Mapletree Pan Asia Commercial Trust: Strategising for a new era of growth
- A potential divestment or asset swap of Pinnacle Gangnam with 14% stake in sponsor’s Harbourfront Centre Redevelopment – a clear win-win strategy
- MPACT to secure long-term growth with future development gains, continued pivot to Singapore, and visible acquisition pipeline are likely to be well received by investors
- Sponsor could gain its reputation as a supportive entity to fuel its managed REIT growth path
- Maintain BUY; TP of SGD1.75
Positive strategic moves not appreciated by market. The recent divestment of Mapletree Anson for SGD775mn, at +1.3% (or SGD10 mn) above book, would be able to address the capital structure issues, with proforma gearing post-divestment reducing to 37.6% - a more comfortable gearing level for investors, in our view. With gearing addressed through the divestment, we believe that MPACT’s share price should have found a bottom. This is evident as MPACT’s share price held relatively stable at these levels despite its recent removal from the MSCI Singapore Index, effective 31 May 2024.
However, the question remains on how MPACT would find its next leg of growth. With the current cost of capital levels (yield at close to 7%), it is sub-optimal for most S-REITs, and MPACT, to pursue accretive acquisitions, especially of office/commercial S-REITs, where office assets have a flat to negative carry cost.
While MPACT’s jewel asset VivoCity continues to surprise us with its growth while hitting new highs operationally, it contributes c.23% of the group’s net property income (NPI). Festival Walk, despite having stabilised, is experiencing a slower-than-expected recovery. 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.
Pinnacle Gangnam is the next best asset to recycle.
Combing through MPACT’s portfolio of assets, while a sale of its China-focused properties will be appreciated by the market, the weak demand environment will result in suboptimal pricing if a sale materialises. As such, we believe that Pinnacle Gangnam is the next asset (after Mapletree Anson) that could be considered for divestment.
Based on the chart below, which compares the latest valuation vs. the purchase price of each asset, we note that only the Singapore assets are above the purchase price. The overseas assets have been pared down, partially by valuation adjustments and the depreciation of foreign currency exchange. Aside from Festival Walk, Pinnacle Gangnam has the lowest negative carry, at c.10% below its acquisition price. Pinnacle Gangnam comprises only 1.6% of assets under management (AUM) and 1.3% of FY24 NPI. In addition, it may not be timely to scale up its presence in the Korea office market, given the strong office market and tight cap rates.
Further asset recycling will position MPACT for further growth.
With global interest rates remaining high and rising expectations that the interest rate normalisation trend through 2H24-2025 will likely be more modest than initially thought, MPACT and most commercial SREITs are caught between a rock and hard place in order to deliver growth, especially through acquisitions.
Exploring the view that S-REITs should continue to utilise their assets as a “currency for growth”, we believe that MPACT could look at further streamlining its portfolio and even consider an asset swap of its 50% stake in Pinnacle Gangnam for a small stake (estimated at c.14%) in its sponsor’s Harbourfront Centre redevelopment project, which provides 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.
The three key potential benefits for MPACT are i) 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; ii) taking a stance on its continued investments in Singapore, especially after the divestment of Mapletree Anson; and iii) the potential to raise the stakes in the future, giving it a visible sponsor pipeline.
On the other hand, through the swap, the sponsor will gain full ownership of and stand to benefit from i) an income-producing asset with almost full occupancy as at Mar 24 at 99.1%; ii) taking over a strong office asset that is currently located in a market with strong rental growth (strong office market in Seoul); and iii) acquiring it at an attractive return.
Minimal short-term financial impact in exchange for future potential upside.
Based on our ballpark estimates (please refer to the table below), Pinnacle Gangnam, with its latest valuation at c.SGD250mn, can be exchanged for an estimated c.14% stake in the Harbourfront development (we estimate gross development value [GDV] with an assumed c.25% premium to our projected development cost). This is approximately only 1.6% of the deposited property (SREITs have a development limit of 10%).
Assuming gearing does not change with the asset swap, we estimate impact to the loss in rental income during the redevelopment period is c.2% (FYE Mar 24 NPI is c.2% of DPU).
We estimate that the potential yield on cost of the Harbourfront Centre redevelopment could be c.6.4% and net asset value (NAV) uplift post completion of the redevelopment could be 1.7% for MPACT.
As such, we believe that the financial impact is minimal in the near term in exchange for future potential upside.
Maintain BUY; TP of SGD1.75.
We maintain our BUY rating with TP of SGD1.75. We believe that MPACT’s share price has found a bottom at current levels, especially after the impact of its removal from the MSCI Singapore Index has stabilised. It is now on the verge of a re-rating since investor concerns on gearing have been addressed with the divestment of Mapletree Anson and MPACT delivers growth once again. MPACT is currently trading at close to 7% FY25F yield and 0.7x P/NAV. Key catalysts in the near term include i) management expressing its intention to execute share buybacks when needed; ii) organic growth, especially from the recovery of Festival Walk; and iii) potential interest rate cuts.
On the long-term horizon, we believe the asset swap strategy mentioned above could lead to MPACT securing its long-term growth with development gains while partnering its sponsor. In addition, it is a testament to its commitment of investing in Singapore despite sub-optimal conditions should MPACT tap into the capital markets.
FY Mar | 4Q2023 | 3Q2024 | 4Q2024 | % chg y/y | % chg q/q |
Gross revenue | 233 | 242 | 239 | 2.6 | (1.0) |
Property expenses | (55.9) | (59.2) | (56.1) | 0.3 | (5.2) |
Net Property Income | 177 | 182 | 183 | 3.2 | 0.4 |
Other Operating expenses | (13.4) | (13.3) | (14.8) | 10.1 | 10.6 |
Other Non Opg (Exp)/Inc | (0.8) | 0.48 | 2.76 | - | 473.2 |
Associates & JV Inc | 2.09 | 1.54 | 1.82 | (13.0) | 18.0 |
Net Interest (Exp)/Inc | (50.9) | (57.4) | (56.4) | (10.8) | 1.7 |
Exceptional Gain/(Loss) | 0.0 | 0.0 | 0.0 | - | - |
Net Income | 114 | 114 | 117 | 1.9 | 2.5 |
Tax | 19.3 | (4.5) | (0.3) | - | (93.9) |
Minority Interest | 0.0 | (1.4) | (0.3) | - | (77.0) |
Net Income after Tax | 134 | 108 | 116 | (13.2) | 7.5 |
Total Return | 35.0 | 108 | 258 | 637.0 | 139.0 |
Non-tax deductible Items | 82.6 | 7.42 | (137) | - | - |
Net Inc available for Dist. | 118 | 115 | 121 | 2.5 | 4.6 |
Ratio (%) |
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Net Prop Inc Margin | 76.0 | 75.5 | 76.6 |
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Dist. Payout Ratio | 100.0 | 100.0 | 100.0 |
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