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3 Major Issues Behind Mapletree Greater China Commercial Trust’s 13% Decline In 3 Months

Over the past three months, Mapletree Greater China Commercial Trust (SGX:RW0U) has seen its unit price fall by 13% to S$0.96 currently. This has happened despite the market – as represented by the Straits Times Index (SGX: ^STI) – basically staying flat.

I thought it would be interesting to explore some of the major issues plaguing the REIT.

But before I do so, here’s a quick background on MGCCT for context later. MGCT is a real estate investment trust which holds three properties in Hong Kong, Beijing, and Shanghai.

The REIT’s flagship property is currently Festival Walk in Hong Kong, which accounts for 71% of its total revenue. Festival Walk has both retail and office elements. The other two properties in MGCCT’s portfolio are the office building Gateway Plaza in Beijing (22% of the REIT’s total revenue) and the business park property Sandhill Plaza in Shanghai (7% of total revenue).

With that, let’s look at some of the REIT’s issues:

Major issue No.1: Weak retail sales and significant upcoming rental renewals

In the six months ended 30 September 2016 (1H FY16/17), Festival Walk experienced year-on-year declines of 10.4% and 6.4% in tenant sales and footfall, respectively. In other words, Festival Walk appears to have become less popular with shoppers in Hong Kong, at least for the period under study.

MGCCT commented in its earnings release that the lower tenant sales and footfall at Festival Walk had been due partly to the closure of its cinema for renovation since early 2016 (a “challenging retail environment” was the other reason cited). The cinema has reopened since July 2016.

As of 30 September 2016, the fiscal year ending 31 March 2018 (FY17/18) is when 36.5% of the REIT’s leases (by gross rental income) will expire. The bulk of that renewal actually comes from Festival Walk. These are summarised in the chart below:

Source: MGCCT earnings presentation

Would the retail tenants of Festival Walk be willing to renew their rent at higher or comparable rates when their leases come due given the decline in the mall’s tenant sales and footfall?

In 1H FY16/17, MGCCT managed to achieve positive rental reversions of 15% for the retail component of Festival Walk. Time will tell if the REIT has the ability to push through higher rental rates in the future as its leases come due.

Major issue No.2: Increasing debt

Debt, when used wisely by a REIT, can help generate value for its investors. But its presence is also a source of financial risk. In the case of MGCCT, it has seen its debt increase sharply since the end of FY14/15. You can see this in the table below:

Source: MGCCT earnings presentation

The increase in MGCCT’s debt was mostly used for the acquisition of Sandhill Plaza in June 2015.

But to MGCCT’s credit, the REIT currently has an average term to maturity for its debt of 3.1 years, which is longer than its weighted average lease expiry of 2.6 years. The REIT has also fixed the interest rates for 85% of its borrowings.

Major issue No.3: Two conservative quarters of declining distribution

Slower economic growth in China appears to have hit MGCCT’s results. The REIT has seen its distribution per unit (DPU) fall for two consecutive quarters.

Source: MGCCT earnings presentation

As you can see from the chart above, consecutive DPU declines is a rare occurrence for MGCCT.

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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 Ong Kai Kiat doesn't own shares in any companies mentioned.