Is Mapletree Commercial Trust set for regional greatness?

TL;DR

• Mapletree Commercial Trust (MCT)’s proposed merger with Mapletree North Asia Commercial Trust (MNACT) might be seen more positively with a revised offer allowing MNACT holders the option to receive the offer in cash.
• This raises the likelihood of the transaction being completed, leading to the potential formation of one of the largest REITs by market capitalization in the region
• MNACT’s key asset is Festival Walk retail mall in Hong Kong, which might see better rental prospects with an improvement in Covid situation domestically.  
• In Singapore, MCT’s flagship asset Vivocity has performed well with a strong recovery in tenant sales. MCT’s gearing is low and it offers a similar dividend yield to other retail REITs.

What happened?

Singaporeans love their shopping malls. And we also want to have a slice of these prime assets by buying the real estate investment trusts (REITs) that own and manage the malls.

This might be why investors were upset when Mapletree Commercial Trust (MCT) announced a proposed merger with Mapletree North Asia Commercial Trust (MNACT) in December. After the news came out, the price of MCT declined by about 10% to a low of $1.78 in February.

After all, some investors might have invested in MCT for its exposure to the stable and resilient Singapore market. The merger with MNACT would require it to expand its mandate to include key Asia gateway markets, including Hong Kong.

This has led the Securities Investors Association Singapore (SIAS) to question the managers of MCT on the rationale of the transaction, as there are “no apparent operational synergies”.

The transaction would mean that each MNACT holder receive either 0.5963 new MCT units or a combination of 0.5009 MCT units and S$0.1912 in cash. This has led activist fund manager Quarz Capital Management to question whether the offer would undervalue MNACT. The implied offer price for MNACT would be around S$1.10, as MCT units were trading at an average price of S$1.83 year to date.

As a result, Quarz sent a letter to the Monetary Authority of Singapore (MAS), asking the regulator to ensure that the managers of MNACT have fulfilled their duties to investors of the REIT.

With the criticism received by numerous parties, MCT came back with a revised offer providing MNACT holders the option to receive the entire offer price of S$1.1949 per unit in cash.

What does this mean?

a) MNACT shareholders might be happy for now

Investors of MNACT effectively have the flexibility in choosing to stay invested with the combined entity, or to cash out on their investment. Following the revised offer, Quarz has said that “the cash offer is fair and a win-win for all parties.”

This might mean that there is higher likelihood that the transaction would be approved by shareholders of MNACT during the upcoming extraordinary general meeting (EGM).

b) Worst might be over for Festival Walk

For investors of MCT, the question remains why the need to acquire assets held by MNACT. For those unfamiliar with MNACT, its key asset would be Festival Walk retail mall and office tower in Hong Kong, which makes up close to half of its revenue in the nine months through December 2021. It also has office assets in China, Japan and South Korea.

Source: Mapletree North Asia Commercial Trust

There are naturally concerns about the performance of Festival Walk given the headlines about how bad the Covid situation is in Hong Kong. Coupled with the protests that impacted the economy earlier, it is no wonder that the average rental reversion accelerated to negative 32% in the nine months through December 2021.

Thankfully, there seems to be some light at the end of the tunnel for retail spending in Hong Kong. In a sign that the worst of the pandemic might be over, Hong Kong has announced that it will scrap a flight ban from nine countries from 1^st April. In addition, the government announced a roadmap for relaxing restrictions on social gatherings if the number of infections continues to drop.

While it may be too early to discuss any uplift from a return of Chinese tourists, it may be a good start if domestic consumption were to start normalizing.

c) MCT’s prospects are improving

We earlier shared that MCT’s flagship asset Vivocity has performed well with a strong recovery in tenant sales. After all, it has good mix of retail and F&B stores that draws a large population of domestic shoppers.

VIvocity’s tenant sales could see a further recovery with a relaxation of safe distancing measures as the Omicron wave continues to subside. In addition, we could even see tourists coming back to Singapore in greater numbers as global travel resumes. And we all know that Vivocity is a must-visit for tourists as the gateway to Sentosa!

Source: Mapletree Commercial Trust

What would Beansprout do?

MCT’s price has been under pressure following the announcement of the transaction with MNACT. However, some of the reasons why investors may now be more optimistic on MCT include:

• More certainty on MNACT transaction. There are some encouraging signs that the concerns on the MNACT deal might be eased with the cash offer made. This raises the likelihood of the transaction being completed, leading to the formation of one of the largest REITs by market capitalization in the region.
• Festival Walk may not be that bad an asset to acquire. With the worst of the Covid situation in Hong Kong appearing to be over, we might start to see improving rental prospects for MNACT’s key asset.
• MCT has low gearing and offers similar dividend yield to peers. Worried about rising interest rates? MCT’s gearing ratio is relatively low at 34% as of December 2021. It also offers a dividend yield of 5.4%, which is on par with other retail REITs such as Frasers Centrepoint Trust (FCT) and Suntec REIT.

Keen to invest in MCT but worried about the impact of rising interest rates? Check out our article on what the US Fed rate hike means for Singapore REITs here.