Mapletree Commercial Trust – A Key Beneficiary Of The Greater Southern Waterfront Rejuvenation

It’s been a long while since I wrote an article. In my last article, I shared my thoughts with regards to Mapletree North Asia Commercial Trust which you can check out here. In today’s article, I will be sharing my thoughts on another Mapletree sponsored REIT, Mapletree Commercial Trust (SGX: N2IU.SI). As a pure-play Singapore commercial REIT with a predominant exposure to the up and coming Greater Southern Waterfront, this is a REIT that I have high hopes for in the decades to come. I will start off by having a look at its 5-year historical share price movement before diving deeper and providing my analysis of its performance. I will end off by providing my thoughts about whether this REIT is worth investing in at its current price of $2.13.

Source: Google

Based on the above chart taken from Google, Mapletree Commercial Trust’s (MCT) share price had been stagnating at the $1.50 to $1.60 range for about 3 years (between 2016 to 2019) before its strong rally that started in 2019. That rally culminated in its share price hitting an all-time high of $2.48 on 16 January 2020. This was followed by a sharp fall towards the end of the first quarter of 2020 due to the COVID-19 induced stock market crash. Since then, the share price had recovered to trade at around the $2 range today.

Its strong rally in 2019 was due to an announcement by the Prime Minister during his National Day rally speech in August 2019, that lays down the road map for the transformation of the Greater Southern Waterfront into a precinct to live, work and play. In order to understand why this announcement had such a material impact on MCT’s share price, we will have to first take a look at its underlying portfolio of properties. 

Source: MCT Investor Presentation Slides 15 Feb 2021

From the above image, we could see that MCT owns a total of 5 assets, all of which are located in the Southern part of Singapore, mostly in the Alexandra and Harbourfront precinct. It essentially dominates the entire precinct through its ownership of VivoCity which is Singapore’s largest retail mall, Mapletree Business City which is one of Singapore’s largest Business Park development, MLHF and mTower which are 2 other office assets that are located within the precinct. It’s last asset, Mapletree Anson, is a Grade A CBD office building located in the Anson planning area. Do note that VivoCity offers direct access to Sentosa, Singapore’s most visited island resort via Sentosa Express Monorail located on Level 3 of the development. 

The above chart shows the breakdown of its portfolio asset value by its individual asset. At a glance, we can see that VivoCity itself constitutes about slightly more than a third of its portfolio while Mapletree Business City constitutes about 43% of its portfolio. Collectively, both these assets make up about 80% of the portfolio by asset value. This means that the performance of the REIT largely hinges on the performance of these 2 assets. In addition, about 90% of its portfolio asset lies within the Alexandra and Harbourfront precinct. 

With a better appreciation of the assets that make up MCT’s portfolio, I will now move on to discuss about some of the pluses and minuses pertaining to this REIT.

Dominance over the Alexandra and Harbourfront Precinct

In the above introduction, I had shared that 90% of MCT’s assets (apart from Mapletree Anson), lies within the Alexandra and Harbourfront precinct. Besides Keppel Bay Tower (owned by Keppel REIT), Alexandra Technopark and Alexandra Point (owned by Frasers Property Limited and its subsidiaries), Fragrance Empire Building (owned by Fragrance Group), HP Building (owned by United Engineers), there are very limited office and retail assets in the immediate Alexandra and Harbourfront precinct. On that basis, one could say that MCT dominates the entire Alexandra and Harbourfront precinct. In addition, its assets are also better located as compared to its competitors in its vicinity.

Source: Keppel REIT

In the Harbourfront precinct for example, we see that both VivoCity and Bank of America Harbourfront (MLHF) are located in closer proximity to Harbourfront MRT than Keppel Bay Tower. Note that there are 2 other developments: Harbourfront Centre Shopping Mall and Harbourfront Tower One & Two which are not owned by the REIT but are owned by its sponsor, Mapletree Investments Pte Ltd. You can kind of guess where this is leading to now but I will be touching more on the potential for inorganic growth via acquisitions from its sponsor in a separate section below. In Singapore and arguably any other gateway cities in the world, proximity to key transportation nodes is crucial to the success of a commercial real estate as it offers a ready flow of transient footfall. 

Source: MCT Investor Presentation 15 Feb 2021

Taking reference to the chart above, VivoCity, being directly integrated with the Harbourfront Interchange station, has allowed it to achieve a strong annual shopper traffic flow of ~55 million, growing by CAGR of 2.5% since 2010.

As for the Mapletree Business City, it is directly connected to the Labrador Park MRT via an overhead bridge that leads to both mTower and itself. This is as compared to its competitors such as Alexandra Technopark and HP Building that are at least one bus-stop away from Labrador MRT station. As such, MBC certainly has a significant advantage over its competitors in the vicinity, possibly allowing it to bargain for higher rents.

In summary, the REIT essentially has a strong foothold over the entire Alexandra and Harbourfront precinct. Now, you might ask why this is important. This is where I will elaborate on my earlier point on the transformation of the Greater Southern Waterfront which I had briefly brought up in the introduction. 

Source: Channel News Asia (CNA)

Based on the above image taken from Channel News Asia’s article covering the transformation of the Greater Southern Waterfront, the area covers a 2,000 hectare area that stretches from Gardens By The Bay East all the way to Pasir Panjang that includes Keppel Club. If you are a more visual person who prefers to watch a video to find out what all these are about, you can check out a minute long video clip by URA below.

 The first phase of the transformation involves the redevelopment of Pulau Brani into a mini Sentosa clone. As part of the Sentosa-Brani Master Plan, it will be integrated with Sentosa Island to further enhance the appeal and competitiveness of the Sentosa area to tourists and locals alike. 

Source: Sentosa Development Corporation

Brani will have a new waterfront park and will also likely incorporate a “Downtown South” resort for NTUC members. The entire Sentosa-Brani Master Plan will definitely bring more tourists and locals alike when completed and this will further enhance the footfall at VivoCity due to the direct connectivity that the mall offers to Sentosa Island. A higher footfall will likely lead to higher tenant sales which should drive rental higher moving forward.

The second phase of the transformation should come after 2021/22 when the lease at Keppel Club ends. According to URA, the entire area, when redeveloped fully, could yield up to 9,000 public and private housing units with waterfront views. This will be a huge positive for MCT. With more households in the area, it should translate to more footfall for VivoCity as well. Moreover, PM Lee had announced in his National Day Rally 2019 speech that more job opportunities will be created in the area to create a precinct that supports a live, work and play culture. This would certainly benefit Mapletree Business City and other office assets under the REIT as it increases the viability of these assets as potential office spaces for MNCs. Given the precinct’s proximity to the CBD, office assets in the Alexandra and Harbourfront precinct should be in relatively high demand.

Based on the above, it is not difficult to see that commercial assets (both retail and offices) located in the Alexandra/Harbourfront precinct are likely to benefit from the transformation of the entire Greater Southern Waterfront. This leads me into my next section where I would discuss why I believe MCT’s domination of the Alexandra/Harbourfront precinct could be further expanded as it holds the ROFR over a sizeable pipeline of properties located within the precinct from its sponsor.

Poised To Benefit From ROFR over sponsor’s pipeline of properties

In one of my first few articles on “Why Does Having A Strong And Reputable REIT Sponsor Matter?”, I had covered how having a strong sponsor could provide a REIT with an additional growth lever through giving it access to good quality assets with good growth potential. In case you have yet to read it, please do check it out here. In the earlier section, I had briefly mentioned that MCT’s sponsor holds other assets located within the Alexandra/Harbourfront precinct that have yet to be injected into the REIT. Some of these are assets which MCT holds the ROFR to. To give you a quick overview of the pipeline of ROFR properties, I had extracted the following slide from MCT’s latest investor presentation slides.

Source: MCT’s Investor Presentation Slides 15 Feb 2021

Based on the above slide, it is important to note that there aren’t any sizeable properties apart from Harbourfront Centre that has an NLA of 715,000 sqft and the Harbourfront Towers that have a combined NLA of approximately 523,000 sqft. While there isn’t publicly available information with regards to the valuation of these properties as they are privately held by the sponsor, I am estimating the entire valuation of the 6 properties to be in the range of S$3 to S$3.5 billion. As compared to the total portfolio value of S$8.7 billion today, this means that the MCT’s portfolio could potentially increase by up to 35 to 40% if all the ROFR are being exercised eventually. While it is difficult to say whether these will materialise, the fact is that the option is there for MCT to acquire these assets if the sponsor is looking to sell. In basic finance theory, it is understood that options are valuable because it gives the buyer the right but not the obligation to buy the underlying security. 

With the Alexandra/Harbourfront precinct projected to be developed in various stages over the next few decades, I do believe that these pipeline assets would see strong demand as explained earlier. Having the option to acquire these assets would thus offer MCT with a further lever to grow its DPU which should be a positive for its share price. Based on the solid track record of MCT’s acquisitions in Mapletree Anson and both MBC I and MBC II, which have delivered solid DPU and NAV growth for shareholders, I am cautiously optimistic that MCT is poised to benefit from further inorganic growth through the acquisition of the above identified ROFR properties. 

Given that the Greater Southern Waterfront would only be fully developed by 2040 and possibly beyond, I think the stage is set perfectly for MCT to acquire these assets progressively over the coming years so as to fully reap the benefits of the urban transformation of the entire precinct. Given that any acquisition is likely to be funded by either debt or equity or both, it is important to also have a look at the current gearing of the REIT. I have extracted a slide below to provide further insights with regards to the REIT’s financial position.

Source: MCT’s Investor Presentation Slides 15 Feb 2021

With a current gearing of 34.0%, MCT has a theoretical debt headroom of ~S$2.8 billion before it hits the MAS gearing limit of 50%. This means that MCT can technically (almost) acquire the entire portfolio of ROFR properties without having to raise any equity from its shareholders. Although this is unlikely to be the case since it would be too risky to push gearing to above the 45% range, MCT’s relatively low gearing certainly bodes well for any potential future acquisitions. In fact, at a gearing of 34.0%, MCT is one of the lowest geared commercial REIT when compared to other S-REITs.

Based on the above, I do believe that MCT is in a very favourable position to leverage on its sound financial position to grow inorganically and to continue delivering strong DPU and NAV growth for its shareholders. In addition, I would also like to point out that MCT also trades at a relatively low dividend yield of ~4.5% (assuming capital distribution that had been retained in 4QFY19/20 wasn’t retained) which is in fact one of the lowest among all SG-listed commercial REITs. Such a low cost of equity stems from its elevated share price which is likely a sign of investors’ confidence in the growth potential of the REIT. Layering on the fact that MCT’s cost of debt is ~2.5% (taking reference from the above screen grab on MCT’s financial position), MCT is in a very favourable position to conduct a DPU accretive acquisition.

As a simple illustration, assuming a 50/50 debt-equity funded acquisition, the weighted average cost of capital works out to be about 3.3%. In case you are wondering how I derived at this number, I simply applied the WACC formula as follows.

Source: Investopedia

I have assumed the corporate tax rate to be 17% as MCT’s investment mandate suggests that it will only invest in Singapore-based commercial real estate assets and thus any future potential acquisition is likely to be in Singapore. Moreover, the pipeline of ROFR properties that I had pointed above are all located in Singapore. With a WACC of ~3.3%, MCT can effectively acquire almost any sort of commercial asset in Singapore and still achieve DPU accretion. The logic is simple, for any investment to be DPU accretive, the yield of the target property i.e. NPI yield needs to minimally exceed the cost of funding.

In Singapore, good prime-quality office assets trade at an NPI yield of 3% to 3.5%. The reason why good prime-quality office assets trade at such yield is because they are deemed as being able to generate a stable cash flow while offering good growth potential. In general, investors are willing to accept a lower return for holding something that is safer and/or with good growth potential. The same is applied to real estate assets and it is reflected in the NPI yield of an asset.

MCT’s latest acquisition of MBC II was acquired at an NPI yield of 5.0% with a WACC of ~3.3% as well (similar to WACC at current share price). According to the screen grab below taken from MCT’s presentation deck, the acquisition is expected to result in a DPU accretion of ~4.0% at a NPI yield of 5.0%. Do note that the DPU accretion was calculated assuming the new units issued under the equity fund raising were priced at $2.10. In actual fact, the units were priced at $2.28 implying a then cost of equity of ~4%. Such a favourable cost of equity resulted in the eventual DPU accretion increasing to ~5%.

Source: Mapletree Commercial Trust

Thus, I expect any future acquisitions conducted by MCT to also result in similar DPU accretion assuming that its WACC remains low and the NPI yield of the proposed target property is reasonable. As it stands, with its share price trading in the $2.1x range and an even lower cost of debt of ~2.5% (vs ~2.9% when the MBC II acquisition occurred), I do not foresee any issues with future acquisitions delivering similar DPU and NAV accretion as the one achieved by the acquisition of MBC II.

Strong Insider Ownerships

As you should know by now, I am a big fan of stocks which have a strong insider ownership and that exhibits evidence of insiders building up their stakes in the company over the years. As one of the greatest investors of all time, Peter Lynch, once said that “insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise.” While it is risky to simply determine your investment strategy solely on the actions of insiders, research has shown that insider trading activity is a valuable barometer of broad shifts in market and sector sentiment.

In the context of MCT, there is clear evidence of strong insider ownership. More recently, the sponsor’s CEO, Hiew Yoon Khong, had bought 250,000 shares at a price of $2.08 on 25 Nov 2020. I have included evidence of the aforementioned transaction taken from SGX’s website below.

Source: SGX

To be very honest, $2.08 seems like a very steep price to pay given that MCT’s NAV is $1.71 at the time of writing, translating to a P/BV of 1.22x. The fact that Mr Hiew had decided to increase his stakes in the REIT at such a steep price is certainly a good sign. On further digging, I had also found that Mr Hiew had been diligently building up stakes in the REIT since the REIT IPO-ed back in 2011, suggesting that he was well aware of the growth potential of the REIT. True enough, the REIT had more than doubled in price since its IPO and that’s not even considering the dividends that unitholders would have earned over the same period! As such, I view the above as a further indication that there is potential for further growth in the REIT despite having advanced by more than 150% since its listing.

Based on what I have written above so far, it seems to suggest that this counter is a must-have for investors looking to have exposure to the commercial real estate sector in Singapore given the REIT’s strong track record and best-in-class assets. Having covered all the good stuff thus far, I will switch gear a little and move on to share some key risks that investors should be wary of before putting their money into this counter. 

Predominant Exposure to Offices

As a result of the COVID-19 pandemic, many Singaporeans have had the opportunity to experience how remote working is like. Personally, having been on a predominant Work-From-Home (“WFH”) arrangement since March 2020, I have to say that I do like having the flexibility and liberty of being able to WFH, at least for a portion of my work week. As such, I do have a strong hunch that moving forward, the default working arrangement would no longer be a full time Work-From-Office (“WFO”) kind of arrangement, but a hybrid arrangement where individuals get to WFH for a part of the normal work week.

So far, analysts have had mixed reviews on the outlook of Office S-REITs. For example, Maybank Kim Eng had issued a sell outlook on both Suntec REIT and Keppel REIT, citing that there could be a structural shift in office demand as institutions reassess their office footprint in a Post-COVID world. That being said, majority of the other analysts such as DBS and UOB Kay-Hian are still bullish on the prospects of the Office S-REITs, citing reasons such as continued strong demand from tenants in the technology sector who have been actively expanding their footprint despite the impact of COVID-19. 

I am no guru when it comes to this but having read through all the analysts reports and other narratives online about the Future of Work (“FoW”), my take is that the office is here to stay but it is likely that employers will rethink how office spaces would be utilised. Office is likely to be a place for collaboration, where teams get together on certain days of the week when they need to. This will have an impact on the way the office spaces are curated and how employers fit-out these office spaces.

Based on my conversation with friends and families, alot of their employers are already starting to relook and rationalise their office footprint. Some of the employers are even contemplating to renovate their office spaces so as to prepare for the FoW where the office serves more as a space for collaboration. It is still early days to say what the net impact on office demand is going to be and I am quite sure no one has the answer to this, at least for now. As long as this remains unknown, it is a risk that investors in Office S-REITs have to bear. 

Being a predominant office landlord, investors in MCT have to be aware of this overhanging risk. Until we have a better idea of what the long-term implications of the FoW is on the office demand, this point here remains a risk that investors have to be cognisant of before they invest in MCT or any REITs with a huge exposure to the office space. 

That being said, I am slightly more bullish on MCT given that most of its offices are decentralised business parks in the city fringe area. There are a lot of talks and narratives out there suggesting that COVID-19 is likely to accelerate the existing trend of decentralisation, where people seek to live, work and play in the more suburban parts of a city/country. Given MCT’s offices in city fringes, MCT’s offices/business parks could in fact benefit from this trend of decentralisation.

In addition to this point, Maybank Kim Eng had actually issued a buy call with a target price of $2.30 on MCT in their 28 January 2021 report, citing that MCT is likely to experience strong demand from tenants who are being displaced by CBD redevelopments. While it is good to be aware of what the analysts have to say, I have to caution that investors should not simply execute their investment decisions based on what analysts are saying. I have had more misses than hits purely by following the recommendation of analysts. Rather, investors should treat these analyses more as a supplement to their due diligence work. Moreover, it doesn’t hurt to have more differing views as it allows you to formulate a better decision after weighing all the pros and cons. 

Going back to MCT, I think MCT’s business parks are likely to remain resilient going forward for the following 2 reasons. First of all, MCT’s business parks i.e. MBC I & MBC II are Grade A business parks with asking rents that are at least 40% below that of comparable Grade A office spaces in the CBD. Taking reference to the screen grab taken from MCT’s circular on the acquisition of MBC II, we could see that the city fringe business park command rents of ~$5.50 psf vs $11.30 psf  commanded by Grade A Offices in CBD back in 2019. For the case of MBC, the rent that it commands is slightly higher than the ~$5.50 psf cited here. In the circular, it was mentioned that the passing rent at MBC II is about $6.15 psf. That is still considerably lower than equivalent Grade A spaces located in the CBD region. As such, from a cost savings point of view, employers are able to realise a substantial amount of savings by moving out of their CBD offices into the business parks in the city fringe owned by MBC.

Moreover, another key takeaway from the chart is the fact that rents at city fringe business parks have been more stable historically. Back in 2017, when Grade A Office CBD rents fell sharply due to a wave of new supply, rents at city fringe business park held up relatively well. This suggests that city fringe business parks are relatively more resilient than its Grade A Office CBD counterparts.

Source: MCT Circular on propose acquisition of MBC II

If we were to zoom in on the chart on the right side of the above screen grab, ~53% of MBC II’s current tenants have relocated from the CBD, further suggesting that employers do find MBC as an attractive alternative to CBD Grade A offices. However, solely viewing this through the lenses of cost savings from the perspective of employers obscures the whole picture as the lower rent is partly due to the fact that MBC is located in the city fringes i.e. less prime and hence less accessible. It is important to bear in mind that no matter what, offices in the CBD should command a premium over offices in other parts of the city solely for the fact that it is located in a more prime and central location. This leads me to the second argument as to why I think that MCT’s business park should remain resilient.

Source: MCT Circular on propose acquisition of MBC II

From the above image, we could see that among all the business park assets across Singapore, MBC is the asset with the closest proximity to the CBD. At about 7.7km away from the CBD, the properties are only about a 10 minutes drive away from the CBD. While that by no means is considered near, I personally think that a ~40% discount in rent for an office space about 10 minutes drive away from the CBD is certainly a reasonable trade off. This could explain why the likes of Google and International Air Transport Association (IATA) have decided to relocate to MBC from the CBD.

For the above reason, I do believe that MBC is likely to remain resilient. My guess is that even if employers decide to cut their office spaces, decentralised office spaces such as MBC would be their go-to destination as they could secure comparable office spaces at a much competitive rate. As we move into a hybrid WFH arrangement, the centrality of office locations should not come as the top priority for employers when sourcing for office spaces and I believe more employers are willing to accept the trade off between rents and location.

Conclusion

Having covered both sides of the story, it is time to make a verdict as to whether MCT is an attractive investment at its current price. Price aside, MCT has shown that its assets are able to leverage on its advantageous location to grow organically and I believe that its assets have further room for growth given the impending rejuvenation of the entire Greater Southern Waterfront. That being said, a lot of this positivity around its future growth potential has been baked into the current price. At the current price of $2.13, it is trading at ~1.25x of its Book Value and it is one of the lowest yielding commercial REIT at ~4.5%. As a comparison, CICT is trading at about 1.1x of its Book Value with a forward yield of slightly above 5%. Hence, MCT is by no means cheap based on the above metrics. 

As such, I would likely stay away from this counter for now and probably relook into it if it falls back down to the $2 range. I tend not to like to buy anything that is above the book value but for the likes of blue-chip REITs like MCT, I do think that they are trading above their book value for good reasons and should continue to do so. Being backed by a blue-chip sponsor also gives me a peace of mind when putting my money into this REIT. Do let me know your thoughts on what I have written by leaving your comments below!

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