THE manager of Mapletree Pan Asia Commercial Trust (MPACT) on Friday (Oct 28) said it does not expect a miraculous recovery for its Festival Walk retail mall in Hong Kong amid China&rsquo s strict zero-Covid policy.

 

One of MPACT&rsquo s three &ldquo core assets&rdquo alongside VivoCity and Mapletree Business City (MBC) in Singapore, Festival Walk was a key blemish on what was otherwise a solid set of results for the real estate investment trust (Reit).

 

In its first results announcement post-merger, the Reit posted a 12.5 per cent increase in distribution per unit (DPU) to S$0.0494 for the first half ended September, with gross revenue and net property income (NPI) both rising 44.9 per cent.

 

The growth was credited mainly to the contribution from properties acquired through the merger of Mapletree Commercial Trust (MCT) with Mapletree North Asia Commercial Trust (MNACT). MCT was renamed MPACT following the completion of the merger in August.

 

The Reit manager also attributed the improvement in financial performance to higher contributions from VivoCity and MBC, even as Festival Walk continued to weigh on the Reit&rsquo s performance.

 

MPACT&rsquo s portfolio average rental reversion stood at a positive 1.1 per cent in the first half, with about 1.1 million square feet (sq ft) of net lettable area (NLA) renewed or re-let. Festival Walk&rsquo s average rental reversion, on the other hand, was negative 11.5 per cent in H1.

 

Shopper traffic and tenants&rsquo sales in Festival Walk dipped in H1, down 0.7 per cent and 0.5 per cent year on year, respectively. Tenants&rsquo sales at Festival Walk are now nearly 30 per cent below pre-Covid levels.

 

In contrast, VivoCity clocked a 49.4 per cent year-on-year surge in shopper traffic in H1 tenants&rsquo sales there jumped 48.4 per cent to surpass pre-Covid levels.

 

Sharon Lim, chief executive officer of the MPACT manager, speaking at an earnings call on Friday following the release of the H1 results after the market close the day before, said: &ldquo Festival Walk cannot just turn over miraculously from what it is overnight. I think we just have to be very realistic.&rdquo

 

She noted that the negative 11.5 per cent rental reversion for Festival Walk was already &ldquo definitely a vast improvement&rdquo , having narrowed from negative 30 per cent in the previous year. &ldquo There&rsquo s still softness &ndash there&rsquo s no denial &ndash but I would say that the traction is getting better over the months,&rdquo she said.

 

The way she sees it, the recovery of Festival Walk is &ldquo highly dependent&rdquo on the reopening of Chinese borders. &ldquo When borders open, my confidence level will shoot up very, very high, because Chinese shoppers, rather than foreign tourists, make up the (biggest) percentage of our shoppers,&rdquo she said.

 

Meanwhile, like its Reit peers, MPACT is also expected to face cost pressures from rising interest rates.

 

As at end September, its aggregate leverage stood at 40.1 per cent, with a weighted average all-in cost of debt at 2.44 per cent per annum, and an average term-to-maturity of debt at three years.

 

Some 72.5 per cent of its S$6.95 billion of borrowings are hedged to fixed interest rates about 88 per cent of its distributable income is either derived in or hedged to Singapore dollars.

 

In a flash note on Oct 27, Citi analyst Brandon Lee cut his DPU estimates for MPACT by 2.8 per cent for FY2023 and by 5.7 per cent for FY2024 due to &ldquo higher debt cost assumption&rdquo . This implies a forecasted DPU growth of 2.3 per cent for FY2023 DPU growth is expected to stay flat in FY2024.

 

Citi has lowered its target price for MPACT by 11 per cent to S$1.70, from S$1.90 previously, while keeping its &ldquo neutral&rdquo recommendation.

 

&ldquo The bottom line, when we look at debt&hellip (is that) we&rsquo re in a very interesting period now,&rdquo said MPACT&rsquo s Lim.

 

The &ldquo burning questions&rdquo for most chief financial officers (CFOs) of the Reits, she said, are when they think the rising interest rates will taper off, and how long they want to lock in their loans for.

 

&ldquo The tenure will be a valid question for most CFOs to ponder over, as to how long they want to lock their debt,&rdquo she said. &ldquo I don&rsquo t think any CFO has the answer today.&rdquo

MAPLETREE Pan Asia Commercial Trust : N2IU +1.22% (MPACT) posted a distribution per unit (DPU) of 4.94 Singapore cents in the first half of its fiscal year ending Sep 30, a 12.5 per cent increase from the 4.39 cents recorded for the same period last year.

 

The increase in DPU was driven by contribution from properties under Mapletree North Asia Commercial Trust, which Mapletree Commercial Trust acquired through a merger.

 

Contributions from its core assets, which include shopping mall VivoCity and integrated development Mapletree Business City, also drove MPACT&rsquo s performance, said its manager, which released the new entity&rsquo s first set of combined earnings in a bourse filing on Thursday (Oct 27).

 

The DPU comprises a clean-up distribution of 3.04 cents per unit by Mapletree Commercial Trust from Apr 1 to Jul 20 this year, which has already been paid, as well as 1.9 cents in DPU from Jul 21 to Sep 30, due at the end of the year.

 

Net property income for the first half went up 44.9 per cent to S$275.2 million in the first six months of its fiscal year, from S$189.9 million over a year ago.

 

Gross revenue rose by the same percentage, coming in at S$353.2 million from S$243.7 million.

 

Sharon Lim, chief executive officer of the newly merged entity, said that 63 per cent of its gross revenue and net property income were derived from Vivocity and Mapletree Business City.

 

The trust achieved a committed occupancy rate of 96.9 per cent across its portfolio, which has assets under management (AUM) of about S$16.9 billion.

 

Over the fiscal half-year, MPACT renewed or re-let a total of 1.1 million square feet of net lettable area, with a positive rental reversion of 1.1 per cent on average. The weighted average lease expiry is 2.4 years.

 

As a result of the merger, MPACT&rsquo s total assets grew to S$17.2 billion from S$9.0 billion in March. The net asset value per unit rose as well, by 4.0 per cent to S$1.81.

 

Its outstanding debt stood at around S$7 billion as at Sep 30, working out to an aggregate leverage ratio of about 40.1 per cent.

 

To mitigate uncertainties arising from interest-rate and foreign-exchange volatilities, about 72.5 per cent of the total gross debt had been fixed through fixed-rate debt or interest rate swaps, and 88 per cent of MPACT&rsquo s distributable income (based on rolling four quarters) was derived or hedged in the Singapore dollar. 

 

MPACT&rsquo s manager said that the debt maturity profile remains well-distributed, with no more than 22 per cent of debt due in any financial year. The debt profile by currency also largely mirrors the geographical composition of MPACT&rsquo s AUM, providing a natural hedge for the balance sheet, it said.

 

Lim said: &ldquo The global economic environment has deteriorated due to prolonged political conflicts, rising energy prices and interest rates. In navigating the volatilities, we will press on with our proactive asset-management approach. We will also focus on safeguarding the balance sheet, and seize suitable opportunities to achieve a balance of risks and costs.&rdquo

 

On Sep 30, MPACT Management Ltd independent non-executive director Lilian Chiang Sui Fook acquired 30,000 units of Mapletree Pan Asia Commercial Trust : N2IU +0.57% (MPACT) at S$1.70 per unit. As the senior partner of Deacons and the head of its property department, she has extensive experience in all types of real estate related transactions. MPACT will report its financials for its H1 2023 (ended Sep 30) after the close of trading hours on Oct 27.