DBS Group Research analysts Rachel Tan and Derek Tan have maintained their “buy” call on Mapletree Pan Asia Commercial Trust N2IU (MPACT) with an unchanged target price of $1.75 following the REIT’s divestment of Mapletree Anson.
On May 30, MPACT announced that it planned to divest Mapletree Anson for $775 million, which is 1.3% above the property's latest book value.
“The recent divestment of Mapletree Anson addresses investors’ concerns over its higher-than-average gearing,” write the analysts in their June 28 report, who note that MPACT's gearing will be reduced to a more comfortable level of 37.6% from 40.5% as at March 31.
The expected accretion to the REIT's distribution per unit (DPU) is around 1.5%, which is a "positive surprise" to the analysts.
“However, the question remains on how MPACT would find its next leg of growth,” say Tan and Tan.
Due to the current cost of capital levels, the analysts view MPACT’s pursuit of accretive acquisitions to be “sub-optimal”, particularly for office and commercial S-REITs where office assets have a flat to negative carry cost.
Despite this, MPACT’s prized jewel asset Vivocity continues to surprise the analysts with its high growth, contributing around 23% of the REIT’s net property income (NPI).
That said, Festival Walk in Hong Kong, is experiencing a slower-than-expected recovery despite having stabilised.
“MPACT is in pursuit of an active asset recycling strategy to optimise its portfolio and drive growth, and we see an opportunity for it to utilise its assets in exchange for future, long- term growth, which will likely have minimal near-term implications,” say the analysts.
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Following the suboptimal pricing of the sale of China-focused properties due to a weak-demand environment, Pinnacle Gangnam is a potential divestment opportunity, in the analysts’ view.
They note that overseas assets have been pared down following valuation adjustments and the depreciation of foreign currency exchange. Aside from Festival Walk, Pinnacle Gangnam has the lowest negative carry, at around 10% below its acquisition price.
Pinnacle Gangnam currently comprises only 1.6% of assets under management (AUM) and 1.3% of the REIT’s FY2024 net property income (NPI).
Additionally, the DBS Group Research analysts hold the position that MPACT should continue utilising its assets as “currency for growth” to streamline its portfolio. They note that an asset swap of its 50% stake in Pinnacle Gangnam for a small stake of around 14% in its sponsor’s Harbourfront Centre redevelopment project could provide a runway for inorganic growth for the REIT.
“We believe this could be a win-win approach for both MPACT and its sponsor Mapletree Investment,” add Tan and Tan.
The analysts note that this swap could potentially benefit MPACT, which includes securing long-term growth in partnership with its sponsor in an attractive development asset that anchors its dominant position within the Southern Waterfront of Singapore.
While the analysts estimate a 2% loss in rental income during the redevelopment period, they also see a potential yield on cost of the Harbourfront Centre redevelopment of around 6.4% and net asset value (NAV) uplift of 1.7% for the REIT post-completion of the redevelopment.
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“As such, we believe that the financial impact is minimal in the near term in exchange for future potential upside,” say Tan and Tan.
MPACT is currently trading at close to 7% of its FY2025 yield and 0.7 times P/NAV.
Potential catalysts identified by the analysts include management expressing its intention to execute share buybacks when needed, potential rate cuts as well as organic growth, especially from the recovery of Festival Walk.
As at 12.32pm, shares in MPACT are trading at 2 cents higher or 1.64% up at $1.24.
