Wednesday, May 6, 2020

The unfortunate case of Mapletree North Asia Commercial Trust - A deep analysis

Hi all, this is really a long post (warning), here are the subtopics I will be discussing.
  1. History of MNAC Trust
  2. Determine the Discount Rate via Capital Asset Pricing Model (CAPM)
  3. Determining Net Profit Margin (NPI)
  4. Derive the ratio of NPI to Distributable Income to Shareholders
  5. Analysis of Japan Properties Acquired in 2018
  6. Analysis of MBP and OPB (Japan Properties Acquired in Dec 2019)
  7. Analysis on Sandhill Plaza
  8. Analysis on Gateway Plaza
  9. Analysis of Festival Walk
  10. Summing up altogether+ Intrinsic Value

1. History of MNAC Trust

Festival Walk
Festival walk was developed jointly in 1998 by Swire and Citic Pacific and back then it was once the biggest shopping mall in HK once opened. It was then owned by Swire Properties and bought over by MNAC’s current sponsor Mapletree Investments @ 18.8 Billion so Swire Pacific could focus on investments in Mainland China in 2011.

Gateway Plaza
It was used to be known as Beijing Gateway Plaza and it’s situated at one of Beijing’s core business district. The building was completed in 2005 by Bestride and sold to HK Gateway in 2006. About a year later, Tin Lik, sold shares of Beijing Gateway Plaza (BVI) Limited which holds HK Gateway to RREEF China Commercial Trust. In April, Gateway Plaza was then acquired by Mapletree India China Fund at RMB 2.1bil, a private real estate fund belonging to Mapletree Investments Pte Ltd (MIPL).

In 2013, the Sponsor launched Mapletree Greater China Commercial Reit in 2013, consisting of the above two properties. In 2015, the Reit acquired Sandhill Plaza at RMB 1,881mil, which is located Zhangjiang HiTech Park, better known as Silicon Valley of Shanghai. The acquisition was yield accretive.

In March 2018, the Reit acquired 98.47% of 6 freehold commercial real estate in Japan from MJOF, a wholly owned subsidiary of Mapletree Investments Pte Ltd. The acquisition was also yield accretive and funded via equity through private placement and debt issuance.

A year later, protests broke out in Hong Kong after Carrie Lam introduced the extradition Bill. The bill was then suspended in June but it did little to restore calm in the city. Finally, in early Sept, she announced a formal withdrawal of the much-despised extradition Bill. However, it was too little too late, as protestors are calling for ‘five key demands, not one less’. 

On the 13th Nov, a peaceful gathering of protestors turned violent in the Festival Walk and they broke glass and ceiling, and set fire on Christmas tree. The building was closed for repair and reopened on 16th January, while its commercial office was reopened on 26 November. It was a very unfortunate that of all the shopping centre, the protestors chose to storm into the suburban shopping Mall in Kowloon Tong. Rents were not collected during the major recovery and repair works till its official opening. 

On 4th Dec, its sponsor, injected 2 more freehold yield accretive properties into MNAC Trust to reduce asset and income concentration in Hong Kong. The manger has also kindly waived the acquisition fee. It was seen as a positive move as it is yield accretive and improves its overall Weighed Asset Lease Expiry (WALE).

A few weeks after its opening come the Corona Virus, and Hong Kong was officially hit by a double whammy of  protests and Corona Virus outbreak. The current situation not only affects Festival Walk but across its portfolio in Japan and China.

So what should investors do with their investment under current situations?

Festival Walk mainly serves the day to day residents of Kowloon Tong and has been a very resilient mall that has withstand crisis such as SARS and GFC with growing Net Property Income (NPI) during such times. It is less dependent on tourist trade like Times Square, Landmark, Elements, Harbourcity. While operations in FW remains challenging, its NPI may not be much impacted by the gloomy outlook of tourism in HK hence a direct comparison in earnings with such properties may not be useful in forecasting it’s impact on FW’s future NPI.

My view is that the closure of Festival Walk is just one off and it’s just so unfortunate that of all malls, the protestors decided to protest in Festival Walk to mourn the death of a protestor and vandalized the building causing extensive damage that it has to be closed till January 2020.

Unfortunately, I was not able to calculate it’s Passing Rent to calculate the NPI (except Gateway Plaza) unlike how I analysed Champion Reit in the past because the figures are not released in annual report or quarterly report except in the IPO Prospectus. I emailed the management to enquire about Festival Walk's passing rent, but she seemed to suggest that the rent varies much between the different trade type. After some calculation, it’s NPI Yield is pretty stable at 80%, dipping to 75% during times like this, hence it’s possible to do some future projection of FW’s DPU if the ratio of NPI to distributable income is stable over the years, including the current FY 20/21.

I like analysing Reits with less profile of properties because it makes it easy to segment each property group to analyse it’s earnings. We will begin by looking at the overall numbers and start with Japan Properties, followed by the two properties in China and FW. Our focus here is about its earnings rather than the asset valuation. My only concern on property valuation is its revaluation loss affects the gearing, hence I will touch on this abit as well.

2. Determine the Discount Rate via CAPM

We will be using the CAPM model to determine the discount rate in this case.

Discount Rate= E(R)= Rf + β (Rm - Rf )

β= 0.97

Rf = 0.884% 

Rm= 5.34

Discount Rate= E(R)= Rf + β (Rm - Rf )
= 0.884 + 0.96 (5.34-0.884)

3. Determining NPI Margin

By dividing NPI/ Gross Revenue we get Net Property Income Margin.

The HK Protest started in June 2019 and then come the Covid 19 this year so the 2Q 2019 onwards its financials would be in distress. So let’s dive in to the last 3 quarters. June-Sept (2Q), Oct- Dec (3Q), Jan- Mar (4Q)

It’s NPI Margin fluctuated between 70% to 80% range, hence its more accurate to assess NPI margin of geographical breakdown or segment revenue, since the NPI of each segment is provided in the quarterly earnings report.

4. Derive the ratio of NPI to Distributable Income to Shareholders

The ratio is fairly stable at low 70% range, from 2015 to 2018, with the exception of 2019, where ratio was 82%. If we remove the distribution top up, the ratio would be 70.28%.
Hence for this exercise, we can use a 5 year average.

For simplicity lets use 0.72

Japan Properties

I will split to 2 sections: Properties acquired in 2018 & Properties Acquired in 2019.

5. Analysis of Japan Properties Acquired in 2018

Of the six properties acquired, four are single tenanted.

While there’s tenant concentration risks in each of the four buildings, I tend to see it positively since these tenants have undergone a few financial crises in the past and have been occupying the building since it was built. Relocating office is not an overnight decision and some single tenanted offices may have purpose-built facility for its daily operations. Despite Japan’s economy being affected by Covid-19, I still expect the properties to achieve 100% occupancy or close to full occupancy.

Furthermore, all four tenants have good credit ratings and three of four are three of the four single tenants are listed companies and I doubt they will be defaulting their rent in such a time as this.

Moreover, the properties have long WALE, and with 75% expiring in 2024/2025. 2024 is still sometime away and the covid-19 would have fade off. Hence, leasing risks is minimal for the next three years when economy is uncertain.

To project total distributions coming from these freehold properties, we assume a zero-growth rate from 2020 to 2024 and a 2% perpetual growth rate.

NPI (Japan Properties) for FY 2019/2020= S$39.937mil.

NPI (Japan Properties acquired in 2019)= S$1.8mil (derived from calculation in 6. Analysis of MBP and OPB (Japan Properties Acquired in Dec 2019)

NPI (6 Japan Properties) = S$39.937mil- S$1.8mil = S$38.137 mil.

Distributable income per unit from 6 Japanese Properties= (NPI of six Japan Properties* 0.72 ratio)/ (Discount rate * No. of units in issuance)

Sum of all PV= $797.464.5 mil

Per share Value from six Japan Properties= $797.464.5 mil/ 3,342,916,300 units

S$ 0.23855

6. Analysis of MBP and OPB (Japan Properties Acquired in Dec 2019)

To reduce concentration risks and geopolitical risks, on 4th Dec, management decided to acquire two more properties in Japan from its Sponsor Mapletree Investments. This move is DPU accretive, improved its WALE, and having more freehold properties in the portfolio.

The two properties started contributing to its NPI from 28th Feb 2020 for a month with MBP contributing 87.2% of Gross Rental Income and OBP contributes the remaining 12.8%.

The quarterly report doesn’t disclose the NPI contributed from the two properties, but I managed to get some information from the acquisition announcement report.

There is no projection on the gross revenue, but I managed to find the 6 months NPI for the two Japan properties ending Sep 2019.

Assuming zero growth and one month of contribution of NPI from mBay Point Makuhari Building & Omori Prime Building, NPI= S$ 10.8 m/6= 1.8mil.

If both properties contributed to NPI for the full 3 months,

5.4m/56.9m *100%= 9.5% that’s about right which should be higher than the relative figure of 6.4% considering significantly lower NPI from Festival Walk the past three months.

Prior to its acquisition in Dec, the committed occupancy is 84.8% which is above the average vacancy rate of 7.7-9%. One of the catalysts for this acquisition is for Reit manager to grow its NPI by improving the vacancy and capture rental reversion. In view of this Covid-19 impact on economy and comments from the REIT manager (see below), the base case would be that current occupancy to remain at 84.8%. I won’t expect further reduction in occupancy as it’s occupancy is already below average and it’s major tenants are big companies.
MBP currently contributes 87.2% of the Gross Monthly Rental

Top tenants:

  • NTT Urban Development, one of the world’s largest telecommunication companies with market cap in excess of US98billion listed on Tokyo Stock Exchange.
  • AEON Group ,with a market cap in excess of US$18 bil, listed on Tokyo stock exchange.


According to report, Vacancy rate expected to maintain low-level between 1.4% to 3.2% from 2019-2023. It was at 100% occupancy prior to acquisition in Dec.

Although it is a multi-tenanted building with smaller sized companies, the sectors which major tenants are belonging in: Eighting (Video Games Developer), Isuzu Linex (Transportation & Logistics) and Brillnics (Information Technology) seemed to be unscathed by the Covid 19 situation. In fact, IT and Video Gaming firms may even thrive during Coronavirus.

 I also did some Googling and guess what I saw. – No available space office at the moment

According to APAC office report outlook, gross face rental growth projected to be -1.1% in 2020 and 2.6% in 2021. If percentage directly translates to a -1.1% dip in NPI for 2020 and -2.6% dip for 2021, and staying constant till 2025 and perpetual growth of 2% from 2025 onwards.

Sum of all PV= $422.8749 mil

Per share Value from six Japan Properties= $422.8749 mil / 3,342,916,300 units
=S$ 0.1264988

7. Properties in China: Analysis on Sandhill Plaza

The latest quarterly report suggested that Sandhill Plaza benefitted from the current Covid 19 crisis, as cost sensitive tenants are inclined to shift to decentralized areas.  Moreover, the tenants are mainly TMT- Technology, Media and Telecom, which are less affected from the current situation.
The latest results speak for itself. Although occupancy dipped slightly, average rental reversion has increased 10%. 

While management commented that the performance is expected to be resilient, there’s not much room left to grow its occupancy as it has already hit 98%. The only way is to grow its average rent.
After tabulating the NPI over the past 4 years, it’s earnings are not very stellar, but growing slowly year on year at CAGR of 0.8%. Hence let’s use a perpetuity model of 0.8%.

CAGR = 0.8%

Using a perpetual CAGR of 0.8%,

Distributable Income for FY 2020/21 = 16,848 * 1.008 = 16.984784 mil.

Per share Value= 388.22 mil / 3,342,916,300 units = S$0.11613322

8. Analysis on Gateway Plaza

Similar to Sandhill Plaza’s analysis, I have done up the table for it’s NPI and distributable income from FY 2015-2019
And management commented:

There is a dip in NPI in 2017 as there’s a change in Property Tax derived for China. Hence additional property tax of $5.4mil.

I wrote to management to enquire on the passing rent and she replied that the passing rent is in the range of 320-350 RMB per sq/m. After digging into some past analyst reports, it was also recorded at 320-350 RMB per sq/m.

Using 320 RMB as passing rent & NLA of 106,456 sqm, Annual Gross Revenue =320 RMB per sm *106.456 *12 months = RMB 408.791040 mil.

Let’s assume that passing rent stays at 320 and slowly recovers to 350 by 2023 and occupancy rate increases from 85% to 96% by 2023.

SGD 1= RMB 5
Sum of all present value= $$ 915.282 mil
Per share Value= $$ 915.282 mil / 3,342,916,300 units =$0.2737975

9. Analysis of Festival Walk

I have to be honest that it’s very hard to analyse on this one. Even as Covid 19 situation improves, Hong Kong may have to brace for more protests. Even protestors are getting smarter; to maintain social distancing during protests and standing 1.5m apart. It’s currently double whammy for HK government, having to face Covid 19 with the protestor’s situation.

Although the current protests and Covid 19 may exert pressure on Festival Walk’s rent, there are two ways to see it. First scenario is that rental and occupancy will drop drastically like Gateway Plaza. Another scenario is that Festival Walk could still maintain at high 90% occupancy rate with only slight dip in passing rent. Reason being that Festival is a suburban mall and serves the residents in Kowloon Tong and its passing rent is lower than Champion Reit. Hence, tenants may be looking to locate their shops near residential malls like Kowloon Tong knowing that shopping centre is less tourist dependant and cheaper rental, driving up overall demand in suburban mall.
Initially I would want to project it’s NPI through passing rent psf but realized that it would not be accurate as there are rental reliefs extend throughout the next few months. 

I have also written an email to Elizabeth of investor relations to enquire on the passing rent psf. She replied me within 2 days and mentioned that rental rates differ among trade types, but yet to give me an answer on the average passing rent.

I did a comparison between Q2-Q4 for FY2019/20 vs FY2018/19 to assess its impact on the NPI. I included the rental topup as I wanted to remove impact on Festival Walk’s closure as I see it as a one time even and not a recurring one.

In fact the worst is yet to come, considering that April 2020’s NPI is not included and there will be more handing out of rental rebates.

I will use Q2-Q4 2019-2020’s result, and project a one time 20% reduction for 2021 Revenue due to rental reliefs, followed by a 5% increment from 2022-2025 (based on 2019-2020’s NPI) & 2% growth perpetually. I don’t think I am being over optimistic here, considering that it will take another 3 years to go back to FY 2018/2019’s NPI.

Sum of all present value= $$ 4,510.8379 mil
Per share Value= $$ 4,510 mil / ,342,916,300 units =$1.349372

However, many have doubts on it’s earnings after 2047 the year when ‘one country, two systems’, expires. Your guess is as good as mine, but Xi Jinping spoke in 2017 once that the principle of one country, two systems should remain unchanged. In my opinion, the CCP will extend the status of one country two systems, and property owners can extend the lease of ownership subject to a fee.

If the worst case scenario plays out, where Festival Walk will continue to collect earnings up to 2047,

Sum of present value from 2020 to 2047 
= $$ 4,510.8379 mil- 2,811.324 mil
= 1,699.513 mil.

Per share Value= 1,699.513 mil / 342,916,300 units= S$0.50839

10. Summing up altogether+ Intrinsic Value

What are your views about MNAC Trust. Do you think it's worth more compared to current prices?