Mapletree North Asia Commercial Trust VS CapitaLand Retail China Trust

I have exceeded my monthly budget for the purchase of shares this month. Recently, I have added small portions of SATS, DBS and BOC HK.

Not too long ago last year, I started a dividend portfolio basically focusing on more Hong Kong centric stocks. This is in view of the HK protests then (still have not died down). With the Wuhan Coronavirus outbreak, which is starting to affect more and more nations (including Singapore), some of the stocks in the Singapore stock market is starting to look attractive.

This provided me with an opportunity to expand my dividend portfolio further.

I have been contemplating CapitaLand Retail China Trust (CRCT) and Mapletree North Asia Commercial Trust (MNACT) for some time. Basically, I tend to think long term rather than the short term price volatility. Neither do I try to aim for some term capital gains. I would be hoping this stock/REIT continue to grow its earnings and provide me with dividend income in the future. So if you are not into this, then you probably won’t want to read further.

I have been hoping and waiting for someone to write something about comparing these 2 REITs. Unfortunately, I have not read any recently. So I decided to do a post.

In my portfolio, I have a few HK listed REITs, such as The Link Real Estate Investment Trust, Sunlight Real Estate Investment Trust, and HK centric property stocks such as Hongkong Land Holdings Limited & Sun Hung Kai Properties Limited.

CapitaMall Saihan in Hohhot (CRCT), above.

Festival Walk (MNACT), above.

From mid-last year to today, it has been an eventful period, esp. for Mapletree North Asia Commercial Trust. Its stock price has been battered since early July 2019, managed to increase a bit, before being knocked down again in Jan 2020 (due to the virus outbreak).

In normal situations, it would be useful to look back at the annual report and past financial performance of the company to make a judgement call. However, as I have said earlier, events have unfolded pretty fast over the past few months, making the extrapolation harder. Nevertheless, to many seasoned investors, this is after all the ‘norm’ as volatility is a fact of life, and we ought to embrace such volatility which offers plenty of opportunities.

The closure of Hong Kong’s Festival Walk mall due to the HK protest exposes the flaw of Mapletree NAC Trust (closed since 13 Nov 2019, and re-opened on 16 Jan 2020, a total of 64 days). For the mall, rental collection resumed, on 16 January 2020.

The office tower was closed from 13 to 25 Nov 2019. During that period, rent was also not collected from office tenants.

While the loss of retail and office revenue, as well as property damage, are covered under the insurance policies, the assessment of the quantum of revenue loss and property damage recoverable by insurance claims is currently underway and the timing of receiving the claims has yet to be determined.

On 17 Jan 2020, MNACT announced that its 3Q FY19/20 DPU Declined 13.3% Year-on-year (read here). This was primarily due to lower revenue from Festival Walk as a result of rent relief granted and the closure of the mall since 13 November 2019, lower revenue from one of the Japan Properties due to expiry of the single tenancy for the building and conversion into multi-tenancies, and lower revenue from Gateway Plaza due to lower average occupancy. There was also lower average rate of HKD and RMB, partially offset by a higher average rate of JPY.

• Hong Kong’s Festival Walk mall to remain closed after damage during protests: Singapore REIT (read here)
• Hong Kong’s Festival Walk mall working towards 2020 reopening after protest damage: Singapore REIT (read here)

The mall’s closure highlights the vulnerability of MNACT’s credit quality because of its reliance on a single asset for some 60 per cent of its revenue and net property income for the 12 months ended Sept 30, 2019.

Subsequently, probably in response to this flaw/vulnerability, MNACT announced in Dec 2019 that it will acquire 2 Tokyo office properties.

With the HK protest on-going, there are ample opportunities to find stocks at bargain prices, in view of the uncertainties going forward. However, as I have mentioned earlier, I do have an HK centric portfolio, and in my opinion, there are bigger, better, more diversified (less retail-centric) REITs in the Hong Kong stock exchange. And also I might not want to be even more HK focus since now I have an even wider selection given the Coronavirus outbreak. Consequently, I may not even need to invest in stocks listed in the Hong Kong stock exchange.

So that brings us to CapitaLand Retail China Trust (CRCT).

Both CRCT and MNACT have heavyweight sponsors (CapitaLand and Mapletree being household names in Singapore) and capable managers.

And frankly, even though some may say the current HK protests and Coronavirus outbreak have inevitably created a permanent dent in the outlook for both these REITs, I personally believe that looking at their past records (prior to the protests and outbreak) might be useful in some ways.

In addition, even if there are no big events, it is really hard staying status quo in this business. By just looking at the news, I see multiple sale and acquisition of properties (eg. malls or office buildings) for them (esp. for CRCT).

CapitaLand Retail China Trust has 13 malls in China. In view of the coronavirus outbreak, CapitaMall Minzhongleyuan in Wuhan is closed and will reopen when local conditions permit. Nevertheless, the mall represented less than 3% of CRCT’s portfolio value as of 30 September 2019 and contributed approximately 0.5% of CRCT’s net property income for the first nine months of 2019. The remaining 12 malls located in various cities such as Beijing, Shanghai, Guangzhou and Chengdu are operating shorter hours, in line with local government guidelines.

• CapitaLand’s China REIT shuts down Wuhan mall amid coronavirus outbreak (read here)

Its share price has dropped from $1.69 on 20 Jan 2020 to $1.52 on 7 Feb 2020. An approx. 10% decline. Not as bad as MNACT share price decline (since it is basically double whammy for MNACT).

So here we are in Feb 2020, 2 REITs whose share prices are under pressure.

I do not know much about the properties as I have not actually been to these properties, and to be frank, you probably know as much as me on what they are.

I have briefly read through both their recent Annual Reports. And frankly, if I just ignore the HK Protests and Outbreak for a second. There are actually quite a few things I like about MNACT, just base on a number of factors (purely numbers).

And IF you believe that these too will pass (distractions for some) and that there will come a day when it is business as usual for these REITs, then why not take a quick glance? After all, what doesn’t break the REIT, might make it stronger. In the future, we can look back and decide if we have made the right judgement call.

 

1) Distribution Income / Distribution per Unit / Net Asset Value per Unit

Extract from MNACT FY 2018/2019 Annual Report (See below)

Extract from CRCT FY 2018 Annual Report (See below)

1. Distribution Income: If you look at MNACT’s figure, FY14/15 to FY18/19, there is a consistent uptrend and in the latest year, there was a 14.1% YoY increase. On the other hand, for CRCT, there was a dip in 2016, in the latest year, there was only a 9.4% YoY increase. And MNACT is a much bigger beast, with S$240.7 mil income vs CRCT’s S$99.7 mil income.
2. DPU: Again MNACT demonstrated consistent uptrend for a 5 year period. In the case of CRCT, I find it rather flat, and it actually dropped in 2016.
3. Net Asset Value per unit: Again MNACT demonstrated consistent uptrend for a 5 year period. In the case of CRCT, it appears to be in a downtrend from 2016 to 2018.

2) Land Use Right Expiry / Remaining Term of Land Lease

There are many freehold properties in MNACT’s portfolio. The shortest Remaining Term of Land Lease in its portfolio belongs to Festival Walk mall & office (@ 28 yrs).

Extract from MNACT FY 2018/2019 Annual Report (See below)

In the case of CRCT, the Remaining Term of Land Lease of the properties in its portfolio are typically 20 odd years (some probably 30+ years, but I see a number of properties with 2 dates… so I am using the earlier date).

CRCT’s retail malls are leasehold properties where their land-use rights would be expiring mostly between 2040 – 2050, which is some 20 – 30 years from today.

Extract from CRCT FY 2018 Annual Report (See below)

Of course, in the case of MNACT, Festival Walk still represents 58.1% of its revenue and net property income, and its Remaining Term of Land Lease in the Annual Report is 28 years. With the “One country, two systems” constitutional principle in Hong Kong set to expire in 2047, there are many uncertainties. What will happen then is a big question mark.

3) Portfolio occupancy rate

The other metric to assess is the occupancy rate.

The occupancy rate for MNACT is really high (at least that is what I can see from the Annual Report). The lowest being the occupancy rate at Sandhill Plaza at 99.3%. Many are at 100% occupancy.

The overall occupancy rate is at 99.6%.

Extract from MNACT FY 2018/2019 Annual Report (See below)

Extract from CRCT FY 2018 Annual Report (See below)

The occupancy rate for CRCT is not as good as MNACT’s (at least that is what I can see from the Annual Report). The lowest being the occupancy rate at CapitaMall Qibao at 95.3% (if I ignore those malls under stabilisation).

There is YoY improvement for most of the CRCT malls, which demonstrate the exceptional capability of the management, but still not as good as MNACT’s occupancy rate.

And not many are at 100% occupancy. The overall occupancy rate is at 97.5%.

In Gist

These are just a few metrics which I have highlighted. There are many ways to slice and dice, and interpret.

Of course, these are all history. I can’t predict the future. In the near to mid-term, these REITs will be without doubt impacted (and I am not talking about the share prices). How much will their revenue, Distribution Income, DPU and the NAV of the properties be changed in the future is also a debate.

However, in life, very few businesses are immune to disruption and changes. Many a time, we can only look at the past to predict future performance. And it is normally not a good idea to just purchase and hold without reading the Annual Reports.

Of course, you may be right that after what had happened, nobody would want to think about these REITs. And yes, there are always better REITs/stocks around.

As to which (MNACT or CRCT), it is a bit of a debate here. If there are no protests and social instability in Hong Kong and the uncertainties come 2047, MNACT would be a clear winner. However, with the massive disruption to Festival Walk (and the on-going unrest in Hong Kong), I would slant towards CRCT.

For an outsider like me looking in, I do question the confidence level of the (current and potential) tenants (and shoppers) towards this mall. However, I believe in the long term, MNACT will stabilise.

On another note, CRCT to me is pretty one dimensional. It is basically just about retail malls and they are all in China. That itself poses a (concentration) risk.

While in the case of MNACT there are retail malls and office buildings in various north Asia countries, offering more diversification (only bear bug is the over-allocation to Festival Walk mall).

• Can You Find Yield Like CapitaLand Retail China Trust? (read here)

The less than perfect occupancy rate of CRCT is also another concern. As mentioned by ValueInvestAsia (for CRCT)- see below extract:

“Wuhu & Minzhongleyuan
The two shopping malls continue to have below 90% in occupancy rate and bringing in insubstantial amount of income presently as both malls are impacted by ongoing tenant mix adjustments. Combined, they have contributed S$ 6.6 million or 3.0% in CRCT’s gross revenue and incurred S$ 0.2 million in net property losses in 2018.”

Nevertheless, for some, there is always a reasonable price when it just negates all the negatives. I am personally still quite open – if prices continue to trend down, the risk would be minimised and margin of safety bigger. Hence, things might change (and the balance tilt towards MNACT). The valuation of CRCT is not drop dead cheap as well (its share price did not tank by a lot despite the coronavirus outbreak and closure of its mall). MNACT is cheaper.

See below figures from Yahoo Finance.

MNACT

• Trailing P/E: 6.13
• Price/book (mrq): 0.84
• Forward annual dividend yield: 5.62%

CRCT

• Trailing P/E: 9.62
• Price/book (mrq): 0.98
• Forward annual dividend yield: 8.13%

Also, I might go for other more stable and cheaper Singapore listed dividend stocks or I might just add on to the stocks in my current portfolio. With the on-going coronavirus outbreak, we are starting to see value emerge from tourism-leisure related stocks, aviation-transport stocks, hospitality-related REITs or stocks, and even bank stocks. Some of which are fundamentally stronger. A wider array of stocks and REITs as compared to the Hong Kong protests episode.

After all, when it comes to retail malls, there is the elephant in room that some may not want to point out. There is always the constant worry of disruption by e-commerce.

To put in another way. When there is a crisis, not every drop in share prices is an opportunity. Shares of good, not as good and bad stocks drop.  After the crisis, the on-going issues (be it company-specific or industry-specific) will remain for these (not as good and bad) companies.

No hurry really. I am just sharing what I have read. Coming from someone who invested last year in HK counters.

Just don’t invest due to the FOMO mentality. We see that in the 2019-nCoV situation here. Don’t be like the ‘kiasu’ Singaporean rushing to Sheng Siong supermart on Friday (7 Feb 2020) to grab as many packets of toilet paper or rice bags as possible. That is upon knowing that the Government has stepped up risk assessment from DORSCON (Disease Outbreak Response System Condition) Yellow to DORSCON Orange on that day.

Not to mention hand sanitizers and face masks.

Note: I am currently not vested in Mapletree North Asia Commercial Trust or CapitaLand Retail China Trust.

 

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