Mapletree Greater China Commercial Trust (MGCCT) (SGX: RW0U) is a REIT with a portfolio of retail and office properties located in Greater China. It currently has three properties in its portfolio: Festival Walk, a retail mall with an office component in Hong Kong; Gateway Plaza, a premier Grade-A office building in Beijing; and Sandhill Plaza, a premium business park in Shanghai. As at 31 March 2017, the portfolio was valued at S$6.2 billion.
MGCCT released a positive set of results when I attended its last annual meeting in 2016 despite the slowing Chinese and Hong Kong economies. Will the REIT be able to report another year of strong growth as both economies seem to have recovered slightly over the last 12 months?
I went to the 2017 Mapletree Greater China Commercial Trust AGM to find out more.
1. Gross revenue increased 4.2% year-on-year to S$350.6 million and net property income (NPI) increased 2.9% to S$285.6 million. This was mainly driven by higher rental income from Festival Walk and full-year contributions from Sandhill Plaza. Festival Walk alone contributes around 70% of MGCCT’s gross revenue and NPI.
2. Distributable income rose 2.4% year-on-year to S$204.6 million and distribution per unit (DPU) rose 1.0% to 7.341 cents. Net asset value (NAV) per unit increased 5% to S$1.301. Based on MGCCT’s closing price of S$1.115 (as at 25 July 2017), the REIT is trading 14.3% below its book value and its distribution yield is 6.6%.
3. Festival Walk reported an occupancy rate of 100% and positive rental reversions of 12% and 7% for its retail and office spaces respectively. This is despite its tenant sales falling 8.8% year-on-year to HK$S4.9 billion due to weak retail sentiment in Hong Kong and the temporary closure of the cinema in the first half of 2016. Annual footfall remained steady at 40.4 million visitors. CEO Cindy Chow explained that the Hong Kong retail scene remains challenging due to the decline in mainland Chinese tourists and a shift in their spending habits (toward e-commerce), but expects domestic consumption in Hong Kong to remain stable. Chairman Paul Ma added that, even though the management is well aware of the threat of e-commerce, online retail sales comprise only around 10% of Hong Kong’s total retail sales because Hong Kongers tend to frequent malls and public areas due to their cramped living conditions. Festival Walk has remained resilient (as seen by its 100% occupancy rate and positive reversions) as there are no competing malls in its vicinity and it serves a large catchment area surrounded by residents, universities, and transport links.
4. Gateway Plaza and Sandhill Plaza had occupancy rates of 96.9% and 100% respectively. Both properties also recorded positive rental reversions of 10% and 16% respectively. CFO Ng Wah Keong said the management expects rental reversions to grow modestly for Gateway Plaza and Sandhill Plaza in the year ahead.
5. Gearing ratio as at 31 March 2017 is 39.2%. The chairman stated that MGCCT is comfortable with a gearing ratio of 40-45%. The CFO added that the management monitors the ratio every month and is mindful of the gearing limit. Average debt maturity extended to 3.73 years (from 3.01 years) and average cost of debt is rose to 2.72% p.a. (from 2.43%) after MGCCT successfully refinanced a portion of its debt. Interest coverage ratio is at 3.6 and 71% of debt is hedged at fixed interest rates.
6. A unitholder raised the same concerns he aired at the 2016 AGM about the sensitive political situation between China and Hong Kong: Any political or economic calamity in Hong Kong would affect MGCCT drastically as Festival Walk currently contributes 70% of the REIT’s gross revenue and NPI. He asked if the management was pursuing expansion into China to diversify the portfolio. The Chairman acknowledged the political issue was a complex one that the management will continue to observe. At the same time, MGCCT cannot simply rush into acquisitions in China. He remarked: “In China… you can have a mall here today and, tomorrow, you can have five other malls next to you!” He feels the Chinese cities are over-malled and property owners are asking for “stupid prices”. For example, he mentioned a potential acquisition in Beijing valued at RMB500 million that was made an offer in excess of RMB700 million. MGCCT has to be mindful of the price it pays for acquisitions because it has to generate a return for unitholders and the chairman advised everyone to be patient.
7. Another unitholder asked if MGCCT planned to hedge more of its borrowings at fixed interest rates since they are expected to rise further. The CFO explained that MGCCT has to consider the cost of hedging. If the REIT were to hedge all of its borrowings now, the cost of it may be equal to the next three interest rate hikes at once. Instead, the management actively monitors the interest rate and progressively locks in the rate at an appropriate cost.
8. Just like at Mapletree Logistics Trust’s 2017 AGM, a unitholder also voiced his concerns about the short land leases in Hong Kong. All land leases in Hong Kong are set to expire in 2047 which includes Festival Walk. The CEO acknowledged the issue and said there is no precedent in Hong Kong yet (since 2047 will be the first time the land leases expire) to know what happens next to the expired land leases. However, based on the management’s dialogue with analysts and lawyers on the ground, the CEO said, subject to the any land use by the government, there is likely to be a rollover to extend the land leases at a premium since the issue affects the whole of Hong Kong.
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