HomeFinancial FootprintsRecent Action- Mapletree NAC Trust

Recent Action- Mapletree NAC Trust




I added 5,000 shares of Mapletree NAC Trust on 1st
Oct at $1.31 and another 5,000 shares on 15th Oct at $1.26 against the
backdrop on the current situation in Hong Kong. It’s a share counter that I had
been wanting to add for a long time but couldn’t manage to catch the price and
the current unrest in Hong Kong gave me the opportunity to buy on weakness.
It used to be known as Mapletree Greater China Commercial Trust (MGCCT) and got its new name after acquiring Tokyo freehold properties in May 2018.
Despite having a portfolio of properties in China and Japan as well, 62% of its
Net Property Income comes from Festival Walk, a suburban shopping Mall in Hong
Kong which explains the drop in share price recently.
While the protests in Hong Kong continues with no end in
sight send many Hong Kong shares tumbling, especially hospitality sector, and
property counters; yet I see it as an opportunity to explore some defensive
counters which are beaten down and MapletreeNAC Trust is one of them. Here are some of my thoughts and I will be focusing more on the Retail side of Festival Walk.
Resilient in the face of economic headwinds
Before Festival Walk was listed as a REIT, it was owned by
Mapletree Investment since 2011. During the SARS incident in 2003, Asian
Financial Crisis in 2008 and Occupy Central Movement in 2004, it managed to
register revenue growth year on year, and I think management deserves a lot of
credit for that. Its occupancy ratio stands at 100% since 2000. While Festival
Walk isn’t immune to the political instability, its occupancy ratio track
record and its ability to grow its sales and revenue during times of economic
slowdown indicates its stability and resilient through economic cycles.
Personally, I believe that the current political unrest in Hong Kong will be
resolved eventually though recovery may take a long time. Hence, when bearish
sentiment emerges, the sell down of this REIT presents an opportunity for me to
‘buy on weakness’.
Not so Touristy

Tripadvisor’s customer review of Festival Walk
Festival walk is located near Kowloon Tong MTR station which
caters to the daily needs and lifestyle of locals – Supermarket, F&B,
cinemas, and a massive ice skating rink. Regular visitors to Hong Kong will be
well aware that Kowloon Tong is a residential area above Kowloon City, and
there is actually not much tourist attractions along the area. It serves as a
heartland mall, a neighbourhood shopping centre that caters more for the
locals. While locals would exercise more caution out in the streets, life still
has to go on. They would still have to do their groceries in supermarkets,
replenish their personal care products in Watson/Mannings and catch the latest
movies during the weekends.
According to the news, recent protests are prevelant in CBD and
touristy areas like Mongkok, Tsim Sha Tsui, CauseWay Bay and Central. The only
incident I recently came to know about in Kowloon Tong is where protesters
shone laser pointers at PLA Barracks. This should point to the fact that
Festival Walk has limited impact by the protests.
Because the sponsor is Mapletree

Mapletree North Asia Commercial Trust also has the advantage
of a strong sponsor, Mapletree Investments with aligned interest with
unitholders. Its alignment is evident in its management fee structure, which
consists of a base fees- 10% of distributable income for financial year and performance
of 25% of difference in DPU in the preceding financial year instead of Net Property
Income (NPI). In instances where fees are pegged to its NPI, there may be
incentive for them to acquire more properties to artificially boost its income
to earn a higher fee. Such structure only incentivises the manager to grow its
assets rather than improving its distribution per unit.
 In the case of
Mapletree NAC’s payout structure, the REIT manager will earn a higher performance
fee by acquiring more properties which are yield and DPU accretive.
One of the hallmarks of having a reputable and good sponsor
also its potential to grow its portfolio by acquiring properties from its
sponsor through its right of first refusal. Having a credible sponsor also
eliminates the possibility that the REIT is seen as a dumping ground for the
sponsor to divest their unwanted properties to raise additional cash. While
there’s certain degree of concentration risks with 62% of NPI derived from a
single country, the REIT manager has diversifying the risks over the years by
actively acquiring properties from China and Japan, which are yield accretive
and improving the DPU at the same time; Not to mention a pipeline of properties
from the sponsor that could be injected into the Reit to further diversify the
Distribution and Risks- Foreign Exchange Risks and
Regulatory Risks

I have done up the above charts for its quarterly distribution
since 2013 till present. Unfortunately, unlike Mapletree Industrial Trust, there
are some quarters which DPU was lower than its previous quarter year-on-year.
The lower distributable income was attributed to a lower gross revenue and
higher property expenses: lower gross revenue due to a weaker HKD and RMB, and
higher property expenses due to additional property tax from Gateway Plaza imposed
by local authorities with effect from July 2016. This affected the 3Q DPU as
well, due to a higher property tax of $3.2mil.
For the FY2017/18 4Q, there was a significant dip in DPU compared
to its previous year which is mainly due to reversal of VAT payable in 4Q
FY2016/17 which was assumed a higher rate hence giving that previous quarter a slight
boost in DPU.
You may notice that SGX listed Reits with majority of assets
in Singapore are traded at a premium compared to their peers with more overseas
exposure (i.e. higher yield, lower p/b) as the market perceives them to be
safer and subject to lesser risks i.e. currency risks, regulatory risks and
political risks. In the case of Mapletree NAC Trust:
From a layman’s perspective, because a Reit that higher exposure
to overseas market is riskier than a domestic reit, you need a higher return to
compensate the risks you are taking.
I have skimmed through many news articles about hospitality sector in HK experiencing
sharpest downturn since 1997/SARS. The slowdown in tourism is one thing, but the
actual consumer spending and impact on Reits are hard to guage. The earnings season is
up and as Mapletree NAC REIT will be releasing its 2Q financial results on 25th Oct, I will be keeping an eye on its earnings as this will be the first quarter
where we will be able to gauge the extent of Hong Kong protests affecting its rental
income and to decide my next move.

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