As a long-term investor, my work to learn about a company does not stop right after I’ve invested in it.

Even after I have invested in the company, I will continue to keep tabs on its developments from newspaper articles, investment sites, forums, and even chat groups, along with updates from the company directly through their quarterly and annual reports.

Mapletree North Asia Commercial Trust (SGX:RW0U), a REIT with properties located in Hong Kong, China, and Japan, published its fourth quarter and full year results for the financial year 2019/20 ended 31 March 2020 last Thursday, 29 April.

As a unitholder of the REIT, I have studied the REIT’s latest set of results in detail and in this post, I’d be sharing with you highlights of the most important aspects you need to know from the REIT’s latest results update, along with my personal thoughts:

Financial Results (Q4 FY2018/19 vs. Q4 FY2019/20, and FY2018/19 vs. FY2019/20):

In this section, I will be taking a look at the REIT’s financial results on a quarter-on-quarter (q-o-q), as well as on a year-on-year (y-o-y) basis:

Q4 FY2018/19 vs. Q4 FY2019/20:

Q4 FY2018/19Q4 FY2019/20% Variance
Gross Revenue
(S$’mil)
$104.0m$76.8m-26.2%
Property Operating
Expenses (S$’mil)
$20.0m$19.9m-0.7%
Net Property
Income (S$’mil)
$84.0m$56.9m-32.2%
Distributable Income
to Unitholders
(S$’mil)
$62.1m$50.8m-18.2%

The REIT reported a weaker set of q-o-q results, as a result of:

  • The 26.2% decline in its gross revenue was due to rental reliefs granted to tenants of Festival Walk (in Hong Kong), totalling S$10.3m as a result of Covid-19, along with the temporary closure of the mall from 01 January 2020 to 15 January 2020 for repair works (from the damages caused by the anti-government protestors), along with a lower average occupancy at Gateway Plaza. Additionally, for the current quarter under review, Festival Walk, Gateway Plaza, Sandhill Plaza, and its Japan Properties contributed 46.6%, 24.5%, 8.3%, and 20.6% (Q4 FY2018/19: 61.4%, 20.8%, 5.8%, and 12.0%) towards the REIT’s gross revenue respectively.
  • The REIT’s property operating expenses was down by 0.7% q-o-q due to lower expenses incurred in Festival Walk due to the closure of the mall between 01 January to 15 January 2020, along with the lower average rate of RMB against SGD.
  • Distributable income to unitholders saw a 18.2% q-o-q decline to S$50.8m, after taking into account the distribution adjustments including the Festival Walk top-up.

FY2018/19 vs. FY2019/20:

FY2018/19FY2019/20% Variance
Gross Revenue
(S$’mil)
$408.7m$354.5m-13.3%
Property Operating
Expenses (S$’mil)
$79.7m$77.0m-3.3%
Net Property
Income (S$’mil)
$329.0m$277.4m-15.7%
Distributable Income
to Unitholders
(S$’mil)
$240.7m$227.9m-5.3%

Looking at the REIT’s latest financial year results, it was also a weaker one compared to the previous year, with reasons as follows:

  • The 13.3% drop in the REIT’s gross revenue was primarily due to reliefs granted to the tenants of Festival Walk (in Hong Kong) of S$17.8m due to the mall’s closure between 13 November 2019 and 15 January 2020 after the anti-government protestors in the country wrecked damages to it, along with the impact of Covid-19 post the re-opening of the mall. Additionally, the lower average occupancy of Gateway Plaza also contributed towards the y-o-y fall in the REIT’s gross revenue. For FY2019/20, Festival Walk, Gateway Plaza, Sandhill Plaza, and the Japan Properties contributed 55.1%, 22.9%, 7.1%, and 14.9% (FY2018/19: 62.1%, 21.4%, 6.1%, and 10.4%) towards the REIT’s gross revenue respectively.
  • The REIT’s property operating expenses was down by 3.3% on a y-o-y basis largely due to lower expenses incurred by Festival Walk between 13 November 2019 and 15 January 2020 for repair works.
  • Finally, the REIT’s distributable income to unitholders decreased by 5.3% y-o-y to S$227.9m after taking into account the distribution adjustments, including Festival Walk top-ups.

My Thoughts: As Festival Walk (in Hong Kong) is the biggest contributor towards the REIT’s overall gross revenue (you can find the percentage contributions both on a q-o-q basis as well as on a y-o-y basis above), the closure of the mall after being damaged by the anti-government protestors in the country has a negative impact on the REIT’s top- and bottom-line.

The REIT’s management understood the unitholders’ concern about the amount of concentration of the Hong Kong mall on the REIT, which was why in February 2020, in a bid to reduce the concentration on this one single mall, the REIT announced the acquisition of two properties in Japan.

Moving forward in the financial year ahead, depending on the situation on Hong Kong, the REIT’s financials may continue to be adversely affected.

Debt Profile (Q3 FY2019/20 vs. Q4 FY2019/20):

Let us take a look at the REIT’s debt profile for the most recent quarter ended 31 March 2020 (i.e. Q4 FY2019/20), compared to its debt profile for the previous quarter ended 31 December 2020 (i.e. Q3 FY2019/20), to find out whether or not it has improved, or deteriorated (I’d be concerned if it is the case):

Q3 FY2019/20Q4 FY2019/20
Aggregate Leverage
(%)
37.1%39.3%
Interest Coverage
Ratio (times)
2.5x2.8x
Average Term to
Debt Maturity (years)
3.1 years3.4 years
Average Cost of
Debt (%)
2.5%2.3%

As at 31 March 2020, the REIT’s total gross borrowings increased to S$3,383.5m (from S$2,877.7m a year ago) to partially fund their acquisition of MBP and Omori (both in Japan.) Also, to mitigate the impact of interest rates, approximately 77% of the REIT’s interest cost has been hedged into fixed rates.

My Thoughts: If based on the previous regulatory limit of 45.0% for aggregate leverage, the REIT’s aggregate leverage at 39.3% in Q4 FY2019/20 is inching towards the limit. However, now with aggregate leverage increased to 50.0%, there still remains some debt headroom for the REIT.

However, I will be concerned if the aggregate leverage crosses above the 40.0% mark, and at the same time, its interest coverage ratio slide to under 2.5x. If these two conditions were to happen, I will re-consider my investment in the REIT, as I am no longer comfortable with such a debt profile.

Occupancy Profile (Q3 FY2019/20 vs. Q4 FY2019/20):

Another area I focus on when I look at a REIT is its occupancy profile, and in this section, I will be looking at the REIT’s most recent portfolio occupancy profile for the quarter ended 31 March 2020, compared against its portfolio occupancy profile recorded in the previous quarter ended 31 December 2020 (i.e. Q3 FY2019/20):

Q3 FY2019/20Q4 FY2019/20
Overall Portfolio
Occupancy (%)
96.3%95.2%
Portfolio Weighted
Average Lease Expiry
(years)
2.7 years2.7 years
Rental Reversion –
Festival Walk (Retail)
(%)
+12.0%+8.0%
Rental Reversion –
Festival Walk (Office)
(%)
+6.0%+6.0%
Rental Reversion –
Gateway Plaza (%)
-3.0%-4.0%
Rental Reversion –
Sandhill Plaza (%)
+9.0%+10.0%
Rental Reversion –
Japan Properties (%)
-2.0%-9.0%

My Thoughts: Compared to the previous quarter, the REIT’s overall portfolio occupancy rate weakened slightly (by 1.1 percentage points to 95.2%.)

In terms of rental reversions, except for Gateway Plaza and its Japan Properties which recorded a negative rental reversion in the most recent quarter under review, the rest of the properties recorded positive rental reversions.

Personally, I feel that the REIT’s overall portfolio occupancy profile still remains resilient.

Distribution Per Unit:

For the current quarter under review, the REIT’s management declared a distribution payout of 0.496 cents/unit for the period between 28 February 2020 and 31 March 2020, with the ex-distribution date to be on 08 May, record date on 11 May, and payout date on 24 June.

One thing to note about the REIT’s distribution payouts moving forward – as they will be adopting a half-yearly reporting with effect from FY2020/21, they will be changing their distribution payout frequency from quarterly to half-yearly. The next distribution payout will be for the six-month period ending 30 September 2020.

Key Summary from Ms Cindy Chow, CEO of the REIT:

  • Festival Walk: To support tenants who were adversely affected by the difficult retail environment as a result of the social unrests in 2019, and subsequently Covid-19, the REIT have offered rental relief during the period social unrests in Q3 and Q4 FY2019/20, through to Q1 FY2020/21. Thereafter, the REIT will re-assess the need for continuing relief in the subsequent months. Also, due to the uncertainties in the financial year ahead, the REIT is expecting lower renewal or re-let rental rates going forward. Finally, regarding the insurance claims on the full quantum of revenue loss and property damage, it is still ongoing and the REIT will provide an update when one is available.
  • Gateway Plaza: With a slowing economy and reduced demand exacerbated by trade tensions and Covid-19, together with new supply coming onstream, vacancy rates are expected to continue to rise, with rents edging down further.
  • Sandhill Plaza: Its performance is expected to remain resilient, underpinned by the tenants that are in the technology, media, and telecom industry, which are relatively unaffected by the current situation.
  • Japan Properties: With Japan’s economy being affected by the ongoing Covid-19 pandemic, more companies in the Tokyo office market are holding off their capital expenditures plans and postponing leasing activities. The REIT will focus on tenant retention to maintain a high level of occupancy and stability in their Japan Properties.
  • Finally, in view of the heightened uncertainties and market volatility caused by Covid-19, with continued headwinds expected on revenue and occupancy levels of the REIT’s portfolio, they are expecting a weaker y-o-y performance ahead.

In Conclusion:

Headwinds aplenty for the REIT ahead.

As a unitholder, I am still concerned by the REIT’s concentration on Festival Walk in Hong Kong (even though the management have tried to bring down the concentration level with the acquisition of two Japanese properties in FY2019/20), with the biggest question being whether the anti-government protests will resume in a similar scale (like in the year 2019) after Covid-19 is over. Another concern I may have is that, should the Festival Walk mall suffer from another similar-scale damage again, how is the REIT going to deal with this. I’m perfectly sure I’m not the only unitholder who is concerned with this; I am looking forward to hear from the REIT’s management on this during their annual general meeting.

Another area I am concerned is the REIT’s debt profile – should it go up to above 40.0%, I will be very concerned. At this point in time, I am not sure if the REIT will be providing key updates for Q1 FY2020/21; if they do, you can be sure that I will zoom right in on the REIT’s debt profile when they release their Q1 FY2020/21 update.

For now, I will continue to remain invested in Mapletree North Asia Commercial Trust.

Download Related Documents on the REIT’s Latest Q4 and Full-Year 2019/20 Results Release Below:

Disclaimer: At the time of writing, I am a unitholder of Mapletree North Asia Commercial Trust.

 

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