Mapletree Commercial Trust’s Latest Earnings: Strong Growth Achieved but Weaker Days May Lie Ahead

Mapletree Commercial Trust (SGX: N2IU) announced its full-year earnings for the financial year ended 31 March 2015 (FY 14/15) yesterday evening.

The real estate investment trust’s portfolio currently consists of four commercial/retail properties in Singapore which are collectively valued at S$4.2 billion as of 31 March 2015. The buildings, which have a total net lettable area of 2.1 million square feet, are namely VivoCity, Bank of America Merrill Lynch Harbourfront, PSA Building, and Mapletree Anson.

With these as a back drop, let’s get started with the REIT’s latest set of financials.

Financial highlights

Mapletree Commercial Trust had been able to grow its annual revenue by 5.7% year-on-year to S$282.5 million for the whole of FY 14/15. With property expenses increasing by just 1.6%, the REIT’s net property income had managed to climb by 8.4% to S$211.7 million compared to a year ago.

The top-line growth ultimately flowed to the bottom-line – Mapletree Commercial Trust’s income available for distribution for the whole of FY 14/15 came in at S$168.3 million, up 10% from the figure of S$153 million seen in FY 13/14. With a slightly large number of units in issue, the distributable income growth had translated into a respectable 8.5% increase in distribution per unit (DPU) to 8.00 cents from the selfsame figure of 7.372 cents seen a year ago.

During the financial year, Mapletree Commercial Trust also saw its properties being revalued upwards. This played a role in the 6.9% year-on-year increase in the REIT’s net asset value per unit to S$1.24 (as of 31 March 2015).

The trust also saw an improvement in its financial health when compared to a year ago. Here’s a table showing some of the important changes:

Mapletree Commercial Trust's balance sheet figures (23 April 2015)

Source: Mapletree Commercial Trust’ earnings release

As you can tell, the REIT has managed to lower both the amount of borrowings it has and its gearing ratio, increased the percentage of debt with fixed interest rates (this helps build a buffer against any possible rise in interest rates in the future), improved its interest coverage ratio, and lengthened the maturity of its borrowings.

The only snag is that Mapletree Commercial Trust’s costs of borrowing (interest rates) have gone up a little. While certainly not overly worrying at this point, it’s still something that investors might want to keep an eyes on in the future as pricier debt could possibly result in thinner profits for the REIT.

Investors might also want to note that Mapletree Commercial Trust would have to refinance S$354 million in debt (some 22.8% of total borrowings at the moment) in FY 16/17.

Are the buildings doing well?

Mapletree Commercial Trust ended FY 14/15 with a portfolio occupancy rate of 95.7%. While that’s high, it’s also a step down from the figure of 98.2% seen a year ago.

One thing for investors to watch out for is the leases on the trust’s properties – more than half the leases (by gross rental revenue) would be expiring over the next two financial years. Investors would need to see if the trust is able to renew the expiring leases and at the same time, secure higher rental rates upon renewal.

Mapletree Commercial Trust’s name is a little misleading because two-thirds of its revenue having been coming from its retail properties over the past few years. In light of that, investors might want to pay attention to retail statistics at Vivocity Mall.

On that front, FY 14/15 had been a mixed year for the mall as shopper traffic had dropped by 1.4% to 53.2 million compared to a year ago while tenant sales had managed to inch up by 0.3% to S$908.9 million

What about the future?

Although Mapletree Commercial Trust has shown steady growth (especially on the DPU front) this year, it might run into some headwinds in the future.

In the earnings release, the REIT warned that the retail-rental market in general might be facing some pressure due to a poorer retail environment and  weakening demand for rental space.

As for the office market, Mapletree Commercial Trust’s hopes for growth aren’t too high either as it’s not expecting strong increases in rent in the current financial year (FY 15/16). The REIT cited studies done by research firm CBRE which shows that “office rental growth may have run its course and is likely to remain fairly flat.” In addition, the REIT also warned about the possibility of future competition from new developments which are coming online towards the end of 2016.

Foolish Summary

Mapletree Commercial Trust closed Wednesday at S$1.64. At that price, it’s trading for 1.3 times its latest book value and has a distribution yield of 4.9% (based on its distribution of 8.0 cents in FY 14/15). With the trust’s growth prospects looking dim over the next few years, its current valuation might be deemed to be slightly on the high end of things.

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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 writer Stanley Lim doesn’t own shares in any companies mentioned.