SINGAPORE (Jan 20): Even as the closure of Festival Walk mall in Hong Kong burned a hole in Mapletree North Asia Commercial Trust’s (MNACT) results for 3QFY2020 ended December 2019, OCBC Investment Research remains optimistic on the REIT’s outlook.
MNACT posted a distribution per unit (DPU) of 1.67 cents for 3QFY2020, down some 13.3% from 1.93 cents a year ago. This had included a distribution top-up to partially offset the impact of Festival Walk’s closure.
Festival Walk, which is MNACT’s most valuable asset, had suffered “extensive damage” amid the Hong Kong protests. Amid worsening city-wide disruptions, Festival Walk had shut its doors on Nov 12, with the REIT’s manager saying that damage assessments were ongoing.
Revenue for the quarter slumped 36.3% to $67.3 million on the back of lower contributions from Festival Walk, Gateway Plaza in Beijing, China, as well as one of its Japan properties.
Consequently, net property income for the quarter fell 40% to $50.8 million.
In its outlook statement, MNACT honed in on the proposed acquisitions of two office properties in Greater Tokyo, citing that these would serve to mitigate Festival Walk’s impact on its distributable income.
“The two properties are expected to contribute to the diversification of MNACT and at the same time, reduce the income and asset concentration of Festival Walk,” the manager said.
“When the insurance claims proceeds are received, any amount which exceeds the distribution top-ups, which are funded from capital, will be paid as distributable income from operations to the unitholders,” it added.
Although the stark declines across several financial metrics could cause investors some worry, OCBC believes the worst is over, and that sequential improvements are in the pipeline especially amid Festival Walk’s reopening on Jan 16.
For a start, OCBC analysts opine that the results were ‘in line with expectations’. In fact, on a 9MFY20 basis, the REIT’s DPU amounted to 75.3% of its FY20 forecast.
Apart from Festival Walk, the brokerage notes that the general climate in Japan and China have been challenging to the REIT too.
“There was also weaker contribution from Japan due to the expiry of a single tenancy and from Gateway Plaza as a result of higher vacancies,” OCBC says.
However, the challenging times could well be over for MNACT. “We believe the worst is likely over for MNACT, although uncertainties remain,” it notes.
With Festival Walk having reopened ahead of management’s previous expectations, OCBC highlights how the mall has insurance coverage on physical damage and business interruption which would cover for the loss of rental income.
“MNACT highlighted that it will no longer be providing any distribution top-ups in 1QFY21, which is within our expectations. The distribution top-up for 4QFY20 will still be in place,” says OCBC.
“There is no visibility on when the insurance reimbursements would come in. As the bulk of the period of Festival Walk mall’s closure was in 3QFY20, we believe the worst is likely over for MNACT, although uncertainties remain,” it adds.
Analysts note that other potential catalysts for the group include further acquisitions in the commercial markets of both Japan and Greater China, as well as better-than-expected momentum in footfall and tenants’ sales at Festival Walk.
However, some key investment risks for the group include a macroeconomic slowdown that could dampen consumer and business sentiment, a continued escalation of Hong Kong protests, as well as a slowdown in portfolio rental reversions.
As the REIT appears to be heading for a recovery in both its operational and financial metrics, OCBC is maintaining its “buy” call on MNACT, with a fair value of $1.37.
As at 12.57pm, shares in MNACT are trading one cent higher, or 0.8% up, at $1.25. This translates into an “attractive” distribution yield of 6.1% for FY21F, according to OCBC valuations.
