One year ago, I covered Manulife US REIT’s declining property valuation. However, MUST’s portfolio valuation has continued to decline. The recent earnings results have documented a -10.9% portfolio valuation decline y-o-y as of 31st December 2022, increasing its gearing ratio to ~49%. This is close to the gearing ratio limit of 50% for REITs. I have therefore asked the following questions, on how MUST can reduce its gearing ratio as well as stem the constant portfolio valuation declines.
MUST’s NAV trend since Q3 2016.
MUST’s Gearing Ratio trend since Q3 2016.
What is the probable gearing ratio at the end of the year if: (1) a more reasonable cap rate used; and (2) if MUST is able to find new tenants to replace old ones who have decided to exit?
The current valuation may be too conservative and planned for the worst-case scenario. Will MUST revalue its properties again in mid-year if there are significant changes in the assumption?
“We will be working to reduce our gearing through various options such as asset dispositions, distribution reinvestment plan, capital injection, discussions with capital partners and so on. We aim to bring our gearing below 45%. The strategic review is also ongoing, with healthy interest from a broad range of counterparties, including local and international developers, REITs and private equity. We expect to provide further updates on the strategic review in 2Q 2023. Meanwhile, the weighted average cap rate of MUST’s portfolio has increased slightly from 6.0% as at Dec 2021 to 6.3% as at Dec 2022. With more clarity on rate hikes and banks easing their lending, we should see some impact on cap rates. It is still early days. As for TCW, the tenant vacating from Figueroa by the end of the year, we have a couple of prospects who have toured the space a few times and we continue to engage them. For valuations, we will continue with yearly valuations in line with MAS regulations and our SREIT peers.” – a MUST spokesperson
MUST’s ESG ratings and transparency is commendable
Despite the poor performance in terms of portfolio valuation and gearing ratio, MUST’s strengths are in the areas of ESG. In the GRESB Real Estate Assessment, it has attained 5 stars, as well as the highest “Negligible” risk rating by Sustainalytics.
Kenny Loh is an Associate Wealth Advisory Director and REITs Specialist of Singapore’s top Independent Financial Advisor. He helps clients construct diversified portfolios consisting of different asset classes from REITs, Equities, Bonds, ETFs, Unit Trusts, Private Equity, Alternative Investments, Digital Assets and Fixed Maturity Funds to achieve an optimal risk adjusted return. Kenny is also a CERTIFIED FINANCIAL PLANNER, SGX Academy REIT Trainer, Certified IBF Trainer of Associate REIT Investment Advisor (ARIA) and also invited speaker of REITs Symposium and Invest Fair.
Based on the latest update, Gateway Plaza has -24% average rental reversion whereas The Pinnacle Gangnam has +44% average rental reversion. What are the reasons for such performance, are there structural changes on the underlying environment? Would this trend continue into the next few quarters, and how does it affect the DPU?
Gateway Plaza
In Beijing1, new supply in the central business district (“CBD”) with more affordable rental rates as well as relocations of tenants to decentralised office areas (such as Wangjing) to achieve cost savings, have resulted in rental declines in office districts such as Lufthansa. Gateway Plaza is an office building located in Lufthansa, a well-established commercial hub in Beijing.
The MNACT Manager had, and continues to prioritise high occupancy level at Gateway Plaza, to minimise downtime and ensure cash flow stability. As a result, occupancy rate improved from 92.9% as at 31 March 2021 to 94.3% as at 31 March 2022. However, rental rates were lower and an average rental reversion of negative 24% was recorded for FY21/22.
Looking ahead1, rents for Beijing office districts, such as Lufthansa, which are nearer to the CBD, are expected to remain stable in the near-term. Based on market views, rents are likely to rise in late 2022 or early 2023.
In line with Beijing’s opening up of the services industry, tenants from these business services segments, in addition to the technology, media and telecommunications, as well as financial services and media sectors, are expected to form the bulk of leasing demand at Lufthansa and benefit Gateway Plaza1. In the second half of FY21/22, Gateway Plaza has also attracted new tenants from the environmental consulting and waste recycling sectors.
Occupancy rate at Gateway Plaza is expected to remain high, with active marketing and leasing of office space.
The Pinnacle Gangnam
South Korea’s Grade A office market1 has shown strong growth in 2021 despite the uncertainty caused by COVID-19, and benefits from attractive market dynamics including built-in rental escalations. Vacancy rates decreased in all major districts, including the strong performing submarket of Gangnam Business District (“GBD”), supported by high-growth tech companies that are still performing well despite COVID-191.
The Pinnacle Gangnam is an office building located in GBD, Seoul. Consequently, The Pinnacle Gangnam has achieved a positive rental reversion of 44% in FY21/22, coupled with a high occupancy rate of 97.3% as at 31 March 2022.
For the Seoul office market2, with limited supply, on-going demand for office spaces due to the expansion of technology and pharmaceutical companies is expected to persist for the next few years. The Pinnacle Gangnam is in a good position to benefit from the strong leasing demand from these high-growth sectors, and to deliver organic growth through the high proportion of leases with built-in rental escalation during the lease term.
Notes:
Source: Colliers International (Hong Kong) Limited, 30 March 2022 (link)
Source: Colliers, Seoul Quarterly, 21 January 2022 (link)
Update on China, Japan and Korea Properties (FY21/22 Results: Presentation)
Is there any Plan B (if the Merger does not go through) for MNACT?
Should the Merger not go through, MNACT will return to business as usual, remaining focused on safeguarding the long-term value for unitholders through proactive asset management, effective cost control and prudent capital management. At the same time, we will continue to source for yield accretive acquisitions to achieve greater diversification and growth of MNACT. MNACT has demonstrated its capabilities in driving inorganic growth through acquisitions of high quality properties spanning across multiple North Asian markets; including expanding beyond its IPO geographies and successfully acquiring nine office properties in Greater Tokyo (2018, 2020 and 2021) and one office property in Seoul (2020).
MNACT will return to business as usual, remaining focused on safeguarding the long-term value for unitholders through proactive asset management, effective cost control and prudent capital management.
The Merger, on the other hand, will harness and combine the respective strengths of both REITs to create a more resilient and diversified platform. Over the years, we have been focused on growing and enhancing the resilience of MNACT’s portfolio through accretive acquisitions that provide both geographical and income diversification. The Merged Entity, MPACT, will have an even higher financial capability and flexibility to pursue value-creating acquisitions and fast-track its growth trajectory. We remain confident in the merits of the Merger and the exciting future ahead.
Enlarged Portfolio of post-merger Mapletree Pan Asia Commercial Trust
What are your priorities for the next 1-2 year post Merger? How do you split the work with Ms Sharon Lim?
As announced on 21 March 2022, it is intended that Ms. Lim Hwee Li Sharon who currently holds the positions of Chief Executive Officer and Executive Director in the MCT Manager, will retain these positions in the manager of the Merged Entity following the completion of the Merger. On or about the completion of the Merger, it is intended that the MNACT Manager will retire as the manager of MNACT and the MCT Manager will be appointed as the manager of the Merged Entity.
Following the Merger, the MCT Manager intends to implement its proactive and tailored “4R” asset and capital management strategy to realise the benefits from the Merger. For more details on the “4R” asset and capital management strategy, you may refer to Paragraph 4.2 in Appendix B – Offeror’s Letter to MNACT Unitholders of the Scheme Document (link).
Kenny Loh is an Associate Wealth Advisory Director and REITs Specialist of Singapore’s top Independent Financial Advisor. He helps clients construct diversified portfolios consisting of different asset classes from REITs, Equities, Bonds, ETFs, Unit Trusts, Private Equity, Alternative Investments, Digital Assets and Fixed Maturity Funds to achieve an optimal risk adjusted return. Kenny is also a CERTIFIED FINANCIAL PLANNER, SGX Academy REIT Trainer, Certified IBF Trainer of Associate REIT Investment Advisor (ARIA) and also invited speaker of REITs Symposium and Invest Fair. You can join my Telegram channel #REITirement – SREIT Singapore REIT Market Update and Retirement related news. https://t.me/REITirement
As we know, MCT and MNACT has proposed a merger. Many of you have had questions regarding this merger, and as such, I had the opportunity to speak to Mapletree Commercial Trust’s CEO, Ms Sharon Lim, questions you may have regarding the merger. This is Part 1 of a 2-part series (Read here), in Part 2 I interview MNACT CEO, Ms Cindy Chow, regarding post-results and the merger with MCT.
Is there any Plan B for MCT if the merger with MNACT does not go through?
It will be business as usual for MCT and we will continue to adhere to our existing investment mandate by focusing on quality commercial assets in Singapore that are value accretive for MCT Unitholders.
We actively explore acquisition opportunities, including third party assets, on an on-going basis. However, opportunities for growth are limited if we remain confined to Singapore. Unitholders have provided as a point of feedback over the years that growth is a priority. We have explored and tried to pursue opportunities in Singapore but good ones that are value accretive are limited. Having reviewed MCT’s growth trajectory, we believe that overseas expansion is inevitable with Asia being a natural place to expand into given our common background and familiarity in the region. MNACT presents itself as a ready platform with footholds in key gateway cities of Asia which will be a springboard for future growth.
Opportunities for growth are limited if we remain confined to Singapore. We have explored and tried to pursue opportunities in Singapore but good ones that are value accretive are limited.
This Merger provides a clear pathway for growth and provides MCT Unitholders with DPU and NAV accretion on a historical pro-forma basis and access to attractive footholds into North Asia, supported by established local operating teams with extensive experience and track record. Growth and expansion in Pan Asia is therefore much easier as opposed to buying individual assets and trying to build an operational team from scratch.
The MCT Manager and the MNACT Manager believe that the Merger will be transformative, and upon completion, will create a flagship commercial REIT in Asia with stability and scale across key Asian gateway markets. The Merged Entity combines the best qualities of both MCT and MNACT – (i) strength, driven by MCT, one of the largest Singapore-focused commercial REITs with longstanding track record in delivering stable returns to unitholders, and (ii) growth potential, driven by MNACT, the first and only North Asia focused REIT listed in Singapore with properties in key gateway markets including China, Hong Kong SAR, Japan and South Korea.
The Merged Entity will comprise a diversified and high-quality portfolio, with a broadened investment mandate to invest in income-producing real estate used primarily for office and/or retail purposes, with an expanded geographic scope to key gateway markets of Asia.
What are your priorities for the next 1-2 years post-Merger? How will you split the work with Ms Cindy Chow? (CEO of MNACT)
We have envisaged our “4R” Asset and Capital Management Strategy to be implemented post-Merger. These have been developed with the goal of providing unitholders of the Merged Entity with a relatively attractive rate of return on their investment through regular and steady distributions, and to achieve long-term stability in DPU and NAV per unit, while maintaining an appropriate capital structure for the Merged Entity.
The following summarises the key tenets of our “4R” Asset and Capital Management Strategy:
Recharge – Driving NPI and DPU growth by incorporating best practices across the Merged Entity’s portfolio to maximise operational performance.
Reconstitute – Optimising the Merged Entity’s portfolio by pursuing selective strategic divestments at an opportune time and redeploying capital into value accretive opportunities.
Refocus – Pursue accretive strategic acquisitions and participate in strategic developments whilst leveraging on the local market expertise of the Merged Entity’s on the ground teams and the Sponsor’s strong Asia network and extensive pipeline.
Resilience – Adopt a comprehensive capital management strategy to maintain a strong balance sheet, maximise liquidity and minimize risk.
(Unitholders should refer to Section 4.2 of the Unitholders’ Circular for an in-depth view on the Merged Entity’s post-Merger strategy.)
It is intended that Ms. Sharon Lim will retain her position as Chief Executive Officer and Executive Director in the manager of the Merged Entity following the completion of the Merger and continue to lead the MCT Manager. For further details on MPACT’s leadership team, please refer to future SGXNet announcements by the MCT Manager.
Assuming the merger with MNACT is successful, please share some insights on:
Where are the synergies to improve the top line and bottom line?
At first glance, I don’t see any synergy in terms of the portfolio as the the properties are at different locations whereby the tenants base are different, lease management, property management and regulatory environment are different. Please share some insights how MPACT is going to manage this?
Following the Merger, our immediate priorities will be the combination of management teams, leveraging on the strong local expertise and on-the-ground presence of MNACT. The MNACT team’s on-the-ground experience in relation to its strong capabilities in asset and property management and their established network will be invaluable and necessary for the execution of our post-merger strategy.
Operational synergies can be realised through the implementation of best practices across the enlarged platform and the integration and cross-pollination of the MCT and MNACT teams across core functions and geographies. With access to both tenants of MCT and MNACT, the Merged Entity will have the ability to provide choice locations for tenants across Singapore and other parts of North Asia.
Operational synergies can be realised through the implementation of best practices across the enlarged platform and the integration and cross-pollination of the MCT and MNACT teams across core functions and geographies.
Post-Merger, the enlarged platform will be better positioned to unlock upside potential. For instance, the enhanced financial flexibility will enable the Merged Entity to pursue more growth opportunities such as larger acquisitions, capital recycling opportunities, The Merged Entity will also have a bigger debt headroom to undertake asset enhancement and development initiatives.
MPACT will also be able to leverage on the domain expertise of the Sponsor to pursue active asset management and enhancement and capture accretive investment opportunities more proactively
3. Please share how much time MPACT needs to streamline the business operations post-Merger?
We value our people and the diverse experiences that come with them. As mentioned earlier, we will focus on realising the benefits of the enlarged platform through the integration and cross-pollination of legacy MCT and MNACT teams across core functions and geographies.
Rather than streamlining, we will seek to harness valuable intellectual capital and best practices that can be implemented across the enlarged platform to capture efficiencies, enhance portfolio optimisation and capitalise on market recovery trends to drive NPI and DPU growth.
We expect that any integration to be seamless as both managers are part of the Mapletree Group with a shared culture and operational procedures.
4. Which segments/ cities does MPACT have in mind for portfolio expansion? What is the estimated timeline?
The Merged Entity’s enlarged portfolio consists of 18 commercial properties spanning five Asia gateway markets, including Singapore, China, Hong Kong SAR, Japan and South Korea. Singapore will continue to provide core and stability to the portfolio through this phase of growth.
Enlarged Portfolio of post-merger Mapletree Pan Asia Commercial Trust
We aim to expand the Merged Entity’s AUM by pursuing a primarily acquisitive growth strategy within its existing markets, and leveraging its enlarged balance sheet to focus on opportunities within key gateway cities that can drive growth in NPI and DPU.
Particular areas of interest for us are office and office-like business park assets, anchored by tenants in high growth sectors including tech-enabled and biomedical tenants.
Kenny Loh is an Associate Wealth Advisory Director and REITs Specialist of Singapore’s top Independent Financial Advisor. He helps clients construct diversified portfolios consisting of different asset classes from REITs, Equities, Bonds, ETFs, Unit Trusts, Private Equity, Alternative Investments, Digital Assets and Fixed Maturity Funds to achieve an optimal risk adjusted return. Kenny is also a CERTIFIED FINANCIAL PLANNER, SGX Academy REIT Trainer, Certified IBF Trainer of Associate REIT Investment Advisor (ARIA) and also invited speaker of REITs Symposium and Invest Fair. You can join my Telegram channel #REITirement – SREIT Singapore REIT Market Update and Retirement related news. https://t.me/REITirement
