Monday, October 21, 2019

Recent Action- Mapletree NAC Trust

I added 5,000 shares of Mapletree NAC Trust on 1st Oct at $1.31 and another 5,000 shares on 15th Oct at $1.26 against the backdrop on the current situation in Hong Kong. It’s a share counter that I had been wanting to add for a long time but couldn’t manage to catch the price and the current unrest in Hong Kong gave me the opportunity to buy on weakness.

It used to be known as Mapletree Greater China Commercial Trust (MGCCT) and got its new name after acquiring Tokyo freehold properties in May 2018. Despite having a portfolio of properties in China and Japan as well, 62% of its Net Property Income comes from Festival Walk, a suburban shopping Mall in Hong Kong which explains the drop in share price recently.

While the protests in Hong Kong continues with no end in sight send many Hong Kong shares tumbling, especially hospitality sector, and property counters; yet I see it as an opportunity to explore some defensive counters which are beaten down and MapletreeNAC Trust is one of them. Here are some of my thoughts and I will be focusing more on the Retail side of Festival Walk.

Resilient in the face of economic headwinds
Before Festival Walk was listed as a REIT, it was owned by Mapletree Investment since 2011. During the SARS incident in 2003, Asian Financial Crisis in 2008 and Occupy Central Movement in 2004, it managed to register revenue growth year on year, and I think management deserves a lot of credit for that. Its occupancy ratio stands at 100% since 2000. While Festival Walk isn’t immune to the political instability, its occupancy ratio track record and its ability to grow its sales and revenue during times of economic slowdown indicates its stability and resilient through economic cycles. Personally, I believe that the current political unrest in Hong Kong will be resolved eventually though recovery may take a long time. Hence, when bearish sentiment emerges, the sell down of this REIT presents an opportunity for me to ‘buy on weakness’.

Not so Touristy

Tripadvisor's customer review of Festival Walk

Festival walk is located near Kowloon Tong MTR station which caters to the daily needs and lifestyle of locals – Supermarket, F&B, cinemas, and a massive ice skating rink. Regular visitors to Hong Kong will be well aware that Kowloon Tong is a residential area above Kowloon City, and there is actually not much tourist attractions along the area. It serves as a heartland mall, a neighbourhood shopping centre that caters more for the locals. While locals would exercise more caution out in the streets, life still has to go on. They would still have to do their groceries in supermarkets, replenish their personal care products in Watson/Mannings and catch the latest movies during the weekends.
According to the news, recent protests are prevelant in CBD and touristy areas like Mongkok, Tsim Sha Tsui, CauseWay Bay and Central. The only incident I recently came to know about in Kowloon Tong is where protesters shone laser pointers at PLA Barracks. This should point to the fact that Festival Walk has limited impact by the protests.

Because the sponsor is Mapletree

Mapletree North Asia Commercial Trust also has the advantage of a strong sponsor, Mapletree Investments with aligned interest with unitholders. Its alignment is evident in its management fee structure, which consists of a base fees- 10% of distributable income for financial year and performance of 25% of difference in DPU in the preceding financial year instead of Net Property Income (NPI). In instances where fees are pegged to its NPI, there may be incentive for them to acquire more properties to artificially boost its income to earn a higher fee. Such structure only incentivises the manager to grow its assets rather than improving its distribution per unit.
 In the case of Mapletree NAC’s payout structure, the REIT manager will earn a higher performance fee by acquiring more properties which are yield and DPU accretive.

One of the hallmarks of having a reputable and good sponsor also its potential to grow its portfolio by acquiring properties from its sponsor through its right of first refusal. Having a credible sponsor also eliminates the possibility that the REIT is seen as a dumping ground for the sponsor to divest their unwanted properties to raise additional cash. While there’s certain degree of concentration risks with 62% of NPI derived from a single country, the REIT manager has diversifying the risks over the years by actively acquiring properties from China and Japan, which are yield accretive and improving the DPU at the same time; Not to mention a pipeline of properties from the sponsor that could be injected into the Reit to further diversify the portfolio.

Distribution and Risks- Foreign Exchange Risks and Regulatory Risks

I have done up the above charts for its quarterly distribution since 2013 till present. Unfortunately, unlike Mapletree Industrial Trust, there are some quarters which DPU was lower than its previous quarter year-on-year. The lower distributable income was attributed to a lower gross revenue and higher property expenses: lower gross revenue due to a weaker HKD and RMB, and higher property expenses due to additional property tax from Gateway Plaza imposed by local authorities with effect from July 2016. This affected the 3Q DPU as well, due to a higher property tax of $3.2mil.

For the FY2017/18 4Q, there was a significant dip in DPU compared to its previous year which is mainly due to reversal of VAT payable in 4Q FY2016/17 which was assumed a higher rate hence giving that previous quarter a slight boost in DPU.

You may notice that SGX listed Reits with majority of assets in Singapore are traded at a premium compared to their peers with more overseas exposure (i.e. higher yield, lower p/b) as the market perceives them to be safer and subject to lesser risks i.e. currency risks, regulatory risks and political risks. In the case of Mapletree NAC Trust:

From a layman’s perspective, because a Reit that higher exposure to overseas market is riskier than a domestic reit, you need a higher return to compensate the risks you are taking.

I have skimmed through many news articles about hospitality sector in HK experiencing sharpest downturn since 1997/SARS. The slowdown in tourism is one thing, but the actual consumer spending and impact on Reits are hard to guage. The earnings season is up and as Mapletree NAC REIT will be releasing its 2Q financial results on 25th Oct, I will be keeping an eye on its earnings as this will be the first quarter where we will be able to gauge the extent of Hong Kong protests affecting its rental income and to decide my next move.

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