Can Mapletree Greater China Commercial Trust Continue To Outperform?

Mapletree Greater China Commercial Trust (MGCCT) has recently announced its 1H FY17/18 earnings.

We take a look at its results to assess if MGCCT is a worthy candidate as an income play of any investor’s portfolio/.

Distribution Income

Income Available for Distribution is 7.1% higher at $49m for 2Q. As for first half 17/18, it increased by 4.1% to $104m.

Quarterly Distribution per Unit (DPU) increased by 5.8% over last year to 1.868c. For the first half of year 17/18, DPU increased by 2.9% to 3.714c. Do note that MGCCT’s distribution occurs on a semi-annual basis.

The increase in Income Available for Distribution is due to the higher rental rates for all 3 assets.

Source: MGCCT 1H FY17/18 Earnings Presentation

Revenue

2Q revenue stood at $88m, a 6.1% year-on-year rise. As for 1H 17/18, revenue showed a similar rise to $177m, a 5.4% increase.

Looking into the assets breakdown, we notice a broad-based revenue increase across all 3 assets. Gateway Plaza (GP) in Beijing showed the largest rise in revenue of 14.6%, followed by Festival Walk (FW) at 3%. Revenue for Sandhill Plaza (SP) remained stable.

Source: MGCCT 1H FY17/18 Earnings Presentation

Net Property Income (NPI)

Quarterly NPI stood at $70.9m, a 5.4% increase over last year. 1H 17/18 NPI likewise grew by 4.5% to $142m.

Looking deeper into each asset, both FW and GP showed an increase in NPI yield of 4.3% and 6.9% respectively.

Source: MGCCT 1H FY17/18 Earnings Presentation

We can calculate the NPI yield by dividing the NPI over revenue. This is an important figure that indicates REIT manager’s overall ability managing the properties well. I view it as the equivalent to net profit margin in a non-REIT company. A high NPI yield would likely give rise to a high distribution that enhances shareholders’ returns. Compared across REITs in the same asset class, NPI also allows us to assess managers’ competency.

MGCCT’s 2Q and 1H 17/18 NPI Yield is 80.5% and 80.7% respectively, a slight dip of 0.6% and 0.9%. Given the small decrease and the similar NPI yield in 2Q and 1H, I would not flag this as a cause of concern.

Occupancy Rate

MGCCT maintained a high Occupancy Rate of 98.2%, an improvement from 87.1% of the previous quarter. FW and SP continue to have full occupancy rate, while GP saw a small decrease.

Source: MGCCT 1H FY17/18 Earnings Presentation

Rental Reversion

In 2Q, all 3 assets under MGCCT enjoyed positive rental reversions, in particular, SP that had its rentals renewed at a 14% higher rate than previous lease cycle. It is quite clear that MGCCT assets were able to raise their rentals at a healthy rate over past 1 year.

Source: MGCCT 1H FY17/18 Earnings Presentation

Footfall and Tenant Sales

FW 4Q enjoyed higher footfall of 19.4m in 1H 17/18, a 2% growth over last year. Tenant sales also showed healthy growth of 2.5% to HK$ 2.37 billion.

Source: MGCCT 1H FY17/18 Earnings Presentation

Similar figures for GP and SP were not disclosed, as they were commercial properties with performance more directly impacted by economic activities and rental rates of offices. However, judging by the high occupancy rate and positive rental reversions, it is quite clear that GP and SP are healthy assets.

Balance Sheet

In terms of balance sheet strength, MGCCT’s gearing ratio stood at 38.5% at 2Q 17/18. Its interest cover ratio is 3.9 times. Both figures did not show large changes compared to previous year.

Source: MGCCT 1H FY17/18 Earnings Presentation

Portfolio Value

MGCCT’s total portfolio value is $5.96 billion in Q2, compared to $6.22 billion at end of year 16/17. The decrease is mainly due to translation loss arising from the weaker HKD against SGD.

Strength

Growing DPU

Investors usually buy into REITs as an income play, attracted by its high dividend returns. While REITs are required by law to distribute 90% of its returns to shareholders as dividends, on a longer term, quality of REIT assets and capability of REIT manager are the key factors in determining a growing DPU, hence a higher return for investors. MGCCT has done well in this area, as seen from its trend of rising Quarterly Distributable Income and DPU since IPO.

I personally have to hold MGCCT since 2014, and it has rewarded me reasonably well through regular dividends that grow steadily.

Based on a price of $1.17 on 31 Oct 17, and trailing 12-month dividends of 7.456 cents per share, MGCCT dividend yield is 6.37%

Positive Rental Reversions

REITs usually grow their revenue organically via higher rentals, or inorganically via an acquisition of new assets. As one of the two main ways of growing revenue, ability to raise rental rates are key to the REIT’s long-term performance. While yield-accretive acquisitions are hard to come by and are usually disliked by shareholders due to the possible rights issue, organic growth via higher rental rates is a good thing and usually points to the good quality of REITs assets.

In this aspect, MGCCT assets are premium quality shopping malls, commercial building and business park located in convenient locations with good local catchment, nearby key transport nodes such as expressways and subway stations, and Free Trade Zone with high office space demand. Hence, MGCCT assets have been enjoying positive rental reversion in the past year.

Assuming stable property expenses, a higher revenue will lead to rising Net Property Income and a higher distribution.

Favourable Outlook

Management is optimistic of MGCCT’s future performance. It has cited favourable macro environment conditions that would spur further growth: resilient domestic consumption and job growth in Hong Kong, domestic enterprises in Beijing driving leasing demand, and robust demand for office space in business parks in Shanghai.

Source: MGCCT 1H FY17/18 Earnings Presentation

Threats

High Valuation

High valuation is not a fundamental flaw or shortcoming of the REIT in itself. However, it will have an impact on total shareholders return, defined as dividends plus capital gain.

Investors who buy into MGCCT now are buying at a high price. At $1.17, it is at a high level for the past 5 years, although it has fallen slightly from the 5-year high of $1.23 touched last week before it went ex-dividend. Correspondingly, its dividend yield has been compressed to the current 6.4%, compared to more than 7% just about half a year ago.

Depending on investors’ risk appetite in a rising interest rate environment, the market may demand a higher yield from MGCCT, which will result in a price fall assuming a constant dividend.

Conclusion

Overall, MGCCT reported a good set of earnings despite challenges posed by patchy economic growth, e-commerce and online shopping.  It has been able to grow its revenue, NPI and DPU thus far while maintaining positive rental reversions and high occupancy rate. Seen through a backward mirror, MGCCT has certainly performed well since its IPO.

Nevertheless, we need to keep a close tab on MGCCT’s earnings in future, in order to form our own opinions regarding its performance and ability to sustain its dividend growth.

One also need to take into account its portfolio composition, to decide whether to trim, hold or increase position in MGCCT. After all, active portfolio management and company results monitoring will mitigate the majority of the risks in equity investment.

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The information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in Ian’s personal capacity. It does not in any way represent those of his employer and other related entities. CS Chong owns Mapletree Greater China Commercial Trust.

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