Questions posed to the managers of Mapletree North Asia Commercial Trust (MNACT) and Mapletree Commercial Trust (MCT) by David Gerald, president and CEO, the Securities Investors Association Singapore (SIAS) underscore the diversification of properties dictum for S-REITs, highlighting the challenge MNACT has in growing its portfolio.
On the portfolio front, SIAS points out that Festival Walk and Gateway Plaza, account for more than 70% of MNACT’s portfolio, and they continued to report lower average rental rate. “Rental reversion for Festival Walk accelerated from negative 21% to negative 30%. For Gateway Plaza in Beijing, the rental reversion was from negative 7% to negative 24%. A major tenant at Gateway Plaza is due for renewal in December 2023,” SIAS indicates.
“Is the proposed Merger a way to leverage the resilient MCT’s portfolio at a time when Festival Walk and Gateway Plaza are underperforming? What are the plans and asset enhancement potential for these two assets? Regardless of the outcome of the proposed Merger, are these two assets considered core to the REIT?” SIAS asks.
Festival Walk and Gateway Plaza accounted for 68% of net property income of $166.2 million, recorded in 1HFY2022, for the six months to Sept 30, 2021. Festival Walk has a committed occupancy of almost 100%, but rental reversions were a negative 30% for 35 retail leases in 1HFY2022. In the three months to Dec 31, 2021, there were 49 retail leases (renewed or relet for YTD FY2022) with an average rental reversion of negative 32%.
Because of a zero-Covid policy, Hong Kong mandates regular lockdowns. On Feb 17, a Singapore Airlines (SIA) spokesman said that SIA flights from Singapore to Hong Kong have been suspended for two weeks, after several passengers tested positive for Covid on arrival in Hong Kong. The directive came from Hong Kong regulators after some SIA customers, who had tested negative for Covid in their pre-departure tests, tested positive on arrival in Hong Kong.
Gateway Plaza - a splendid building in the heart of Beijing - has as its anchor tenant BMW. In presentation on Oct 28, MNACT’s manager had said one of the major tenants (whose current lease is due to expire by December 2022) has extended its lease in advance by another year. There is a risk that this lease might not be extended beyond December 2023, it added. In 1HFY2022, Gateway Plaza had renewals for 13 office leases with average rental reversions of negative 24%.
See also: CICT's manager proposes to acquire ION Orchard at $1.85 billion, subject to EGM
S-REITs with higher trading yields usually have a challenge with growth, because the higher trading yields limit the properties it can acquire that are accretive to distributions per unit (DPU). MNACT faced this challenge following the unrest in Hong Kong, when Festival Walk was damaged, and its unit price fell. Now, though, Festival Walk may have a different challenge in the form of supply which comes onstream in 2023.
Hence a larger portfolio, with assets such as Vivocity and Mapletree Business City (MBC) would help buoy MNACT’s operational performance (should the merger be successful), given that Singapore is emerging from Covid, and is opening its borders. In addition, as people go back to office, Vivocity would get a double whammy from the office crowd and tourists. As MCT unitholders see it, MNACT unitholders are likely to benefit more from the proposed merger.
“It is not apparent that there are any operational synergies in the proposed Merger with MCT. Can the MNACT Manager share more on why this Merger is necessary other than having access to Singapore market? Has the MNACT Manager carefully considered whether this Merger is in line with MNACT Unitholders’ expectations and/or needs?” SIAS asks.
See also: CICT's manager proposes to acquire ION Orchard at $1.85 billion, subject to EGM
Obviously, since the announcement of the proposed merger, the unit price of MCT has declined by about 10% from $2 to as low as $1.78 in early February. “With this proposed merger, MCT has to expand its mandate to include key Asia gateway markets from the current focus on Singapore. This proposed merger comes as a surprise to some unitholders who have invested in MCT for exposure to the stable and resilient Singapore market,” SIAS says.
MCT’s manager has justified the merger from the point of view of growth but at what cost? “Is this acquisition critical to MCT? What can the enlarged REIT achieve due to its larger scale that MCT would not be able to do on its own? Has MCT considered the operational challenges of the two largest assets in MNACT’s portfolio?” SIAS asks.
SIAS points out the obvious: MNACT has historically traded below its NAV because of its geographical exposure. In addition, MNACT has a higher gearing ratio. On the other hand, MCT has consistently traded above its NAV – the units were trading at as high as 1.28 times its Price-to-NAV ratio in the past six months. Since the announcement, the premium has fallen to 1.05 times and MCT has lost over $660 million in market capitalisation.
SIAS other questions to MCT’s manager are: i)Is MCT overpaying for MNACT’s portfolio when even MNACT has openly stated that the market has historically valued MNACT’s units at below NAV?
Ii) What is the basis of the scheme consideration of $1.1949 per MNACT unit? MCT’s offer is at a 14-18% premium to the 1-month to 12-month VWAP of MNACT and is in-line with MNACT’s NAV. How does this proposed merger create value for MCT unitholders when there are no operational synergies and MCT is paying MNACT its full NAV?
When the proposed merger was announced, most market watchers thought is was a slam dunk. Now though, with SIAS’ pertinent questions, would MCT’s minority unitholders dare vote against the merger? That would raise MCT’s unit price back to $2, but shave a few percentage points off MNACT’s unit price.
