Questions posed to the managers of Mapletree North Asia Commercial Trust (MNACT) and Mapletree Commercial Trust (MCT) by David Gerald, president and CEO of the Securities Investors Association Singapore (SIAS) underscore the diversification of properties dictum for S-REITs, highlighting the challenge MNACT has in growing its portfolio.
On the portfolio front, SIAS points out that Festival Walk and Gateway Plaza, account for more than 70% of MNACT’s portfolio, and they continued to report lower average rental rate. “Rental reversion for Festival Walk accelerated from negative 21% to negative 30%. For Gateway Plaza in Beijing, the rental reversion was from negative 7% to negative 24%. A major tenant at Gateway Plaza is due for renewal in December 2023,” SIAS indicates.
“Is the proposed Merger a way to leverage the resilient MCT’s portfolio at a time when Festival Walk and Gateway Plaza are underperforming? What are the plans and asset enhancement potential for these two assets? Regardless of the outcome of the proposed Merger, are these two assets considered core to the REIT?” SIAS asks.
Festival Walk and Gateway Plaza accounted for 68% of net property income of $166.2 million, recorded in 1HFY2022, for the six months to Sept 30, 2021.
Gateway Plaza - a splendid building in the heart of Beijing - has as its anchor tenant BMW. In presentation on Oct 28, MNACT’s manager had said one of the major tenants (whose current lease is due to expire by December 2022) has extended its lease in advance by another year. There is a risk that this lease might not be extended beyond December 2023, it added. In 1HFY2022, Gateway Plaza had renewals for 13 office leases with average rental reversions of negative 24%.
“Gateway Plaza remains a high-quality Grade-A office building located in the established and mature Lufthansa Area in Beijing, China, with high quality international tenants and good tenancy profile. The strategy for Gateway Plaza is to focus on maintaining a high occupancy rate and adopting flexible leasing strategies to retain existing tenants and to attract new tenants.
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"Over the next few years, domestic insurance, wealth management and media companies, and international tenants in the financial services and media sector will form the bulk of leasing demand at Lufthansa in line with Beijing’s opening up of the services industry,” MNACT’s manager says.
Festival Walk has a committed occupancy of almost 100%, but rental reversions were a negative 30% for 35 retail leases in 1HFY2022. In the three months to Dec 31, 2021, there were 49 retail leases (renewed or relet for YTD FY2022) with an average rental reversion of negative 32%.
“Although short to mid-term challenges remain amidst uncertainties of recovery, we will continue to execute these initiatives in Festival Walk, capitalising on the long-term prospects of Hong Kong,” MNACT’s manager says.
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MNACT’s manager also explains that Festival Walk has a non-renewale land lease. These non-renewable leases may be extended upon expiry for a term of 50 years without payment of an additional premium, at the sole discretion of the Hong Kong.
"Although Festival Walk's lease is a non-renewable lease, there are no exceptional circumstances to expect that the lease will not be renewed (except as in the case of the site being required for a public purpose or a serious breach of the lease). The valuation is done on the basis that the lease will be renewed,” MNACT’s manager explains.
SIAS also asked if the MNACT Manager would consider other alternatives, such as sale of key assets coupled with a faster pace of capital recycling, to crystallise value for MNACT Unitholders.
·The MNACT Manager said it will not seek or solicit competing bids for the duration of the Implementation Agreement. The exclusivity to MCT would allow for the Trust Scheme to be brought to MNACT Unitholders for a vote. The granting of exclusivity is common in precedent trust schemetransactions in Singapore, it adds.
However, the MNACT Manager will consider any third party offer for the REIT or assets which it receives. There is also no break fee payable to MCT in the event a competing bid is successful.
The MNACT Manager points out that the proposed Merger is the only offer that has been received for the entire portfolio to date and the transaction terms have been extensively negotiated.
MCT’s manager explains how the pricing was arrived at. The Scheme Consideration is based on: (i) P/NAV multiple of 1.0x of MNACT’s adjusted NAV per unit of $1.1949; and (ii) Issue Price of MCT Units at S$2.0039, which is based on MCT’s 1-day VWAP on December 27, 2021, being the last traded dayy before the Joint Announcement.
“We have given full consideration for not just the MNACT assets but also from the benefits that can be derived from the ready platform that MNACT offers. This is unlikely to be achieved through a piecemeal purchase of its assets and unitholders would be deprived from the benefit of participating in the merged entity,” MCT’s manager says in replies to SIAS.
“We believe that we have put forward the best available offer to MNACT Unitholders that also takes care of the interests of MCT Unitholders. This is because the Scheme Consideration continues to give both MNACT and MCT Unitholders the opportunity to stay invested in an enlarged platform poised for growth into key gateway markets in Asia; and delivers a balanced outcome for both sets of unitholders, resulting in a merged entity with an optimal capital structure which is best positioned to capture the benefits of the Merger,” MCT’s manager adds.
