Retail and office REIT Mapletree North Asia Commercial Trust (SGX:RW0U) held its 7th annual general meeting for the financial year 2018/19 ended 31 March 2020 via virtual means (due to the ongoing Covid-19 situation in Singapore) earlier this afternoon (16 July 2020), which I have attended as a unitholder.

For the benefit of those who were not able to attend the meeting, in this post you’ll find a summary of the most important pointers to take note of (as a unitholder):

Presentation on Key Performance Statistics for FY2019/20 by Mr Ng Wah Keong, Chief Financial Officer of Mapletree North Asia Commercial Trust

Financial Performance (FY2018/19 vs. FY2019/20):

  • Gross Revenue: Down 13.3% year-on-year (y-o-y) to S$354.5m (FY2018/19: S$408.7m) – the decrease was due to the temporary closure of Festival Walk (for repair works), lower occupancy in Gateway Plaza, offset by its Japan properties
  • Net Property Income: Down 15.7% y-o-y to S$277.5m (FY2018/19: S$329.0m) – Festival Walk contributed 53.7%, Gateway Plaza contributed 23.5%, Sandhill Plaza contributed 8.4%, and its Japan Properties contributed 14.4% (this includes the one month contribution from MBP and Omori, both properties acquired in February 2020)
  • Distributable Income to Unitholders: Down 5.3% y-o-y to S$227.9m (FY2018/19: S$240.7m)
  • Distribution Per Unit: Down 7.4% to 7.124 cents/unit (FY2018/19: 7.690 cents/unit) – Mr Ng informed that the REIT will be changing its distribution to unitholders from quarterly to semi-annual from FY2020/21 onwards

Capital Management (FY2018/19 vs. FY2019/20):

The following is the REIT’s capital management as at 31 March 2020 (FY2019/20), compared against its capital management as at 31 March 2019 (FY2018/19):

  • Aggregate Leverage: 39.3% (FY2018/19: 36.6%) – Mr Ng re-assured unitholders that there remains adequate debt headroom (of approximately S$400m and S$900m, before reaching the 42% and 45% aggregate leverage ratios respectively) for further acquisitions
  • Average Term to Maturity for Debt: 3.35 years (FY2018/19: 3.70 years)
  • Interest Cover Ratio: 3.5x (FY2018/19: 4.2x)
  • In terms of debt maturity, Mr Ng updated that only 8% (or S$300m) of debts will mature by March 2021. He also shared that approximately 77% of the REIT’s debts are on fixed interest rates, and approximately 65% of the expected distributed income for 1H FY2020/21 has been hedged into SGD to mitigate Forex risks

Portfolio Performance (as at 31 March 2020):

  • Portfolio Occupancy: 95.2%
  • Weighted Average Lease Expiry by Monthly Gross Rental Income: 2.7 years
  • Portfolio Valuation: S$8.3b (with Festival Walk contributing 61.0%, Gateway Plaza contributing 16.4%, Sandhill Plaza contributing 5.8%, and its Japan Properties contributing 16.8%)

Presentation on Properties in the REIT’s Portfolio by Ms Cindy Chow, Chief Executive Officer of Mapletree North Asia Commercial Trust

Tenant Base Well-Diversified:

  • Ms Chow shared that the top 3 trade sectors by Gross Rental Income are: Machinery/Equipment/Manufacturing (at 14.7%), Apparel & Fashion Accessories (at 14.5%), and Financial Institution/Insurance/Banking/Real Estate (at 12.3%), with most of them coming from the REIT’s offices in China and Japan
  • Additionally, in terms of the REIT’s top 3 tenants by monthly gross rental income, they come from the offices located in China and Japan – namely BMW’s office (contributing 7.4% towards the REIT’s monthly gross rental income) in Gateway Plaza, Seiko Instruments Inc’s office (contributing 5.2% towards the REIT’s monthly gross rental income) in SMB, and NTT UD’s office (contributing 5.2% towards the REIT’s monthly gross rental income) in MBP

Updates on Festival Walk:

  • Due to the Hong Kong government’s tighter social distancing measures to be implemented between 15 July and 21 July 2020 to contain the further spread of Covid-19 in the country, which will see the number of patrons allowed at a table in F&B outlets to four, banning of dining-in service from 6pm till 5am, and closure of cinema and ice rink, Ms Chow opined that the retail mall’s footfall and sales will be affected, even though all shops will remain open for business throughout this period
  • With regard to how the new security law and the loss of special trading status in Hong Kong, Ms Chow responded that the REIT will continue to monitor the developments. That said, she is of the opinion that Hong Kong’s status as one of Asia’s most prominent financial hubs may be hard to shaken, as damage to this role will have have consequential impact on many foreign businesses currently operating in the country
  • On the status of insurance claims (relating to the extensive damages sustained by the mall by anti-government protestors), Ms Chow updated that to date, the insurers have made without prejudice interim payments of HK$145m (approximately S$26m) in total, as partial payments on account of the estimated claims for property damage and revenue loss due to business interruption
  • Additionally, Mr Chow clarified that as the proceeds received for property damage are capital in nature, they will not be distributed to unitholders. However, she said that should there be any proceeds for the revenue loss from business interruption which exceeds the distribution top-ups of S$32.9m, they will be distributed to unitholders
  • Finally, Ms Chow expects uncertainties in Hong Kong to result in a lower average renewal or re-let rental rate, and Festival Walk’s performance in the financial year ahead is going to be weaker one compared to FY2019/20

Updates on Gateway Plaza:

  • Ms Chow shared that while the REIT have granted rental reliefs to certain SME tenants, the amount was insignificant
  • She updated that the office market in Beijing (where Gateway Plaza is located in) remains weak, due to persistent trade tensions, evolving impact from Covid-19, along with an oversupply of spaces in the vicinity where Gateway Plaza is located. As such, she cautioned that occupancy rates of the property is expected to come under pressure, and rents are expected to edge down further
  • Despite that, Ms Chow re-assured unitholders that all efforts will be made to stabilise rentals and occupancy levels in Gateway Plaza

Updates on Sandhill Plaza:

  • Ms Chow shared that tenants in Sandhill Plaza (in Shanghai) are less affected by the current situation, as most of them are from the growing industries such as technology, media and communications, and that all the tenants have since returned to work as at end of June 2020
  • She added that in the year ahead, the REIT is expecting a positive rental reversion for lease renewals

Updates on the REIT’s Japan Properties:

  • Ms Chow shared that even though most of the tenants have returned to work (with the lifting of the state of emergency in Tokyo in end-May 2020), market uncertainties have led to a slower leasing momentum in the office sector
  • That said, she added the REIT will be focusing their efforts on tenant retention to maintain a high level of occupancy and stability, and that on the average, she expects the the renewal or re-let rental rate in the year ahead to be slightly higher than the expiring rental rate

Closing Thoughts

Seems like there are plenty of headwinds ahead for the REIT – particularly where Festival Walk in Hong Kong (which contributed a lion’s share towards the REIT’s overall revenue), and Gateway Plaza in Beijing are concerned.

The REIT’s financial performances in the year ahead (i.e. FY2020/21) will also be a weaker one compared to the previous year (i.e. FY2019/20.) As such, distribution payouts to unitholders is also going to be weaker as well (we have not even factored in possible retentions of distribution payouts by the REIT to deal with the negative impacts of Covid-19 – like what most of the other S-REITs have done.)

Despite all of that, I am still adopting a “wait and see” attitude to see how the REIT’s management deals with the challenges. As such, I will continue to remain invested in the REIT.

Last but not least, in my post where I shared the key highlights from the REIT’s FY2019/20 annual report (you can check out the post here in case you’ve missed it), when I registered to attend its AGM, I have raised three questions, all of which the REIT have responded to, as follows:

Question #1: Are there any plans for the REIT to make any M&A activities this year to further reduce the concentration of revenue contribution on Festival Walk (which at the end of FY2019/20 was 55%), taking into considering the economic headwinds ahead (no thanks to Covid-19 pandemic.)

Answer: We are committed to deliver sustainable growth to our Unitholders.

We continually scan the market and review our existing portfolio to see if the value of our REIT can be improved with asset enhancements, accretive acquisitions or meaningful recycling of existing properties. We have reduced the portfolio concentration of Festival Walk in the last two years with acquisitions of office properties in Japan and will continue to look for more accretive acquisitions in Japan and China. The Sponsor also has a retail
property in Osaka which we have a right of first refusal to. Our focus will remain on retail and commercial office properties but in the medium term, we expect Festival Walk to remain the largest asset in the REIT.

Question #2: Is there any chance that the REIT (MNACT) be merged into Mapletree Commercial Trust? I personally feel is a win in both ways – for MNACT, it solves the problem of gross revenue concentration on Festival Walk; for Mapletree Commercial Trust, it allows for geographical diversification. Also, an enlarged REIT will also result in more liquidity.

Answer: We are open to any opportunity that makes sense for the REIT but the decision does not lie solely with us.

Question #3: Is there any timeline as to when the outcome of the insurance claim (for the damages in Festival Walk) be let known, and the case be finally closed?

Answer: An assessment of the full quantum of revenue loss and property damage recoverable from the insurance claims is still ongoing. We will continue to pursue the claims and will inform the Unitholders on the progress through announcements on MNACT’s website and SGX-ST accordingly.

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

 

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