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Author: kimeng   |   Latest post: Thu, 27 Feb 2020, 3:43 PM

 

Mapletree North Asia Commercial Trust: Distribution Top-up and Growing Its Japan Presence

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  • Distribution top-up to mitigate income void
  • No visibility on timing of insurance claims
  • Diversifying income stream with proposed Japan acquisitions

Aiming to Reopen Festival Walk in 1QCY20

Mapletree North Asia Commercial Trust’s (MNACT) Festival Walk (FW) mall has been closed since 13 Nov, and there are major recovery and repair works to be carried out. Management is working towards having the mall reopen (partially or fully) in 1QCY20 (subject to approvals from the relevant authorities). For the office tower, it was also closed on 13 Nov but reopened on 26 Nov. Rental from FW’s retail tenants will not be collected over the duration when the mall is closed. However, as highlighted previously, FW has insurance coverage which includes property damage and loss of revenue due to business interruptions.

Rental Income Void to be Partially Covered by Distribution Top-up in 2HFY20 and 1QFY21

While assessment of the revenue loss amount and property damage is currently underway, there is no visibility yet on when MNACT will receive the insurance claims reimbursement. Given this income void, MNACT will be implementing a top-up to the distributable income for 2HFY20 and 1QFY21. This distribution top-up amounts to ~40% of FW’s retail revenue. Once the insurance claims proceeds are received, it will be used to repay the borrowings undertaken to fund the top-up.

Proposed Acquisitions of Two Properties in Greater Tokyo From Sponsor

Separately, MNACT also announced the proposed acquisition of a 98.47% stake in two freehold, multitenanted office properties (mBay Point Makuhari Building (MBP) in Chiba and Omori Prime Building (OPB) in Shinagawa) in Greater Tokyo, Japan, from its sponsor. The combined agreed property value is JPY38.1b (~S$485.1m), and translates into an NPI yield of 4.5%.

Occupancy rate is 85.9% (84.8% for MBP and 100% for OPB) and hence we see potential upside to the income yield if MNACT manages to ramp up MBP’s occupancy to 90-95%, which is the average occupancy for surrounding buildings. Given Japan’s negative 10-year government bond yield, this acquisition represents a healthy yield spread of 470 bps as compared to MNACT’s existing portfolio outside of Japan (~270 bps for FW and ~160 bps for its China properties), although this is lower than its existing Japan portfolio (~510 bps).

Funding would come in the form of i) issuance of transaction units to its sponsor (subject to whitewash waiver) and ii) debt financing. The funding mix is likely to be ~30/70% equity/debt. Pro forma aggregate leverage is expected to increase from 37.1% to 39.0% post completion, while pro forma FY19 DPU is expected to increase by 1.8% (assuming transaction units are issued at S$1.15 per unit).

FW’s contribution is expected to decline from 62% to 58% of overall portfolio NPI post completion of the acquisitions. Taking these developments into account and also lowering our rental assumptions for FW, we pare our FY20F and FY21F DPU forecasts by 4.8% and 2.4%, respectively. Correspondingly our fair value is reduced to S$1.36 from S$1.41.

Source: OCBC Research - 6 Dec 2019

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