What You Should Know About Mapletree North Asia Commercial Trust (SGX: RW0U) Now

Mapletree North Asia Commercial Trust‘s (SGX: RW0U) unit price (technically known as unit price for REITs) is at S$1.17 right now. 

At the time of writing on Tuesday, the REIT’s unit price has fallen around 6% from last Friday’s close, most probably due to the Wuhan virus scare. 

At that unit price, Mapletree North Asia Commercial Trust has a distribution yield of 6.4%.

The distribution yield looks high, and that might attract some investors. However, we shouldn’t buy REITs, or stocks for that matter, based on their yields alone. 

Here, let’s explore using our 10-step guide to pick the best Singapore REITs on whether Mapletree North Asia Commercial Trust could be an excellent investment for the long-term. 

As a summary, here are the 10 steps to pick the best Singapore REITs:

1. Growth in Gross Revenue and Net Property Income
2. Growth in Distribution Per Unit
3. Property Yield of Between 5% and 9%
4. Gearing Ratio of Below 40%
5. Interest Coverage Ratio of Above 5x
6. Healthy Portfolio Occupancy Rate
7. Positive Rental Reversions
8. Presence of Growth Prospects
9. Acceptable Price-to-Book Ratio
10. Distribution Yield of Above 5%

Business Background

Before we start analysing Mapletree North Asia Commercial Trust, let’s take a quick look at what its business is about. 

Mapletree North Asia Commercial Trust is Singapore’s first commercial REIT with properties in China, Hong Kong and Japan. Its portfolio is valued at S$7.6 billion (as of 31 December 2019) and consists of nine properties. 

Mapletree North Asia Commercial Trust’s key markets include Tier-1 cities (Beijing, Shanghai, Guangzhou and Shenzhen) and Tier-2 cities in China, and Hong Kong and Japan.

The following shows the breakdown of the nine buildings in Mapletree North Asia Commercial Trust’s portfolio:

The largest property in its portfolio is Hong Kong’s Festival Walk. The building, which mostly comprises of retail shops, takes up around 65% of Mapletree North Asia Commercial Trust’s total portfolio value. 

Mapletree North Asia Commercial Trust’s sponsor, Mapletree Investments, had a 34% stake in the REIT, as of 31 December 2019. 

1. Gross Revenue and Net Property Income (NPI) Check

Check for: Increasing gross revenue and NPI

Mapletree North Asia Commercial Trust has a financial year that ends on 31 March each year. 

The table below shows the REIT’s gross revenue and NPI growth from FY14/15 to FY18/19:

As seen, both gross revenue and NPI have climbed consistently on a year-on-year basis. On an annualised basis, both metrics have grown by 9% to 10% each. 

Verdict: Pass

2. Distribution Per Unit (DPU) Check

Check for: Increasing DPU

Along with the increase in gross revenue and NPI, DPU has also consistently grown over the years.

The following shows the breakdown of Mapletree North Asia Commercial Trust’s DPU since FY15/16:

In the third quarter of FY19/20, DPU fell 13.3% year-on-year. The huge fall was mainly due to “lower revenue from Festival Walk as a result of rent relief granted and the closure of the mall since 13 November 2019”, following the protests in Hong Kong.

Rentals from Festival Walk’s tenants were not collected when the building was closed. Festival Walk’s mall component has since re-opened, and rental collection resumed on 16 January 2020. As for the office tower, rental collection resumed after its re-opening on 26 November 2019.

Since Festival Walk is 100% occupied (more on that later), gross revenue should normalise in the future quarters. The property is also covered by insurance, so there’s the possibility of revenue loss being recovered through insurance claims.

Verdict: Pass

3. Property Yield Check 

Check for: Property yield of between 5% and 9%

For FY18/19, Mapletree North Asia Commercial Trust had an NPI of S$329.0 million and a portfolio value of S$7.61 billion. The figures translate to a property yield of 4.3%.

Mapletree North Asia Commercial Trust’s property yield is below my range of 5% to 9%. 

Verdict: Fail 

4. Gearing Ratio Check

Check for: Gearing ratio below 40%

As of 31 December 2019, Mapletree North Asia Commercial Trust’s gearing ratio stood at 37.1%, which is below my 40% limit. 

Verdict: Pass

5. Interest Coverage Ratio Check

Check for: Interest coverage ratio above 5 times

At end-December 2019, Mapletree North Asia Commercial Trust’s interest coverage was 2.5x, which is also below 5 times. 

Verdict: Fail

6. Portfolio Occupancy Rate Check

Check for: Healthy portfolio occupancy rate

As of 31 December 2019, Mapletree North Asia Commercial Trust had a portfolio occupancy rate of 96.3%. 

Even though the latest occupancy rate looks high, it has fallen from the end of March 2019 on the back of lower occupancy rates at Gateway Plaza, Sandhill Plaza, and the Japan properties. The declines could be one-off events, so it pays to monitor this aspect of the REIT going forward.

Verdict: Pass

7. Rental Reversion Check

Check for: Positive rental reversions

All properties in Mapletree North Asia Commercial Trust’s portfolio saw positive rental reversions for FY18/19, reflecting “resilient demand for space from existing and new tenants”.

The following shows the average rental reversion for the latest period: 

Verdict: Pass

8. Growth Prospects Check

The short-term prospects for Mapletree North Asia Commercial Trust look grim due to the Hong Kong protests. In its latest outlook statement, the REIT said that “[n]ear-term retail consumption sentiments are expected to remain weak amid persistent protests in the city since June 2019”.

Over the longer term, though, things could pick up for the REIT as I believe Hong Kong will still be a relevant financial market of the world.

Also, the REIT is looking to diversify its portfolio. Recently, the REIT’s unitholders approved its plans to acquire two freehold, multi-tenanted office properties in Greater Tokyo, Japan. Mapletree North Asia Commercial Trust will own 98.47% of the properties, and the total acquisition cost is S$482.5 million (around JPY37.9 billion).

Verdict: Pass

9. Price-to-Book Ratio Check

Check for: Acceptable price-to-book ratio 

At Mapletree North Asia Commercial Trust’s unit price of S$1.17, it is valued at a price-to-book (PB) ratio of 0.8x.

Over the past five years, its average PB ratio was 0.9x. 

With a PB ratio that’s below the mean, Mapletree North Asia Commercial Trust looks interesting. This is especially so when many REITs seem overvalued. 

Verdict: Pass

10. Distribution Yield Check

Check for: Distribution yield to be above 5% 

At Mapletree North Asia Commercial Trust’s unit price of S$1.17, it has a distribution yield of 6.4%, which attracts me. 

Verdict: Pass

The Final Verdict

Mapletree North Asia Commercial Trust has a final score of 8/10.

The REIT has plenty of great things going on for it. Some of its investment merits:

• Great sponsor in Mapletree;
• Strong historical gross revenue, NPI, and DPU growth;
• Healthy portfolio occupancy, although there was a decline of late;
• Positive rental reversion; and
• Palatable valuations. 

However, I’m not totally comfortable with Mapletree North Asia Commercial Trust’s low interest coverage ratio and short-term headwinds in the Hong Kong market.

I’m also aware of the fact that even after the latest property acquisitions in Japan, Festival Walk will still take up a considerable portion of Mapletree North Asia Commercial Trust’s portfolio. 

Therefore, I’d invest in Mapletree North Asia Commercial Trust but with a portfolio weighting of just 3%.

I might add on to the REIT as I get more clarity on the REIT’s outlook and growth prospects. 

Would You Invest In Mapletree North Asia Commercial Trust?

Come discuss your thoughts and more in our Seedly Community under a page specifically dedicated to Mapletree North Asia Commercial Trust (SGX: RW0U). 

Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. ​Readers should always do their own due diligence and consider their financial goals before investing in any stock.