have structured the fees (which I agree as well).
- A unitholder then asked if MGCCT has any interest in the JV projects developed between the Singapore and Chinese governments. CEO Cindy Chow replied that these projects are usually large scale and long term due to the infrastructure involved. As a REIT, MGCCT is focused on yield and acquiring assets with ready and stable income to deliver DPU growth for unitholders. So MGCCT is not looking for developmental properties.
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