Tea with Solace: Mapletree Greater China Commercial Trust.

This is a guest blog from a regular guest blogger, Solace, on a REIT in his portfolio. I always appreciate Solace's guest blogs which show how much thought he puts into every single one of his investments in the stock market. I hope you find Solace's guest blogs beneficial like I have.

So, here is Solace's Review of 
Mapletree Greater China Commercial Trust (MGCCT):

MGCCT got listed on March 2013. It was oversubscribed and the general feeling of the stock market at the time was bullish. I subscribed to this IPO and was one of the lucky people who received allocation of shares. I did a quick flip on the first day of IPO and realized a gain of about 11%.

The reason for selling during the first day of trading and my subsequent relook at the stock more than a year later will be discussed further.

Asset Portfolio

MGCCT consists of just two mixed use assets - Festival Walk and Gateway Plaza.

Festival Walk

A landmark territorial retail mall and lifestyle destination with an office component, comprising a seven-storey retail mall with a four-storey office tower and three underground car park levels, located in the upscale residential area of Kowloon Tong, Hong Kong.

Gateway Plaza

A premier Grade A office building with a retail atrium, consisting of two 25-storey towers connected by a three-storey retail atrium and three underground floors, located in the established and mature prime Lufthansa Area in Beijing, China.

The two properties cover a gross floor area of approximately 2.4 million square feet and the total net lettable area is about 1.9 Mil square feet.

With only 2 properties, it is easier to do an analysis but it also presented a problem of its own, Concentration Risk.

One has to take note that Festival Walk alone contributes to 75 per cent of the asset value and gross revenue of the Reit. The performance of the REIT is tied to the fortunes of the Festival Walk. As an investor we should do our homework to ensure that we can predict the earning power of the mall or we might be in for a big surprise if the earnings tumble down the road along and, with it, the share price.

Portfolio Performance thus far

Gross revenue and Net Property income has shown to be beat initial forecasts in prospectus and reported to outperform Y-O-Y comparing FY Quarters to Quarters.

Festival Walk remained fully occupied at 100% for both retail and office sectors. Shopper traffic and tenant sales in 1Q FY14/15 increased slightly at 0.5% and 0.1% respectively year on year. Of the retail leases expiring in FY14/15 at Festival Walk, 90% have been renewed or re-let with rental uplift of 21%. Weighted Average Lease Expiry (WALE) by Gross Rental Income of Festival Walk is 2.9 years. Do take note that for FY16/17, 22% of Gross rental income is due to be renew.

The committed occupancy at Gateway Plaza was 98.6% as of 30 June 2014. These committed leases represented tenants from the automobile and machinery sectors. As of 30 June 2014, 80% of the leases expiring in FY14/15 have been committed, with a significant rental uplift of 33% against preceding rental rates. WALE for Gateway Plaza it is 2.5 years.

Key Financial Indicators and Capital Management.

Gearing Ratios: 38.6%

Interest Coverage Ratio: 4.8 x

Total Debt Outstanding: HK$11,455 m

Weighted Debt Maturity: 2.7 years

Annualised DPU (cents): 6.257 cents

Distribution Policy: Semi- Annual Basis

Gearing Ratio is definitely on the high side. A silver lining would be in order to mitigate the risk of rising interest rates; more than 70% of MGCCT’s debt has been fixed for FY14/15 and FY15/16.

To ensure stability of distributions, MGCCT has hedged 90% of HK$ Distributable Income forecasted for FY14/15 and is actively monitoring the market to progressively convert RMB Distributable Income to SGD when the rates are favourable.

Management Fees Structure.

How Reits pay their manager through fees has been questioned from time to time. MGCCT is one of the first Reits to adopt DPU-based fee model rather than the traditional asset based fee structure that most S-Reits use. This is touted to be superior as most of the return from a Reits is delivered via DPU yield.

However, some would argue tying fees based on DPU may or may not necessarily better align the interests of the management and unit holders. A group will believe that fees tied to assets are more stable and makes it easier to pursue asset enhancement activities. There is also a possibility of managers using the DPU based model to focus on short term gain through increase use of gearing to boost DPU, but set itself up for disaster over the long term.

There is no evident of MGCCT behaving this way currently. I do not have opinion on this matter as I believe no fee structure is fool proof. Concentrating on the track records of the manager seems to be a wiser choice.

Solace's Recent Actions.

At Listing Date of 7 March 2013, issue price was $0.93 (NAV/unit $0.91). It had a projected dividend yield of 5.6% for FY 13/14 and 6.1% for FY 14/15. I sold the shares when the price reached $1.04. Translates to about 11.8% gain.

At the price, I felt that it makes sense to cash in. It was above NAV, the projected yield of 5.6% didn’t justify the concentration risk and high gearing in my opinion. I needed to have bigger safety margins and want to see that the management can achieve its DPU while paying close attention to the performance of Festival Walk.

When prices break below 90 cents towards the end of last year, I decide to the put the Reits back in my watch list. Also during the waiting period, it has shown that the Mapletree pedigree had delivered again with reports of DPU and NPI beating forecasts in prospectus.

It was a game of waiting patiently to see if the price would drop to a level where the dividend yield was more acceptable to me with the concentration risk in mind.

I pick up some shares in at prices from 83 cents to 85 cents a unit. Average entry is about 84 cents. This gives me a dividend yield of about 7.5% which is more acceptable to me. It was revealed that some of the senior managements also bought shares in recent months at $0.805 and $0.80. It is always a plus point if one can load up at about the same price as the board of directors.

If the share price declines to a level close to dividend yield 8% again, I might be interested to increase exposure again.

Read some of Solace's other guest blogs:
1. Frasers Centrepoint Limited (FCL).
2. King Wan Corp. Ltd.
3. Common Sense Investing.