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How Will Mapletree Greater China Commercial Trust’s Latest Acquisition Proposal Of Japanese Properties Affect Its Investors?

In late March this year, Mapletree Greater China Commercial Trust (SGX: RW0U) announced its proposed acquisition of six properties in Japan. This would mark the REIT’s maiden entry into Japan after it announced an expansion of its investment mandate on January 2018 to include the country.

In this article, I will dissect how this acquisition might affect Mapletree Greater China Commercial Trust’s unitholders.

A peek into the REIT

As a quick introduction, Mapletree Greater China Commercial Trust is a REIT that currently has a portfolio of three properties. These properties are: Festival Walk, a retail mall in Hong Kong; Gateway Plaza, an office building in Beijing; and Sandhill Plaza, a business park development in Shanghai.

If the proposed acquisition of the properties in Japan does succeed, it will expand the trust’s portfolio beyond the Greater China region. As such, the REIT has also proposed renaming itself to Mapletree North Asia Commercial Trust to reflect its wider geographical footprint. Now, lets dive into some important details of the acquisition that investors should be aware of.

Acquisition details

The total acquisition cost will come up to around ¥62.3 billion, or approximately S$770.5 million. It consists of the cost of ¥60.9 billion (S$753.4 million) for the six properties, plus other acquisition expenses and fees that total S$17.1 million.

The acquisition will bring Mapletree Greater China Commercial Trust’s total portfolio size to nine properties with a collective value of S$6.8 billion, up from its current portfolio size of S$6 billion. The REIT intends to fund the deal through a combination of debt and cash. The cash will come from a private placement.

Regarding the private placement, Mapletree Greater China Commercial Trust is hoping to raise S$323.1 million through the private placement of 296.4 million new units of itself at a price of S$1.09 each. The price for the private placement units is at a slight discount to the REIT’s current net asset value per unit of S$1.228, and its last trading price of S$1.16 per unit.

As for the debt needed to finance the remaining portion of the acquisition cost, the REIT will have to take on an additional loan of ¥33 billion (S$441.6 million). This means that around 57% of the Japan acquisition will be debt-financed.

What do the new properties bring?

The new properties will add a level of diversification to Mapletree Greater China Commercial Trust’s current property portfolio. The six properties in Japan are also reported to have a net property income yield of 4.8% in the 12 months ended 31 March 2017, based on the portfolio’s market value of S$782.8 million.

So, we can calculate that the new properties will add around S$37.6 million in net property income to the REIT. This is 13.2% of Mapletree Greater China Commercial Trust’s total net property income of S$285.6 million in its fiscal year ended 31 March 2017 (FY16/17).

Will the deal be yield accretive for unitholders?

Perhaps the more pertinent question for investors in Mapletree Greater China Commercial Trust is whether the acquisition will increase its distributions. To calculate this, we need to determine if the increase in the REIT’s net property income is greater than the dilutive impact of the private placement.

As mentioned earlier, the private placement will increase the REIT’s unit base by 296 million units. As of 31 December 2017, the REIT’s existing number of units totalled 2,807 million. Therefore, the private placement will increase the unit base by 10.5%. We have also already calculated that the new properties would have increased the REIT’s net property income in FY16/17 by 13.2%, assuming all else remain equal.

As the total net property income growth is greater than the increase in the unit base, it is likely that the REIT’s unitholders will benefit through higher distributions per unit.

Mapletree Greater China Commercial Trust’s own calculations also suggest the same. Assuming the Japan portfolio was acquired at the start of FY16/17, the REIT’s distribution per unit (DPU) for the year would have increased by 3.6%.

The Foolish bottom line

I have done a very simple exercise to determine if Mapletree Greater China Commercial Trust’s unitholders will benefit from its latest proposed acquisition. By my calculations, despite the enlarged unit base, the acquisition is likely to have a net increase on the REIT’s distributions per unit for existing unitholders.

However, besides the change in the REIT’s distributions, there are also other aspects of the deal that investors need to take note of. For one, the acquisition will be largely funded by debt, which could increase the REIT’s gearing ratio. Even before the acquisition, Mapletree Greater China Commercial Trust already had a relatively high gearing ratio of around 39.3% as of 31 December 2017. The increased debt load will stretch the REIT’s balance sheet. REITs in Singapore have a regulatory gearing ceiling of 45%.

Second, unitholders will need to continue to monitor Mapletree Greater China Commercial Trust’s already low interest coverage ratio of 3.9 at the end of 2017. Only by putting all the pieces together can we get a better idea on the long-term effects of the acquisition.

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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 Jeremy Chia doesn’t own shares in any companies mentioned.