Wednesday, January 15, 2014

Recent Actions - Mapletree Greater ChinaCommercial Trust (MGCCT)

Today I've initiated a long position in Mapletree Greater ChinaCommercial Trust (MGCCT) at a price of $0.81.



This is my second additions to the Mapletree Reits family which I have in my portfolio after the purchase of Mapletree Log last month.

I've long been impressed with the quality of the assets that MGCCT has when it launched its IPO last year.

Festive Walk - one of the highly sought retail components in the strategic location of Kowloon. Even during the epidemic of SARS and the GFC in 2008/2009, rental revenue has managed to creep up higher, giving a CAGR of 5.8% over the past 10 years.



Gateway Plaza - One of the grade A office located in strategic Beijing area. As seen from past history, occupancy rate has stayed well above 95% for the past 2-3 years, with office rent climbing back up after improvement in the global economy.



So why do I buy?

Back during the IPO, the stock was priced at the higher range end at $0.93 which yield investors at about 5.3%. It is easy to look back now given that at that point in time, news of Fed tapering are not even at the slightest concern on the back of investors' mind and we have the US 10 YR bond treasury yielding around 2%.

Given today's impending interest rate increase situation (US 10 YR bond treasury yielding 2.87%), it is natural that investors are generally seeking a higher required rate of returns on riskier assets. I decided to purchase it at $0.81, yielding me about 6.9% for FY2014 and 7.3% for FY2015 and beyond.

Another interesting news for MGCCT investors is that they have performed well that exceeded their forecasted numbers in terms of their Distribution per Unit (DPU) by as much as 10.4% when they announced their 2nd Quarter results back in Nov 13. Their next scheduled result announcement is due on the 22nd January and I do expect a similar strong performance.

The management has also announced that 95% of the expiring leases for Festive Walk for FY2013/2014 have been successfully renewed with rental uplift of approximately 22%. For Gateway Plaza, 78% of the expiring leases have been renewed with a rental uplift also. Through these actions, investors can expect a stronger performance for years to come and this will give a strong foundation for the stock price to hold.

Some investors have raised concerns regarding the high gearing the stock has. For me, this is not so much of a concern.

First of all, management has taken initiative to reduce debt such that gearing has been reduced to 40.1% at the moment. Since I do not expect them to acquire any major asset acquisitions in the next 2-3 years, there will not be any equity raised by the company for the short term. Perhaps the more concerning situation is the probability of a property bubble in HK which will devalue its asset prices and hence affects the gearing upwards.

Second, MGCCT has a debt expiry profile that averages about 3.5 years to maturity, with no refinancing risk for the next two years. The management has also prudently hedged their earnings against interest rate increase volatility (71% is fixed rate) as well as forex risk, thereby reducing any earnings downward surprise to investors.

Conclusion


We know that Reits are no longer as popular to investors as previously were. But given the pessimistic comes great opportunity for me to accumulate stocks that can still yield good returns. The numbers look decent to me in terms of price and earnings. Depending on your risk flavor, this could be one to look out for.

11 comments:

  1. If u delve deeper into the rental reversions at gateway plaza leases are being renewed at 80pct uplift owing to chronic shortage of offices in Beijing due to strong demand and very limited land supply within 3 rings of Beijing. Given typical lease of 3 years its 33pct being renewed every year. So basically u can be more or less certain of double digit rental growth in the next few years barring really adverse events

    ReplyDelete
    Replies
    1. Hi Anonymous

      Thanks for adding the relevant facts.

      80% uplift is actually quite scary. Imagine it can go up almost 1 fold and then come down by 1 fold, it will have a big impact on earnings if economy sudddenly turns weak. In Singapore, a 10-20% increase/decrease in the office sector caused massive uproar, not to imagine it is happening in China.

      Delete
  2. "But given the pessimistic comes great opportunity for me to accumulate stocks that can still yield good returns."

    I like your fighting spirit! I'll keep this in mind and look out for this too. Thanks for sharing your thoughts!

    ReplyDelete
    Replies
    1. Thanks Vicky.

      I hope the review helps in your decision :)

      Delete
  3. Hi B,

    Thanks for sharing about this MGCCT. I do have some reservations about this stock. 1) Given the possible increased interests rates this year or the coming few years, won't the high gearing be an issue? 2) I read in the company website that management is only committed to paying distributing 100% to shareholders this year (and possibly next?) but after that, management is committed to a 90% payout. In that case, dividends will be reduced hence possibly less than the 6%.

    what are your thoughts on this?

    Renewed investor

    ReplyDelete
    Replies
    1. Hi renewed investor

      Mgcct has fixed rate set at 2.3% on 71% of its existing loan and they do not hv to refinance their loans until 2 to 3 years later, so an increase in interest rates will impact them minimally in my opinion.

      Regarding the 90% payout, I feel the management should do that instead of distributing 100% payout for the next couple of years. They did the 100% payout because of the recent ipo in order to entice investors. The remaining earnings could then be used to repay some of the debt, or fund some small asset enhancement program. Depending on the management ability, I think we should be safr with mapletree group management.

      Delete
  4. Hi B,

    Thanks for your response. I agree with what you have said. With possible 90% payout in future, we could still get about 6.4% payout at current price of $0.80. I think that is not too bad. Like you said, I really like the quality asset of this reit and the strong sponsor of Mapletree. What remains now is whether we have an effective management for this reit.

    Renewed investor

    ReplyDelete
  5. Added 5 lots at 0.795~~
    Will keep coming here to see your blog~~~
    新年快乐~~

    ReplyDelete
    Replies
    1. Hi Meow meow

      Good value to add the price.

      I am looking to add should the price goes a little cheaper.

      Delete
  6. In the Last CRASH, all the REITS CRASHED until BOTTOM BOTTOM FLAT FLAT.
    TWO DIAMOND GRADE PROPERTIES in SINGAPORE were SOLD and OFFERED recently.
    PARAGON ORCHARD
    CENTER POINT ORCHARD

    This is the SIGNAL that PROPERTY PRICES are the THE PEAK of ALL Peaks NOW !

    ReplyDelete
  7. How would u compare this to CroesusRT ? Their yield is not bad as well. Seems like their management have also locked in interest rates as well to forsee future rising interest rates. Plus they have recently acquired some malls which, looking forward, would increase the DPU of the trust. Any thoughts?

    ReplyDelete

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