SINGAPORE (Oct 17): Analysts from OCBC Investment Research and Maybank Kim Eng Research are maintaining their “hold” calls on Mapletree Commercial Trust (MCT), despite the trust progressing with its proposed acquisition of Mapletree Business City (Phase 2) (MBC 2), which is expected to be NPI, DPU and NAV per unit accretive.

MCT earlier this week obtained unitholders’ approval for the proposed acquisition.

However, in its morning call on Wednesday, the research team from OCBC says the unitholders’ approval of the proposed acquisition is “unsurprising”. “We have already factored in this acquisition in our forecasts,” OCBC adds.

The agreed consideration for the acquisition, which will see MCT consolidate its ownership over the entire Mapletree Business City Development, was $1.55 billion.   

See: Mapletree Commercial Trust to acquire Mapletree Business City (Phase 2) for $1.58 bil

Shortly after unitholders approved the acquisition, MCT launched an equity fund raising to raise proceeds of no less than $902.3 million. This comprised an offering of a total of 406.5 million new units in MCT via a private placement and a preferential offering.

See: Mapletree Commercial Trust launches equity fund raising to raise more than $902 mil to help fund MBC 2 acquisition

“Its MBC II acquisition completes its control over the entire Alexandra precinct – which is touted to gain from longer term Southern Waterfront rejuvenation plans,” says Maybank analyst Chua Su Tye in a Wednesday report. 

However, the analysts warns the proposed acquisition carries its own set of risks, especially in the near term.

Although the acquisition will see VivoCity, MBC I & II jointly contribute 80% of MCT’s assets under management (AUM) and NPI, tenant concentration risks have also risen in tandem with Google occupying 13.5% of its enlarged net leasable area (NLA). 

“We see its low 31.7% gearing and $1.7 billion in debt headroom supporting further opportunities from its 1.8 million sqft NLA sponsor pipeline, but potential deals are likely towards the medium-to-longer term,” says Chua. 

Maybank has a target price of $2.35 for the REIT, while OCBC has a fair value estimate of $2.28.

On Tuesday, MCT reported a 2.2% increase in its FY20 distribution per unit (DPU) to 2.27 cents, bringing DPU for 1H20 to 4.63 cents from 4.50 cents for the same period in the preceding year. 

Gross revenue for the quarter rose 1.9% to $112.0 million on the back of higher contributions from the trust’s properties at VivoCity, Mapletree Business City 1 (MBC 1), PSA Building and Bank of America Merrill Lynch HarbourFront.

See: Mapletree Commercial Trust posts 2.2% rise in 2Q DPU to 2.32 cents

“All properties contributed positively to net property income (NPI) growth, with the exception of Mapletree Anson, which saw a 21.9% y-o-y dip due to reduced occupancy,” says OCBC.

Both OCBC and Maybank say MCT’s latest set of results were “in-line” with expectations. 

But, despite the recent set of results that indicate MCT is indeed gaining some traction, the analysts are quick to point out some shortcomings for the REIT. 

“MCT’s portfolio occupancy was down q-o-q from 97.3% to 96.1% with weaker transitory occupancy at Mapletree Anson (from 92.7% to 75.1%),” says Maybank’s Chua.

At the same time, both OCBC and Maybank agree that the trust’s retail segment, spearheaded by VivoCity, could well ensure that the REIT stays healthy. 

“VivoCity’s revenue and NPI increased 5.1% y-o-y and 4.9% y-o-y, even as shopper traffic and tenant sales fell 2.8% y-o-y and 2.0% y-o-y,” says Chua. 

Chua also notes that stronger sales growth momentum can be expected in the upcoming quarters on the back of higher contributions from NTUC Fairprice, new F&B tenancies as well as the expanded Uniqlo space. The management also shared that F&B tenancies had delivered positive reversions of 10%, and is guiding for positive rental reversions in FY20-21. 

“Sales momentum has been encouraging, and we note that VivoCity’s tenant sales for 2Q20 only declined marginally by 0.3% y-o-y,” says the OCBC research team. 

As at 3.09pm, units in Mapletree Commercial Trust are trading flat at $2.38, translating into a DPU yield of 3.98%.