DBS Group Research, OCBC Investment Research, and CGS-CIMB have rated Mapletree North Asia Commercial Trust (MNACT) “buy” or “add” following MNACT’s acquisition announcement on September 25.
The trust, together with its sponsor Mapletree Investments (MIPL), entered into a unit sale and purchase agreement to co-invest in The Pinnacle Gangnam, a Grade A office building in Seoul, South Korea, for KRW 452 billion ($528.4 million).
Under the agreement, MNACT will own a 50% stake in the property, while MIPL will own the remaining 49.95%. The remaining 0.05% will be held by an independent third-party investor.
The Pinnacle is located in Seoul’s Gangnam Business District (GBD) and has direct access to the Gangnam-gu Office station. The property is also served by various rail, subway, and bus networks including direct connections across the Seoul metropolitan area.
In the same statement, the manager of MNACT also announced that it will waive its entitlement to performance fees until the REIT’s distribution per unit (DPU) exceeds 7.12 cents, which is the same amount achieved in FY20 pre-Covid.
DBS analyst Derek Tan is positive on the acquisition, as he feels the deal will give MNACT access to the expanding South Korea real estate market and a “possible pipeline” from MIPL’s remaining stake in the property.
Tan notes that the acquisition, along with the strategic deals in Japan, adds to the REIT’s consistent diversification strategy. The acquisitions, he says, will offset the temporary drop income from the closure of MNACT’s anchor mall asset, Festival Walk in Hong Kong.
“With greater income diversity from Japan and Korea, we believe that prospects of potential inclusion into the EPRA NAREIT Developed World Index will drive share price upside in the medium term,” he adds.
The way Tan sees it, while the property’s initial yield of 3.2% appears low due to its age, Tan notes that it allows it to be competitive in the Gangnam submarket.
The property also has a low occupancy rate of 89.6% and in-place rents that are slightly below market.
“While there is a major number of tenants renewing in FY22F of c.51.3%, we understand that tenants are looking to renew their leases and are also looking to expand at this property. Assuming that the occupancy is raised to market average of around 95%, yields may rise to around 3.5% based on our estimates. Annual rental escalations of around 2%-3% will drive returns higher in the medium term,” he says.
OCBC’s research team says it is also positive on the REIT’s diversification on its income streams and co-investment with its sponsor MIPL. However, the team notes that more than half (or 51.3%) of the building’s monthly gross rental income in leases will be expiring in FY22.
The team added that while MNACT’s management was confident of growing the property’s occupancy rate, it “remains to be seen on how fast MNACT can ramp this up”.
“We do note that vacancies in the GBD remain low at 4.2% as at end 2Q20 and the property is slightly under-rented, which would provide some support on management’s drive to improve the operating metrics. Approximately 97% of the property’s leases have fixed annual rental escalations of around 2-3%. If management is able to bring up the occupancy and passing rent of the property, there would be further upside to its entry NPI yield of 3.2% as mentioned earlier,” it says.
CGS-CIMB analysts Lock Mun Yee and Eing Kar Mei are also buoyant on MNACT’s maiden entry into Seoul.
The analysts have lifted their DPU estimates for FY21-23F by 0.45-1.23% to 6-8.2 cents, as it expects the deal to be accretive to MNACT’s DPU. Lock and Eing also feels the deal will not only diversify the REIT’s income streams, it will enhance its resilience with an expanded tenant trade sector exposure.
“Based on our FY21-23F DPU estimates, we believe that performance fees will likely resume only from FY3/22F onwards,” they say.
The analysts add that they “still like MNACT for its attractive FY3/21F dividend yield of 6.7% and its increased resilience through its diversification strategy. A downside risk is slower-than-expected recovery of the HK SAR retail rental market”.
DBS and OCBC have maintained their target price at $1.05 and $1.09, while CGS-CIMB has increased its target price to $1.15 from $1.12 previously.
Units in MNACT closed flat at 92.5 cents on September 29.
