AnalysisSGX

12 things I learned from the 2021 Mapletree North Asia Commercial Trust AGM

Listed on the SGX in March 2013, Mapletree North Asia Commercial Trust (MNACT) is a REIT that invests in commercial properties located in China, Hong Kong, Japan, and South Korea. As at 31 March 2021, MNACT owns a portfolio comprising 12 properties with assets under management (AUM) of S$7.9 billion.

At MNACT’s eighth AGM, CFO Ng Wah Keong presented the key highlights and financial summary for FY20/21, while CEO Cindy Chow covered market insights and MNACT’s property performances. A live Q&A session was also conducted to address unitholders concerns.

Here are 12 things I learned from the 2021 Mapletree North Asia Commercial Trust AGM.

1. MNACT reported distributable income of S$210.2 million and a distribution per unit (DPU) of 6.175 cents, a decline of 7.8% and 13% respectively compared to a year ago. A lower DPU was largely due to higher rental reliefs and lower average rental rates for Festival Walk in Hong Kong and Gateway Plaza in Beijing, and top-ups to distributable income to mitigate the loss of rent during the temporary closure of Festival Walk.

Source: Mapletree North Asia Commercial Trust

Ng said that the decline was partially offset by acquisition growth and lowered finance costs from refinancing efforts taken during the year. He added that the latest reported rental arrears for 4Q FY20/21 remains low at 1.5% of total portfolio gross rental income.

2. MNACT’S total borrowings stands at S$3.4 billion, with a gearing ratio of 41.5% as at 31 March 2021. Ng said that the gearing ratio would have been 41.9% assuming the acquisition of Hewlett-Packard Japan Headquarters was completed as at 31 March 2021.

According to Ng, MNACT’s well-staggered debt maturity profile and healthy liquidity position for provides for both working capital and acquisition needs, and that MNACT maintains disciplined in its interest rate and foreign exchange risk management with 73% of its borrowings pegged to fixed interest rates.

3. Since its IPO, MNACT’s total returns including distributions is 73.7%, and its latest one-year return is 39.3%. MNACT continued with its distribution reinvestment plan in FY20/21 to progressively lower the REIT’s gearing ratio and strengthen its balance sheet to maintain an optimal capital structure. To further align interests with unitholders, MNACT’s management waived its entitlement to performance fees; Ng said that this will continue until DPU exceeds that of FY19/20.

4. MNACT has increasingly diversified its portfolio with acquisitions over the past two years. MNACT’s portfolio composition as at 31 March 2021 sees 20% of AUM coming from Japan and South Korea, with the remainder coming from Greater China.

Source: Mapletree North Asia Commercial Trust

In terms of NPI contributions, Hong Kong’s Festival Walk remains the largest asset and contributed 46.9% of NPI compared to 53.7% a year ago, while Japan properties contributed 22.4% compared to 14.4%. a year ago.

5. Individual property performances were provided by CEO Cindy Chow beginning with Festival Walk Mall in Hong Kong. Festival Walk Mall in Hong Kong maintained a high occupancy rate of 99.9% despite the pandemic. Chow updated that recovery works at the mall are not yet complete; the mall has been converting apparel fashion shops into new F&B and service offerings which the CEO shared are key to driving footfall to the mall.

Since 2013, Festival Walk has delivered a revenue CAGR of 6.1%, but was impacted by the Hong Kong protests in FY19/20 and the pandemic in FY2020. MNACT will continue to position the mall as the preferred venue for social gatherings. The management is confident that Festival Walk mall is well positioned to recover from COVID-19 when it recedes.

6. Gateway Plaza, an office building, in Beijing, maintained a stable occupancy rate at close to 93% amidst significantly lower market rental rates due to an influx of office supply. However, Chow shared that there have been expansion requests from existing tenants and new demands from prospects looking to relocate to better managed buildings. MNACT will tap on this demand to boost occupancy.

Sandhill Plaza, a business park in Shanghai, achieved a high occupancy rate of close to 98% with positive rental reversion. Chow said that demand for office space at business parks are underpinned by the TMT and biomedical sectors as these sectors are less impacted by COVID-19.

7. MNACT acquired Hewlett-Packard Japan Headquarters in June 2021 for S$480 million. Chow shared that the headquarters is a single-leased property with a long balance lease term of more than eight years.

MNACT also acquired Pinnacle Gangnam, an office building in South Korea, in October 2020 which has seen occupancy rates close to 97%. This is due to the strong demand of high-growth tech-based sectors attracted to the Gangnam business district.

8. MNACT remains positive on the prospects of Hong Kong and its retail market, as well as opportunities of growth in the office market over the mid to long term. On the increasing trend of e-commerce competing with physical stores, Chow shared that e-commerce penetration rates have remained low in Hong Kong — standing only at 7% as of May 2021. This is a low figure compared to the double-digit rates in other markets, notably China. MNACT believes that eating out, shopping, and entertainment will remain integral to the Hong Kong lifestyle and that retail malls will remain relevant.

On office market trends, she shared that the culture of working at the office remains fairly strong for all markets that MNACT operates in. She sees demand for firms setting up satellite offices for business continuity planning purposes or relocating to suburban markets to achieve cost savings.

9. A unitholder questioned the rationale for the recent issue of perpetual securities at 3.5% yield. The CFO explained that perpetuals are classified as an equity instrument for financial reporting purposes and, for that reason, doesn’t increase the REIT’s gearing ratio.

The cost of perpetual securities is typically compared with the cost of other equity instruments. He said that the issuance of the perpetuals was to fund the acquisition of Hewlett Packard Japan Headquarters. At 3.5% yield, the perpetuals are cheaper than issuing new equity units which have a current yield of about 6%.

10. A unitholder highlighted that MNACT had mainly made office acquisitions recently and asked if the management planned to increase the proportion of office assets in the portfolio. Chow said that acquisitions depend on the market that MNACT is looking at. In China, for example, MNACT’s recent focus has predominantly been on decentralized offices and business parks. Overall, MNACT is clear that it wants to diversify from Hong Kong and look to acquire retail and/or office assets in China, Japan, and South Korea.  

11. A unitholder asked if the management was looking to acquire another Hong Kong mall given the management’s’ reasons for optimism in that retail market, and to reduce reliance on Festival Walk. Chairman Paul Ma said that Festival Walk has been a star performer over many years until the protests and COVID-19 ensued. It is unlikely that MNACT will increase its concentration in Hong Kong as there is no comparable mall like Festival Mall there.

The management is aware of the concentration risk and actively moved to diversify into Japan and South Korea. He explained that reducing concentration risk cannot be done instantly as the MNACT needs to find acquisitions that are accretive and provide long-term returns.

12. A unitholder asked if there were opportunities to scale up by merging with other Mapletree REITs to reap larger economies of scale. Ma said he does not expect any merger in the foreseeable future.

The fifth perspective

MNACT’s recent priority has been to mitigate the impact of COVID-19 and stablise distributions to unitholders. It has also worked to ensure that occupancy at Festival Walk remains at high levels with the right mix of tenants, so that the mall will be well positioned when the impact of COVID-19 recedes. The recovery of the Hong Kong economy should see results improve.

Although FY20/21 DPU decreased due to COVID-19 rental reliefs, the management has demonstrated its ability to align with the interest of unitholders by waiving its entitlement to performance fees. This will continue until DPU exceeds that of FY19/20.

Moving forward, the management is confident of its plans to diversify and acquire accretive assets, although the pace of recovery will depend on progress of vaccine deployments, a decline in global infection rates, as well as geopolitical developments in its various markets.

Liked our analysis of this AGM? Click here to view a complete list of AGMs we’ve attended »

Julian Kay

Julian graduated with a Bachelor of Business honours degree in banking and wealth management from the University of College Dublin. He possesses CFA Level I and IBF Level 1 Fund Management qualifications, and was previously in the investor relations industry.

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