Mapletree Pan Asia Commercial Trust at 1-year low. Is it a buy at 6.5% yield?

What happened?

Mapletree Pan Asia Commercial Trust, or MPACT, has seen its share price head steadily down to multi-year low of S$1.39 recently. This would represent a fall of close to 20% year-to-date. 

While the decline has not been as steep as other stocks such as Venture Corp and OUE Commercial REIT, we have still received questions about what is driving weakness in the share price of MPACT.

To be fair, MPACT has not been trading in the stock market for long as this REIT is the result of a merger between Mapletree Commercial Trust (MCT) and Mapletree North Asia Commercial Trust (MNACT).

The aim of the merger back then was to create a S$10 billion REIT with 18 properties based on MCT’s closing price of S$1.92 as of 10 August 2022.

MPACT has only been listed for more than a year after the merger and its market capitalisation has since declined to around S$7.6 billion.

Investors may be curious to know if the share price weakness represents a solid bargain that they can scoop up.

If the pessimism is justified, it could also turn out to be a value trap.

Let’s review the positives and negatives for MPACT to come to a conclusion.

What are the challenges faced by Mapletree Pan Asia Commercial Trust (MPACT)?

The challenges faced by MPACT were present even before the merger as some of these relate to the COVID-19 pandemic.

#1 – An increase in finance costs

With the surge in interest rates, it is not surprising to see MPACT reeling from these effects as the REIT had to cough up more cash to pay its lenders.

As of 31 March 2022 (pre-merger), the REIT’s aggregate leverage stood at just 33.5% with an average cost of debt of 2.4%.

Post-merger, the gearing ratio jumped to 40.9% while the average cost of debt rose to 2.68% as of 31 March 2023.

In absolute terms, finance expenses soared from S$72.6 million to S$163.8 million.[4] 

Despite this sharp jump, MPACT still managed to report a 6.1% year-on-year increase in its distribution per unit (DPU) for FY2023 to S$0.0961 (excluding the release of retained cash from 4Q FY2020).

The increase in the REIT’s total debt load was, in part, due to the merger between MCOT and MNACT.

But when the first quarter of fiscal 2024 (1Q FY2024) rolled by, investors were disappointed to learn that finance costs had nearly tripled year on year to S$54.7 million.

Although the aggregate leverage dipped slightly to 40.7% as of 30 June 2023, MPACT’s cost of debt rose sharply higher to 3.17%.

With around 74.2% of its debt on fixed rates, there is the spectre of a further increase in finance costs.

#2 – Adverse exchange rates

Aside from higher interest rates, the REIT was also been impacted by adverse exchange rates as the RMB, JPY and KRW depreciated against the Singapore Dollar (SGD).

Together, these three countries contributed around 32% of net property income for 1Q FY2024.

#3 – Negative rental reversion for Hong Kong and China properties

The trend of negative rental reversions continues for MPACT’s China and Hong Kong properties.

For FY2023, Festival Walk in Hong Kong reported a negative 12.7% rental reversion while China properties logged a negative 3.7% rental reversion.

The situation has not improved for 1Q FY2024 as both these property segments still displayed negative rental reversions.

Festival Walk and MPACT’s China properties saw negative rental reversion of 9.4% and 3.6%, respectively.

What investors may like about Mapletree Pan Asia Commercial Trust (MPACT)?

It would be unfair to focus solely on the negatives for MPACT while glossing over the positive points.

Here are a few strengths that the REIT that investors should consider.

#1 – A strong sponsor

MPACT is anchored by a strong sponsor in Mapletree Investments Pte Ltd.

A wholly-owned subsidiary of investment firm Temasek Holdings, Mapletree owns and manages S$77.4 billion of real estate assets spanning office, retail, logistics, industrial, data centre, and residential, as of 31 March 2023.

MPACT’s sponsor should have a healthy pipeline of assets that can be injected into the REIT in the future.

#2 – Strong operating metrics

Despite the foreign exchange and interest rate headwinds, MPACT still boasts robust operating metrics.

Portfolio committed occupancy stood at 95.7% as of 30 June 2023 with an overall positive portfolio rental reversion of 2.4%.

The tenant retention rate also stood high at 79.1%, demonstrating MPACT’s allure to tenants.

The REIT’s two key retail assets, VivoCity and Festival Walk, both saw year-on-year increases in tenant sales and shopper traffic for 1Q FY2024.

#3 – Asset enhancement initiatives

MPACT conducted an asset enhancement initiative (AEI) for VivoCity that was completed and opened in May 2023.

It involved almost 80,000 square feet of space reconfiguration to enrich shoppers’ experience and improve connectivity.

This entire AEI will deliver a return on investment of over 20% based on a capital expenditure of S$10 million.

The REIT manager has pulled off an impressive feat by completing an AEI to boost VivoCity’s appeal and also organically increase the asset’s rental income.

These asset enhancement initiatives are part of MPACT’s “4R” strategy to “Recharge, Resilience, Reconstitute and Refocus”.

In a nutshell, the REIT manager seeks to rebalance its Japan portfolio through capital recycling while looking for growth in both South Korea and China.

Thus far, the recovery has been anaemic for both China and Hong Kong, thus dragging on the REIT’s performance. However, Hong Kong could see a recovery as the pandemic’s restrictions came off early this year.

What would Beansprout do?

MPACT has several strengths that may  carry it through these tough times – the presence of a strong sponsor along with quality assets that should command good rentals and enjoy better reversions in time to come.

What MPACT is experiencing now seems to be temporary headwinds but investors should monitor for signs of improvement once these challenges abate.

For now, analysts remain positive on the prospects of MPACT, with a consensus target price of S$1.80 as of 27 September 2023. 

This represents a potential upside of nearly 27% compared to its price of S$1.42 as of 27 September 2023. 

According to consensus estimates as of 27 September 2023, MPACT is expected to offer a forward dividend yield of 6.5%, above the forward dividend yield of 5.8% offered by CapitaLand Integrated Commercial Trust (CICT), and the forward dividend yield of 5.7% offered by Frasers Centrepoint Trust.

Check out our REIT comparison tool to compare REITs and find the best REIT for your portfolio.

Related links:

• Mapletree Pan Asia Commercial Trust share price and analysis
• Mapletree Pan Asia Commercial Trust dividend history and calculator

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