Analysts from CGS-CIMB Research and OCBC Investment Research have maintained their “add” and “hold” ratings for Mapletree Pan Asia Commercial Trust (MPACT) with increased target prices (TPs) of $2.08 and $1.81 from $1.98 and $1.72 previously.
Brandon Lee of Citi Investment Research has maintained his “buy” rating and TP of $1.90.
In their Feb 2 report, CGS-CIMB’s Lock Mun Yee and Natalie Ong say that MPACT faces and uneven recovery path, with good leasing traction for its Singapore, Japan and South Korea assets, while those in Greater China continue to lag.
“While MPACT’s Singapore, Japan and South Korea portfolio delivered positive reversion and occupancy gains, its Greater China portfolio delivered the opposite,” they say.
For the 3QFY2023 ended December 2022, portfolio occupancy dipped q-o-q from 96.9% to 95.5% due to occupancy losses at Mapletree Business City (MBC) and in its China portfolio. MPACT has reported positive reversions for leases signed year-to-date (YTD) for FY2023 at VivoCity, MBC, Singapore offices, Japan properties and at The Pinnacle Gangnam in South Korea.
Meanwhile, tenant sales at Vivo City for the quarter came in at 110% of 3QFY2020’s levels despite shopper traffic still forming only 79% of pre-Covid levels.
On the other hand, the analysts note that 3QFY2023 tenant sales at Festival Walk in Hong Kong fell 2.3% y-o-y, likely impacted by outbound travel, coming in at 74% of pre-Covid levels. While occupancy at Festival Walk was stable q-o-q at 99.8%, reversions for leases signed during the year were 12.7% lower on average, they say.
Meanwhile, MPACT’s renewed five-year lease at Gateway Plaza with BMW during the quarter — the second-largest tenant in MPACT’s portfolio accounting for 3.9% of gross rental income (GRI) — could also be a drag. “Given the elevated levels of office space in the Lufthansa district where Gateway Plaza is located, we think this renewal would have attracted negative reversions,” explain Lock and Ong.
MPACT’s 3QFY2023 revenue and net property income (NP) grew 84% and 77% y-o-y to $239.8 million and $179.4 million respectively, boosted by full quarter contribution from properties acquired through the merger and higher earnings from VivoCity.
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For the period, the REIT’s dividend per unit (DPU) of 2.42 cents came in flat y-o-y, eroded by higher interest costs. For the 9MFY2023, MPACT’s total DPU of 7.36 cents stands 8.1% higher y-o-y and in line at 73.7% of Lock and Ong’s FY2023 estimates.
OCBC’s research team note that while MPACT has now become one of the largest REITs by market capitalisation listed in Asia, with a significantly larger scale and a platform that is “better
positioned to unlock upside potential”, they believe MPACT has also gained new exposure to riskier markets and has seen dilution to its pure-play Singapore status.
“Operating metrics from its Greater China assets have seen weakness, but could improve with the faster-than-expected reopening of China. The increase in its aggregate leverage ratio post-merger also leaves it more susceptible to higher borrowing costs in a rising interest rate environment,” explains the team.
They point out that MPACT has seen slight increases in aggregate leverage, cost of debt and interest rate hedges in the last quarter.The REIT’s aggregate leverage ratio inched up from 40.1% to 40.2% during 3QFY2023, while 78.3% of its debt has been hedged, versus 72.5% in the preceding quarter. Its weighted average all-in cost of debt also rose 13 basis points (bps) to 2.57%.
“According to MPACT’s estimates, every 50 bps increase in benchmark rates is estimated to impact its DPU by 0.14 Singapore cents, or around 1.4% of our FY2023 DPU forecast. We make minor tweaks to our DPU forecasts, and raise our terminal growth rate assumption from 1.5% to 1.75% given the faster-than-expected easing of Covid-19 measures and expected rebound in China’s economic growth,” says the OCBC team in explaining their increased TP of $1.81.
With MPACT’s results mostly in line with expectations, Citi’s Lee sees “muted share price impact”. His $1.90 TP is derived from an average of dividend discount model (DDM) and revalued net asset value (RNAV) valuations.
His DDM valuation includes the assumptions of a risk-free rate of 3.5%, overall cost of equity (COE) of 8.5% and terminal growth of 2.5%, without factoring in any potential earnings accretion or dilution from any unannounced acquisitions. For RNAV, Lee values its portfolio at a weighted-average cap rate of 4.2%.
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Key downside risks to his investment thesis on MPACT include the continued negative rental reversion at its largest asset Festival Walk, foreign exchange risks as 44% of its earnings are derived from Hong Kong, China, Japan and South Korea, and a sharper-than-expected increase in interest rates, which could impact DPU and cap rates.
Meanwhile, his upside risks include a quicker-than-expected improvement in retail outlook post resumption in international travel in Hong Kong, China or Singapore, the recovery of anchor and mini-anchor spaces for new asset enhancement initiatives (AEIs) and the potential acquisition of or joint redevelopment of sponsors assets.
As at 12.37pm, units in MPACT were trading 1 cent or 0.55% up at $1.84.
