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The unfortunate case of Mapletree North Asia Commercial Trust – A deep analysis




Hi all, this is really a long post (warning), here are the subtopics I will be discussing.
  1. History of MNAC Trust
  2. Determine the Discount Rate via Capital Asset Pricing Model
  3. Determining Net Profit Margin (NPI)
  4. Derive the ratio of NPI to Distributable Income to Shareholders
  5. Analysis of Japan Properties Acquired in 2018
  6. Analysis of MBP and OPB (Japan Properties Acquired in Dec
  7. Analysis on Sandhill Plaza
  8. Analysis on Gateway Plaza
  9. Analysis of Festival Walk
  10. Summing up altogether+ Intrinsic Value

1. History of MNAC Trust

Festival Walk
Festival walk was developed jointly in 1998 by Swire and
Citic Pacific and back then it was once the biggest shopping mall in HK once
opened. It was then owned by Swire Properties and bought over by MNAC’s current
sponsor Mapletree Investments @ 18.8 Billion so Swire Pacific could focus on
investments in Mainland China in 2011.
Gateway Plaza
It was used to be known as Beijing Gateway Plaza and it’s
situated at one of Beijing’s core business district. The building was completed
in 2005 by Bestride and sold to HK Gateway in 2006. About a year later, Tin
Lik, sold shares of Beijing Gateway Plaza (BVI) Limited which holds HK Gateway
to RREEF China Commercial Trust. In April, Gateway Plaza was then acquired by
Mapletree India China Fund at RMB 2.1bil, a private real estate fund belonging
to Mapletree Investments Pte Ltd (MIPL).
In 2013, the Sponsor launched Mapletree Greater China Commercial
Reit in 2013, consisting of the above two properties. In 2015, the Reit
acquired Sandhill Plaza at RMB 1,881mil, which is located Zhangjiang HiTech
Park, better known as Silicon Valley of Shanghai. The acquisition was yield
In March 2018, the Reit acquired 98.47% of 6 freehold
commercial real estate in Japan from MJOF, a wholly owned subsidiary of
Mapletree Investments Pte Ltd. The acquisition was also yield accretive and
funded via equity through private placement and debt issuance.
A year later, protests broke out in Hong Kong after Carrie
Lam introduced the extradition Bill. The bill was then suspended in June but it
did little to restore calm in the city. Finally, in early Sept, she announced a
formal withdrawal of the much-despised extradition Bill. However, it was too
little too late, as protestors are calling for ‘five key demands, not one

On the 13th Nov, a peaceful gathering of
protestors turned violent in the Festival Walk and they broke glass and
ceiling, and set fire on Christmas tree. The building was closed for repair and
reopened on 16th January, while its commercial office was reopened
on 26 November. It was a very unfortunate that of all the shopping centre, the
protestors chose to storm into the suburban shopping Mall in Kowloon Tong.
Rents were not collected during the major recovery and repair works till its
official opening. 

On 4th Dec, its sponsor, injected 2 more freehold
yield accretive properties into MNAC Trust to reduce asset and income
concentration in Hong Kong. The manger has also kindly waived the acquisition
fee. It was seen as a positive move as it is yield accretive and improves its
overall Weighed Asset Lease Expiry (WALE).
A few weeks after its opening come the Corona Virus, and
Hong Kong was officially hit by a double whammy of  protests and Corona Virus outbreak. The
current situation not only affects Festival Walk but across its portfolio in
Japan and China.
So what should investors do
with their investment under current situations?

Festival Walk mainly serves the
day to day residents of Kowloon Tong and has been a very resilient mall that
has withstand crisis such as SARS and GFC with growing Net Property Income (NPI)
during such times. It is less dependent on tourist trade like Times Square, Landmark,
Elements, Harbourcity. While operations in FW remains challenging, its NPI may
not be much impacted by the gloomy outlook of tourism in HK hence a direct
comparison in earnings with such properties may not be useful in forecasting
it’s impact on FW’s future NPI.

My view is that the closure of
Festival Walk is just one off and it’s just so unfortunate that of all malls,
the protestors decided to protest in Festival Walk to mourn the death of a
protestor and vandalized the building causing extensive damage that it has to
be closed till January 2020.
Unfortunately, I was not able to
calculate it’s Passing Rent to calculate the NPI (except Gateway Plaza) unlike how I analysed Champion
Reit in the past because the figures are not released in annual report or
quarterly report except in the IPO Prospectus. I emailed the management to
enquire about Festival Walk’s passing rent, but she seemed to suggest that the rent varies much between
the different trade type. After some calculation, it’s NPI Yield is pretty
stable at 80%, dipping to 75% during times like this, hence it’s possible to do
some future projection of FW’s DPU if the ratio of NPI to distributable income
is stable over the years, including the current FY 20/21.
I like analysing Reits with less
profile of properties because it makes it easy to segment each property group
to analyse it’s earnings. We will begin by looking at the overall numbers and
start with Japan Properties, followed by the two properties in China and FW.
Our focus here is about its earnings rather than the asset valuation. My only concern
on property valuation is its revaluation loss affects the gearing, hence I will
touch on this abit as well.
2. Determine the Discount Rate via CAPM

We will be using the
CAPM model to determine the discount rate in this case.
Discount Rate= E(R)= Rf + β (Rm – Rf )
β= 0.97

Rf = 0.884% 
Rm= 5.34

Discount Rate= E(R)= Rf + β (Rm – Rf )
= 0.884 + 0.96 (5.34-0.884)
3. Determining NPI Margin
By dividing NPI/ Gross Revenue we
get Net Property Income Margin.
The HK Protest started in June
2019 and then come the Covid 19 this year so the 2Q 2019 onwards its financials
would be in distress. So let’s dive in to the last 3 quarters. June-Sept (2Q), Oct-
Dec (3Q), Jan- Mar (4Q)
It’s NPI Margin fluctuated between
70% to 80% range, hence its more accurate to assess NPI margin of geographical breakdown
or segment revenue, since the NPI of each segment is provided in the quarterly
earnings report.
4. Derive the ratio of NPI to Distributable Income to Shareholders
The ratio is fairly stable at low
70% range, from 2015 to 2018, with the exception of 2019, where ratio was 82%.
If we remove the distribution top up, the ratio would be 70.28%.
Hence for this exercise, we can
use a 5 year average.
For simplicity lets use

Japan Properties
I will split to 2 sections:
Properties acquired in 2018 & Properties Acquired in 2019.
5. Analysis of Japan Properties Acquired in 2018

Of the six properties acquired, four
are single tenanted.
While there’s tenant concentration
risks in each of the four buildings, I tend to see it positively since these
tenants have undergone a few financial crises in the past and have been
occupying the building since it was built. Relocating office is not an
overnight decision and some single tenanted offices may have purpose-built
facility for its daily operations. Despite Japan’s economy being affected by
Covid-19, I still expect the properties to achieve 100% occupancy or close to
full occupancy.
Furthermore, all four tenants have good credit ratings and three of four are three of the four single tenants are listed companies and I doubt they
will be defaulting their rent in such a time as this.
Moreover, the properties have long
WALE, and with 75% expiring in 2024/2025. 2024 is still sometime away and the
covid-19 would have fade off. Hence, leasing risks is minimal for the next three
years when economy is uncertain.
To project total distributions coming
from these freehold properties, we assume a zero-growth rate from 2020 to 2024
and a 2% perpetual growth rate.
NPI (Japan Properties) for FY
2019/2020= S$39.937mil.
NPI (Japan Properties acquired in
2019)= S$1.8mil (derived from calculation in 6. Analysis of MBP and OPB (Japan Properties Acquired in Dec 2019)
NPI (6 Japan Properties) = S$39.937mil-
S$1.8mil = S$38.137 mil.
Distributable income per unit from
6 Japanese Properties= (NPI of six Japan Properties* 0.72 ratio)/ (Discount
rate * No. of units in issuance)
Sum of all PV= $797.464.5 mil
Per share Value from six Japan
Properties= $797.464.5 mil/ 3,342,916,300 units
S$ 0.23855

6. Analysis of MBP and OPB (Japan Properties Acquired in
Dec 2019)
To reduce concentration risks and geopolitical risks, on 4th
Dec, management decided to acquire two more properties in Japan from its
Sponsor Mapletree Investments. This move is DPU accretive, improved its WALE,
and having more freehold properties in the portfolio.
The two properties started contributing to its NPI from 28th
Feb 2020 for a month with MBP contributing 87.2% of Gross Rental Income and OBP
contributes the remaining 12.8%.
The quarterly report doesn’t disclose the NPI contributed
from the two properties, but I managed to get some information from the acquisition
announcement report.
There is no projection on the gross revenue, but I managed
to find the 6 months NPI for the two Japan properties ending Sep 2019.
Assuming zero growth and one month of contribution of NPI
from mBay Point Makuhari Building & Omori Prime Building, NPI= S$ 10.8 m/6=
If both properties contributed to NPI for the full 3 months,
5.4m/56.9m *100%= 9.5% that’s about right which should be
higher than the relative figure of 6.4% considering significantly lower NPI
from Festival Walk the past three months.
Prior to its acquisition in Dec, the committed occupancy is
84.8% which is above the average vacancy rate of 7.7-9%. One of the catalysts
for this acquisition is for Reit manager to grow its NPI by improving the
vacancy and capture rental reversion. In view of this Covid-19 impact on
economy and comments from the REIT manager (see below), the base case would be
that current occupancy to remain at 84.8%. I won’t expect further reduction in
occupancy as it’s occupancy is already below average and it’s major tenants are
big companies.
MBP currently contributes 87.2% of the Gross Monthly Rental
Top tenants:
  • NTT Urban Development, one of the world’s largest
    telecommunication companies with market cap in excess of US98billion listed on
    Tokyo Stock Exchange.
  • AEON Group ,with a market cap in excess of US$18 bil, listed
    on Tokyo stock exchange.


According to report, Vacancy rate expected to maintain
low-level between 1.4% to 3.2% from 2019-2023. It was at 100% occupancy prior
to acquisition in Dec.
Although it is a multi-tenanted building with smaller sized
companies, the sectors which major tenants are belonging in: Eighting (Video
Games Developer), Isuzu Linex (Transportation & Logistics) and Brillnics
(Information Technology) seemed to be unscathed by the Covid 19 situation. In
fact, IT and Video Gaming firms may even thrive during Coronavirus.
 I also did some
Googling and guess what I saw. – No available space office at the moment
According to APAC office report outlook, gross face rental
growth projected to be -1.1% in 2020 and 2.6% in 2021. If percentage directly
translates to a -1.1% dip in NPI for 2020 and -2.6% dip for 2021, and staying
constant till 2025 and perpetual growth of 2% from 2025 onwards.
Sum of all PV= $422.8749 mil
Per share Value from six Japan
Properties= $422.8749 mil / 3,342,916,300 units
=S$ 0.1264988

7. Properties in China: Analysis on Sandhill Plaza
The latest quarterly report suggested that Sandhill Plaza
benefitted from the current Covid 19 crisis, as cost sensitive tenants are
inclined to shift to decentralized areas. 
Moreover, the tenants are mainly TMT- Technology, Media and Telecom,
which are less affected from the current situation.
The latest results speak for itself. Although occupancy
dipped slightly, average rental reversion has increased 10%. 

While management commented that the performance is expected
to be resilient, there’s not much room left to grow its occupancy as it has already
hit 98%. The only way is to grow its average rent.
After tabulating the NPI over the past 4 years, it’s earnings are not very stellar,
but growing slowly year on year at CAGR of 0.8%. Hence let’s use a perpetuity
model of 0.8%.
CAGR = 0.8%
Using a perpetual CAGR of 0.8%,
Distributable Income for FY 2020/21 = 16,848 * 1.008 = 16.984784
Per share Value= 388.22 mil / 3,342,916,300
units = S$0.11613322
8. Analysis on Gateway Plaza

Similar to Sandhill Plaza’s analysis, I
have done up the table for it’s NPI and distributable income from FY 2015-2019
And management commented:
There is a dip in NPI in 2017 as
there’s a change in Property Tax derived for China. Hence additional property
tax of $5.4mil.
I wrote to management to enquire on the passing rent and she
replied that the passing rent is in the range of 320-350 RMB per sq/m. After
digging into some past analyst reports, it was also recorded at 320-350 RMB per
Using 320 RMB as passing rent & NLA of 106,456 sqm, Annual
Gross Revenue =320 RMB per sm *106.456 *12 months = RMB 408.791040 mil.
Let’s assume that passing rent stays at 320 and slowly
recovers to 350 by 2023 and occupancy rate increases from 85% to 96% by 2023.
SGD 1= RMB 5
Sum of all present value= $$ 915.282 mil
Per share Value= $$ 915.282 mil
/ 3,342,916,300 units =$0.2737975
9. Analysis of Festival Walk

I have to be honest that it’s very hard to analyse on this
one. Even as Covid 19 situation improves, Hong Kong may have to brace for more
protests. Even protestors are getting smarter; to maintain social distancing
during protests and standing 1.5m apart. It’s currently double whammy for HK
government, having to face Covid 19 with the protestor’s situation.
Although the current protests and Covid 19 may exert
pressure on Festival Walk’s rent, there are two ways to see it. First scenario
is that rental and occupancy will drop drastically like Gateway Plaza. Another
scenario is that Festival Walk could still maintain at high 90% occupancy rate
with only slight dip in passing rent. Reason being that Festival is a suburban mall
and serves the residents in Kowloon Tong and its passing rent is lower than
Champion Reit. Hence, tenants may be looking to locate their shops near residential
malls like Kowloon Tong knowing that shopping centre is less tourist dependant
and cheaper rental, driving up overall demand in suburban mall.

Initially I would want to project it’s NPI through passing
rent psf but realized that it would not be accurate as there are rental reliefs
extend throughout the next few months. 
I have also written an email to Elizabeth of investor relations
to enquire on the passing rent psf. She replied me within 2 days and mentioned
that rental rates differ among trade types, but yet to give me an answer on the
average passing rent.
I did a comparison between Q2-Q4 for FY2019/20 vs FY2018/19
to assess its impact on the NPI. I included the rental topup as I wanted to
remove impact on Festival Walk’s closure as I see it as a one time even and not
a recurring one.
In fact the worst is yet to come,
considering that April 2020’s NPI is not included and there will be more handing
out of rental rebates.
I will use Q2-Q4 2019-2020’s result, and project a one time 20%
reduction for 2021 Revenue due to rental reliefs, followed by a 5% increment
from 2022-2025 (based on 2019-2020’s NPI) & 2% growth perpetually. I don’t think
I am being over optimistic here, considering that it will take another 3 years
to go back to FY 2018/2019’s NPI.
Sum of all present value= $$ 4,510.8379 mil
Per share Value= $$ 4,510 mil
/ ,342,916,300 units =$1.349372

However, many have doubts on it’s earnings after 2047 the year when ‘one country, two systems’, expires. Your guess is as good as mine, but Xi Jinping spoke in 2017 once that the principle of one country, two systems should remain unchanged. In my opinion, the CCP will extend the status of one country two systems, and property owners can extend the lease of ownership subject to a fee.

If the worst case scenario plays out, where Festival Walk will continue to collect earnings up to 2047,

Sum of present value from 2020 to 2047 
= $$ 4,510.8379 mil-
2,811.324 mil
= 1,699.513 mil.
Per share Value= 1,699.513 mil / 342,916,300 units= S$0.50839
10. Summing up altogether+ Intrinsic Value

What are your views about MNAC Trust. Do you think it’s worth more compared to current prices?


  1. Thanks for the hard work putting this together. Very informative.
    Oh, by the way, i think yr spellcheck needs rework. Spotted a typo in last para of the article.

  2. The future of HK is bleak with the non stop protest and violence.
    Commercial property prices has been declining as the rich unload them. China is pivoting to Macau, away from HK.
    I am vested since 2014 but will not add more.

  3. Hi, thanks for sharing your view. It's sad to see the current situation in HK. I love Hong Kong because of it's vibrant city and people there are very diligent and driven.

    Personally, I am still optimistic on Hong Kong in the long run, as long as Hong Kong still have value to China. I believe that China and asia will benefit from a prosperous Hong Kong.

    The former HK Chief executives come together to form alliance to restore hong Kong to resolve the crisis. I am optimistic they will do all they can to restore Hong Kong to its former glory.

    CH Tung said “Their intention is to harm the common interests of Hongkongers, and push Hong Kong toward the edge of the cliff… [we] will not let you succeed,” Tung said”

  4. Thanks for the great analysis!

    With the lower demand and higher supply for the Beijing office market, as well as long term concerns that companies may consider cutting costs by shifting some of their offices to decentralised areas, do you think it may be a little optimistic to assume increases in both rent and occupancy for your Gateway Plaza projections?

  5. Hi, thanks for taking time to visit my blog.

    Yes, I agree that the monthly rent may have slightly been slightly optimistic, since it is located at Chaoyang district , CBD of Beijing. However I have assumed an occupancy rate of 85% yet as of March 2020, its occupancy rate has been 91.5%.
    Also its major tenants, are BMW, Bank of China, China Fortune Land Developement (CFLD). These are big companies,and I don't see them shifting due to short term economic uncertainties and they have a reason to have their office in CBD.

    Also because its sponsor is Mapletree hence I also believe in management in maintaing high occupancy levels, and maximizing NPI. Their current quarter result didn't disappoint after all.


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