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What Does the Future Hold for Mapletree Greater China Commercial Trust? Part 2

Welcome to the second part of the article on Mapletree Greater China Commercial Trust’s  (SGX: RW0U) ability to sustain or grow its distributions and business.

In my previous article, I covered the REIT’s sources of revenue and revenue-growth since its initial public offering (IPO) in early 2013.

In this article, I’d like to look at the net property income (NPI) and debt profile of the retail and commercial property owner.

As a quick recap: MGCCT is a real estate investment trust (REIT) that focuses on commercial properties with strong retail elements (more on that later) and has an investment mandate in Hong Kong, first tier cities in China, and key second tier cities in the same country.

The REIT’s initial portfolio at its listing consists of just two properties: Festive Walk in Hong Kong and Gateway Plaza in Beijing, China.

The REIT got listed on 7 March 2013 and since then, its units have recorded price gains of 8.6% up till their closing price last Friday.

By comparison, the capital gains of the SPDR STI ETF (SGX: ES3) – a proxy for the Straits Times Index (SGX: ^STI) – was relatively unchanged during the same period.

Between its IPO and last Friday, MGCCT has given out steady distributions per unit (DPU) totaling more than 11 cents per share.

Quarter DPU (Singapore cents)
Q1-FY13/14* 1.7337
Q2-FY13/14 1.4550
Q3-FY13/14 1.5180
Q4-FY13/14 1.5870
Q1-FY14/15 1.5600
Q2-FY14/15 1.6060
Q3-FY14/15 1.6220

Source: MGCCT’s Earnings Presentation; Q1-FY13/14 covers 7 March to 30 June 2013

A closer look at NPI

Ideally, we would like to see MGCCT’s revenue dollars drip down to the bottom-line. For that, we look into the NPI of the REIT’s properties. The NPI is defined as revenue minus all direct expenses.

mapletree mgcct - 3 

Source: MGCCT’s Earnings Presentation; author’s calculation

It should not be surprising that Festive Walk makes up the bulk of MGCCT’s NPI given that the property accounts for nearly three-quarters of the REIT’s current gross revenue. For the third quarter of the financial year that began on 1 April 2014 (Q3-FY14/15), Festive Walk made up 70% of the REIT’s total NPI.

Comparing Q3-FY14/15 to the same period a year ago, NPIs at Festive Walk and Gateway Plaza are up 5.3% and 23.8% respectively.

Let’s look at the NPI by segment as well.

mgcct mapletree -4

Source: MGCCT’s Earnings Report

Again, the retail segment makes up most of MGCCT’s NPI as well (just like for gross revenue), taking up almost 62% of the total. This is what I meant by my “strong retail elements” comment earlier.

For Q3-FY14/15, NPI for the retail segment grew by 3.7% compared to a year ago while the office segment’s NPI increased by 21%.

Foolish investors might want to keep an eye on a REIT’s debt profile. The debt profile may provide clues on how a REIT is funded and its sensitivity to the interest rate environment. We can look at MGCCT’s latest debt profile as of 31 December 2014:

Gearing Ratio 37.9%
Interest Cover ratio 5.0 times
Average Term to Maturity for Debt 2.5 years
Average All-in Cost of Debt 2.10%
Unsecured debt 100%
Total debt outstanding HK$11.2 billion

Source: MGCCT’s Earnings Presentation

From these figures, here are some points to note:

  1. MGCCT’s current gearing of 37.9% is a little on the higher end, therefore any new property additions may require the issuance of new units.
  2. The REIT does not have any refinancing requirements until March 2016.
  3. At the moment, 77% of the REIT’s interest costs have been fixed for FY14/15 and FY15/16.
  4. Having a nice chunk of debt on fixed rates might give MGCCT a bit of protection from short-term changes in interest rates, but we should still keep our Foolish eyes on FY16/17 and FY17/18 when the majority of the REIT’s debt becomes due for repayment.

Foolish summary

As lifelong students of Foolish long term investing, it pays to look under the hood to understand whether a rise in the REIT’s unit price is supported by the quality of growth that we are looking for.

Currently, MGCCT’s portfolio is focused around only two major properties and it may thus run the risk of portfolio concentration. Future growth for MGCCT will have to rely on a combination of organic growth and from the pipeline of projects from its sponsor, Mapletree Investments Pte. Ltd.

MGCCT last traded at S$1.01 last Friday. This translates to a historical price-to-book ratio of 0.95 and a distribution yield of around 6.3%.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.