Mapletree Commercial Trust: Slow and Steady recovery

Yes, I know recently many others are talking about the proposed restructuring of SPH and its CEO Ng Yat Chung who took umbrage at a reporter’s question at the press briefing.

Let’s take a break from SPH.

Personally I feel that Mapletree Commercial Trust (MCT) is one of the stronger listed REIT in the Singapore market.

To first understand about MCT, we must first think about the components within the REIT itself.

MCT Group’s properties comprises of VivoCity, Mapletree Business City (“MBC”) I and MBC II, mTower1, Mapletree Anson and Bank of America Merrill Lynch HarbourFront. The aggregate value of these properties was S$8,737.0 million as at 31 March 2021. FYI, mTower was formerly known as PSA Building. mTower is an integrated development with a 40-storey office block and a three-storey retail centre, ARC, with an aggregate NLA of 523,839 square feet.

Among these components and with reference to the gross revenue, the biggest contributor is from Vivocity (35.3%) followed by MBC I (26.9%). There is also a significant increase in revenue contribution from MBC II in FY 20/21. See below.

Before I continue, I would like to highlight that I am currently vested in MCT.

In this post, I would like to share a few key points in the recent 2H and FY20/21 Financial Results dated 27 April 21, which I feel is noteworthy.

Tenant sales and shopper traffic

Whenever I think about MCT, it is only natural to think about Vivocity first and without fail, the footfall traffic in MCT. After Vivacity is the biggest revenue contributor.

My family and I frequent Vivocity quite often, so I do have a feel about how it is like there, especially during the weekends. Nevertheless, I can also refer to the chart below. As you can see, base on the YoY performance, shopper traffic has not recovered to the pre-pandemic levels. See below.

However, I find that given the slow but progressive recovery from the pandemic in Singapore, the place is rather vibrant during the weekends. Do check out the above video. These are the scenes I as a retail investor would like to see. On the other hand, I would be very worried if it appears to be like a ghost town.

In fact, if you look at the chart below, Tenant sales and shopper traffic in March 21 is near to the pre-Covid levels. Both tenant sales and shopper traffic have recovered progressively since Phase Two of reopening from 19 June 2020 with the rebound in tenant sales continuing to outpace shopper traffic.

However, with stricter measures which started in 8 May 21, which Education Minister Lawrence Wong described as a return to phase two of the country’s reopening, the next quarterly performance might not be a straight forward upward trend. Bumpy recovery to say the least.

Return to phase 2: Stricter rules on social gatherings to curb virus (read here)

Another point that is worth noting, is that MCT has managed to secure a further expansion by existing tenant, adidas, at VivoCity. Following adidas Originals’ flagship store that was successfully opened last December, adidas launched another flagship store for its Performance line in April 2021. Spanning over 13,000 square feet, this Performance store is more than three times its previous footprint and is the largest in Singapore. adidas has also debuted the MakerLab right here.

Revenue, Grant and DPU

For the 2H FY20/21, we can see that there is a slight drop in the gross revenue (of 1.5%), however this is mitigated by MBC II’s full period contribution and tapering of COVID-19 rental rebates to retail tenants. Operating expenses and net finance costs have also dropped (which is good). Consequently net property income has increased by 1.8% and distribution per unit has increased by an astounding 57.9%.

A good set of 2H FY results.

Low Gearing

In April 2020, MAS raised the leverage limit for S-REITs from 45% to 50%, to provide S-REITs greater flexibility to manage their capital structure amid the challenging environment created by the COVID-19 pandemic. (read here)

MCT currently only has a gearing ratio 33.9% (or S$3,032.9 mil). It has in fact improved slightly from end 2020.

MCT’s distribution policy (as with other REITs) is to distribute at least 90.0% of its adjusted taxable income. Consequently, there is scope for MCT to increase gearing in the future for yield accretive acquisitions.

Moreover the Average Term to Maturity of Debt is a comfortable 4.2 years, with the bulk maturing in FY 24/25 to FY 26/27. See below.

Turn-around for mTower (formerly known as PSA Building)

Reading through the past financial reports of MCT, I always felt that the laggard among the properties in MCT’s portfolio is the PSA Building.

Hence, in the recent 2H FY report, I was pleasantly surprised. The committed occupancies for mTower has jumped from 75.5% to 91.7%. It would have been 95.9% assuming the lease pre-termination had occurred before 31 March 2021 and the space had remained uncommitted as at 31 March 2021.

Bearing in mind that many companies are still allowing their employees to work from home, and many companies have decided to trim down on their office spaces in Singapore. So this increase in committed occupancies percentage is indeed a piece of good news.

In fact, overall, the committed occupancies for MCT Portfolio has increased from 93.5% to 97.1%. If we look through the list, all the properties committed occupancies percentage has either increased or remained at 100%.

MCT in its report, highlighted the following forward outlook for the office sector: “Going forward, demand is expected to be supported by employment gains, a gradual recovery of the economy and a tight supply pipeline. However, recovery will not be uniform – the Grade A market is expected to be the main beneficiary as large corporates leverage on the pull-back in rents for an upgrade in location and quality.”

For the Overall outlook, MCT stated: “Anchored by a well-diversified portfolio with key best-in-class assets, MCT is expected to derive stable cashflows from high quality tenants. MCT’s overall resilience will keep the vehicle well-placed to ride through the pandemic.”

Valuation

In terms of share price, MCT share price has increased by approximately 40% since the March 2020 lows, but is is still off the peak reached in Jan 2020 (eg. at $2.45). It is currently priced at $2.11 per share.

Currently, MCT shares has a P/B of around 1.21, with a distribution yield of around 3.79%. Yes, it is not exactly cheap. However, if the strong performance, low gearing and good management continue, it would be good to add more or hold on to the current holdings.

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