Mapletree Greater China Commercial Trust

Kim Eng on 21 Feb 2013

Attractive Yields. Mapletree Greater China Commercial Trust (MGCCT) is slated for listing on 12 Mar 2013, with market cap of SGD2.3-2.5bn (Offering Price of SGD0.88-0.93 per unit). Its initial portfolio comprises the Festival Walk (NLA: 794k sqft; Valuation: SGD3.4bn; Avg NPI yield-on-cost: c.4.2%) in HK and Gateway Plaza (NLA: 1,146k sqft; Valuation: SGD1bn; Avg NPI yield-on-cost: c.4.9%) in Beijing, According to the preliminary prospectus, MGCCT is offering DPU yields of 5.6%-6% for FY3/14 and 6.1%-6.5% for FY3/15, to be paid semi-annually. This compares favorably with other listed Chinabased landlords such as CRCT (5.2% yield), Fortune REIT (5.1% yield) and PCRT (6% yield).

Strong cornerstone investors Interest. MGCCT has garnered strong support from 11 cornerstone investors that will subscribe for 953m units (36% total units). Notable names include AIA, CBRE Clarion, Columbia Wanger, Henderson, Morgan Stanley, Norges Bank, Asdew Acquisitions etc. We view this as a testament to MGCCT’s asset quality (best in class properties in strategic locations) and attractive yields. The Manager believes that Festival Walk will deliver stable and sustainable growth, supported by an established Hong   Kong retail market while Gateway Plaza offers significant rental growth upside, driven by robust supply and demand dynamics in the Beijing office market.

Fee structure promotes DPU growth – Alignment with Unitholders. We noted that the REIT manager will be paid a base management fee of 10% of distributable income, as opposed to the conventional 0.1%- 0.5% of AUM. Its performance fees is also pegged to the difference in DPU (25%) with the preceding FY, rather than a function of deposited property or gross revenue/NPI (if over a benchmark). We think MGCCT
has one of the most “equitable” management fees structures amongst S-REITs, which in the past tend to promote an asset growth bias rather than unitholders’ interest. Making fees contingent on actual performance such as relative share price performance or DPU will better align interests and decrease potential agency problems, in our view.

Expect strong take-up. Given the heightened investors’ interest in China’s growth story, we expect MGCCT to be priced at the high end of its offering price (SGD0.93). Our top concern is that MGCCT will be one of the highest-geared S-REITs (~43% aggregate leverage with SGD1.9bn gross borrowings; provisional credit rating of Baa1 from Moody’s) post-listing, and this may constrained its inorganic growth in the initial years. Nonetheless, we expect its favorable lease profile (WALE of 2.4 yrs by gross rental income) to drive organic growth via rental reversions in the next two years. From our estimates, the implied cap rate for MGCCT (based on FY3/14 NPI) is c4.3% and average borrowing cost stands at 2%. If we take this cap rate as the floor for FY3/14 DPU yield, we believe yields can still be compressed by another 130bps from its forecasted FY3/14 DPU yield of 5.6%. We expect the share price to perform well and will advise investors to subscribe to its Public Offer (265m units) when it opens for application on 28 Feb.