Mapletree Commercial Trust - 1H FY16 in line, +13% retail reversions, and limited vacancy risk for office


MCT's 1H FY16 DPU of S¢4.03 (+2.8%) was in line. Revenue of S$141 mn was up 1.7% YoY, mainly due to higher rents at VivoCity and Merrill Lynch Harbourfront (MLHF). NPI rose 5.1% as property operating expenses fell 8.3% YoY, driven by lower electricity consumption and tariff rates.

VivoCity tenant sales rose 5.5% in 2Q FY16, helped by more public holidays and stronger tourist arrivals; as a result, 1H FY16 tenant sales turned positive to +1.6%. Retail rent reversions came in at +13.2% for 1H FY16, and there are still more opportunities available for remixing of tenants and spaces.

The office portfolio recorded rent reversions of 10.6% while vacancy risk on will be limited until FY18 as office expiries for 2H FY16/17 will only account for 0.5%/1.0% of total rental income.

We upgrade MCT to OUTPERFORM (from Neutral) as vacancy risk on the office portfolio is limited, and rent reversions should continue to remain above peers. MCT has fallen 19% over the past six months and offers a CY16E yield of 6.2%.

MCT's 1H FY16 DPU of S¢4.03 (+2.8%) was in line, accounting for 49-50% of our and the street's full-year estimates. Revenue grew 1.7% YoY, mainly due to higher rents at VivoCity and Merrill Lynch Harbourfront (MLHF). NPI rose 5.1% as property operating expenses fell 8.3% YoY, driven by lower electricity consumption and tariff rates. Interest costs rose 12% due to higher interest rates and longer-term debt; as such, distributable income only rose 3.6%.

VivoCity tenant sales rose 5.5% in 2Q FY16, helped by more public holidays and stronger tourist arrivals. 1H FY16 tenant sales growth turned positive to +1.6% (from -2.0% in 1Q FY16). 2Q FY16 shoppers traffic also rose +3.1%, reducing the decline in shopper traffic in 1H FY16 to -1.9% (-6.7% in 1Q FY16).

The retail portfolio achieved rent reversions of +13.2% for 1H FY16, with a retention rate of 85.2%. Management believes there are still more opportunities available for remixing of tenants and spaces at VivoCity, which could drive reversions going forward. 114 leases representing ~15.8% of rental income have been renewed so far, with only 4.0% remaining in 2H FY16.

The office portfolio recorded rent reversions of +10.6% but with a low retention rate of 66.8%. Portfolio occupancy improved 1.1 pp QoQ to 96.6%, mainly due to the improvement at PSAB (+2.4 pp) and Mapletree Anson (+4.3 pp). The improvement could continue in the coming quarters with committed occupancy at 99.9% at VivoCity, 94.7% at PSAB and 99.1% at Mapletree Anson.

Vacancy risk on MCT's office will be limited until FY18 as expiries for 2H FY16 and FY17 should only account for 0.5% and 1.0% of total rental income, respectively.

Average cost of debt remained stable QoQ at 2.42% with gearing at 36.4%, and 70.6% fixed. Management could look to raise the fixed proportion of debt moving forward and is comfortable within a range of 70-85%. S$354 mn of debt will be expiring in FY17 (S$169 mn in April 2016 and S$187 in Jan 2017).

Technical Analysis
Daily Chart
We upgrade MCT to OUTPERFORM (from Neutral) as near-term downside from the office portfolio appears limited, and we believe rent reversions will continue to remain above peers. Additionally, MCT has fallen 19% over the past six months and offers a CY16E yield of 6.2% compared to CMT (5.8%), SPH REIT (5.9%) and FCT (6.1%). (Read Report)

Read Related Reports
1) Mapletree Commercial Trust - Helped by haze and holidays by Maybank Kim Eng Research, published on 22 October 2015

2) Mapletree Commercial Trust - Better operating performance by CIMB Research, published on 21 October 2015

Source : Credit Suisse Asia Pacific Equity Research

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