SINGAPORE (Sept 30): Investors have been wary over the impact of ongoing protests in Hong Kong on Mapletree North Asia Commercial Trust (MNACT) – and understandably so. After all, the REIT derives close to 62% of its net property income from the Chinese special administrative region.
After climbing steadily this year to a peak of $1.48 in early July – the highest level since its IPO in 2013 – units in MNACT have fallen sharply over the past two months in tandem with escalating violence in the protests in Hong Kong.
Units in MNACT closed at $1.33 on Friday, some 10% lower than the multi-year high in July.
However, DBS Group Research believes concerns over the REIT’s exposure to Hong Kong are “overdone”.
“With its fortunes tied closely to the outlook for its key asset, Festival Walk, we believe that the mall should be able to hold its fort in the wake of weaker retail sentiment in Hong Kong,” says lead analyst Derek Tan in a Monday report. “We see the mall demonstrating resilience against expectations of a fall in revenues, as seen in other retail malls in Hong Kong.”
The way Tan sees it, Festival Walk will see limited impact of an expected drop in retail sales, on the back of its positioning towards more resilient sectors such as F&B, entertainment and supermarket. It also enjoys limited exposure to tenant sales volatility as the gross turnover contribution to topline sales figures is less than 3% of portfolio revenues.
Further, Tan opines that the concerns are already priced in.
“[MNACT’s] valuations are attractive at 0.9x P/NAV and its yield of 6.0% is 50bps higher than the S-REIT average. Thus, we advise investors to accumulate MNACT’s shares,” he says.
The brokerage is maintaining its “buy” call on MNACT with an unchanged target price of $1.65, representing an upside of around 24%.
Outside of Hong Kong, Tan sees a relatively stable future for the REIT.
“MNACT is positioned to continue to deliver on its inorganic growth strategy, targeting to deepen its exposure into key markets of China and Japan,” Tan says. “We have not priced in any acquisitions in our estimates and will be positive earnings surprise when they happen.”
In China, the manager is keen on Tier 1 cities such as Beijing and Shanghai, as well as cities like Chengdu and Hangzhou. The list does not stop there: other countries of interest include North Asian cities like South Korea, though Tan says such plans are still “quite preliminary”.
According to Tan, these new acquisitions can only strengthen MNACT’s performance. Currently, the REIT enjoys a robust growth story and steady rental reversions for Sandhill Plaza in Shanghai, and strong income visibility from its six properties in Japan, all of which have relatively long weighted average lease expiry (WALE) and positive rentals of up to 6%.
MNACT also currently offers investors a diversified exposure to prime properties in Hong Kong, China and Japan – accounting for 62%, 27% and 11% of its NPI respectively.
Lastly, MNACT’s prudent risk management policy is also a key factor that could enable it to weather the storms. With a stable gearing of 36.9% and average debt tenure of 3.5 years, the REIT employs a conservative capital management strategy.
“87% of the debt is hedged into fixed rates while the manager has hedged a high level of 69% of its distributable income into SGD [with four rolling quarter forward contracts], reducing income volatility for the REIT,” says Tan.
“With a gearing of 37%, the manager has a debt headroom of close to $680 million to take on opportunistic acquisitions,” he adds.
As at 12pm, units in MNACT are trading 1 cent lower, or down 0.8%, at $1.32.
