SINGAPORE (Dec 6): DBS Group Research is cutting its target price for Mapletree North Asia Commercial Trust (MNACT) by 18.8% to $1.30 on the back of lower rental reversion assumptions for key asset Festival Walk.
This comes after the REIT manager on Dec 4 announced that the mall, which accounted for 61.7% of MNACT’s net property income (NPI) in the latest 1HFY2020 ended September, is expected to remain shuttered until 1QCY2020.
The Kowloon Tong property, Hong Kong’s then-largest shopping mall when it was first opened in 1998, has been closed since Nov 13 following the spilling over of clashes between Hong Kong protestors and police.
Protestors on Nov 12 torched a Christmas tree in the mall and set fire to the office lobby, and also smashed glass panels at the entrances to the property as well as balustrades on various levels of the mall.
See: MNACT's Festival Walk mall to stay shuttered until 2020; manager to top-up distributable income
“With its fortunes tied closely to the outlook for its key asset Festival Walk, the closure of the mall for extensive repairs and loss of income during the period will have an impact on its distributions,” says lead analyst Derek Tan in a Dec 6 report.
“While the manager is confident that a substantial part of the loss of income and repairs can be claimed, the timing of receipt is yet to be determined,” he adds.
Meanwhile, to help mitigate the impact of a distribution per unit (DPU) that is expected to be “significantly lower” as a result of the loss in revenue at Festival Walk, the manager has announced a plan to implement a top-up to the distributable income for the next three quarters up to 1QFY20/21 ending June 2020.
The way Tan sees it, this distribution top-up, which will be funded by external borrowings that will be repaid once the insurance claims proceeds are received, should be read positively.
“The timely support from a distribution top-up adds clarity to the stock, in our view, stemming further downside risk,” he explains. “Gearing is not expected to rise significantly in the interim period of such distribution payout.”
At the same time, MNACT’s manager has also announced the proposed acquisition of an effective interest of 98.47% in two office properties in Japan from sponsor Mapletree Investments for a total acquisition cost of $482.5 million.
The two freehold, multi-tenanted properties have a combined gross floor area (GFA) of 180,941 sqm and a net lettable area (NLA) of 91,583 sqm.
As at end-September, the properties have a weighted average lease expiry (WALE) by monthly gross rental income (GRI) of 3.4 years and an occupancy rate of 85.9%.
Notably, the proposed acquisition, which has an expected NPI yield of 4.5%, will also reduce the income and asset concentration of Festival Walk and accelerate the income diversification of MNACT.
See: Mapletree North Asia Commercial Trust to acquire 2 office properties in Greater Tokyo for $482.5 mil
“We see upside given that [the two Japan properties] are under-rented assets with potential marketing to market opportunities, and have vacancies that, when filled, will generate higher returns in the medium term,” Tan says.
He points out that MNACT’s sponsor has also shown strong support by waiving its acquisition fees, and will take part of the acquisition in the form of consideration units.
Despite the expected additional rental income from the Japan acquisitions, the brokerage is cutting its distribution per unit (DPU) estimates for FY2020F and FY2021F by 23% and 8% respectively, to account for the disruption in rental income from Festival Walk.
However, Tan sees some positives for MNACT in the medium term. For one, he believes the re-opening of Festival Walk will be a “key driver” for the stock.
“We believe that the stock, at 0.8 times P/NAV with forward prospective yields of 6.2% (for FY2021F), has priced in the majority of the negatives,” he adds.
DBS is keeping its “buy” recommendation on MNACT.
As at 11.26am, units in Mapletree North Asia Commercial Trust are trading 1 cent higher at $1.16, implying an estimated price-to-earnings (PE) ratio of 36.2 times, a price-to-net tangible asset (P/NAV) of 0.8 times, and a distribution yield of 5.3% for FY2020F.
