Accumulating MapleTree Commercial Trust

I did some research on MapleTree Commercial Trust (MCT) and found it a solid company to consider investing in.

 

vivocity

 

Although the current share price provides good value, I will accumulate more when its share price is $1.47 and below to satisfy the “safety margin” that I set for myself.

Below are my key findings that I am happy to share with you.

  • It is one of the few rare SReits that have been delivering growing dividend per share and Net Asset Value per share year on year – Very Impressive!

2016 2015 2014 2013 2012 2011
Net Asset Value (cents) 138 130 124 116 106 95
Distribution per Share (cents) 8.62 8.13 8.00 7.37 6.49 5.27

The average growth of DPS from 2011 to 2016 is ~ 6%. Even the net asset value is growing at 5.6%. Somehow MCT has found a way to grow the value of their assets annually.

If you look into the change in the valuation of the properties, it has been increasing steadily and almost at a constant annual rate, almost to the point that it is too surreal.

2016 2015 2014 2013 2012
Change in Fair Value (Mil) 135 140 156 201 197

Average increase in fair value of their assets has been $ 166 Mln per year in the last 5 years.

 

  • MCT is Big and it has a strong sponsor and shareholder in Mapletree and Temasek Holding respectively.

MCT owns assets with a total value of $6.3 Bln, making it one of biggest SReits in Singapore.

As they always say, there is an advantage that comes with size. For example, it will enjoy the economy of scale when negotiating with vendors/suppliers and when allocating overheads over a larger asset base. It will also attract the attentions of rich pocket investors who are inclined to invest in large stable companies only.

Its sponsor, Mapletree, should be able to provide a constant feed of commercial properties to MCT when those assets are ready so that MCT can continue its growth unabated. MCT has stated acquisition as one of its main strategy thrusts so we can expect growth to continue. The injection of the mammoth $1.85 B MapleTree Business Centre 1 (MBC-1) last year is a prime example of that. There is still MBC-2 as a potential target to be acquired.

Having a strong deep-pocket shareholder like Temasek, who owns 35% of MCT ensures that when the times come for growth to be funded by Equity (like the MBC-1). The move will most likely materialize if Temasek supports. Other substantial shareholder (since IPO) is Schroders with 7.5% stake, an increase from 5.7% previous year.

Interestingly though AIA, which is also a substantial holder since IPO, has ceased to be a substantial shareholder this year. There are many reasons why substantial shareholder will sell out. I am just wondering if it is they were short of cash and therefore, sold their stake so that they did not need to participate in the rights issue for MBC-1. Only AIA knows ….

 

  • Occupancy Rate has been constantly higher than 96%.

Being outside the prime CBD and yet not too far from it, it will provide some resilience if the office rental market goes downhill rapidly due to any sudden shock in the macro economics.

The drag in occupancy rate has been the Harbourfront Building after Bank of America renewed their lease with a smaller footprint. Not totally a bad news as MCT would have secured a longer lease with BoA now and improve its rental stability. In the last report, the management of MCT has guided that they had found some tenants for part of the space given up by BoA. Hopefully, it will continue to improve this quarter. On an overall basis, 98% occupany rate is a fantastic outcome whichever way you look at it. It can only get better with the improving occupancy in Harbourfront.

2016 2015 2014 2013 2012
Occupancy Rate, % 98% 97% 96% 98% 98%

MBC2010 gatefold hero shot.ashx

  • Gearing ratio is managed around 35-36% but cost of borrowing is going up to 2.66% last year, the highest since IPO.

35-36% is a comfortable gearing ratio as it offers some protection from the limit of 45%, in case of any reduction in the valuation of its properties. I don’t expect MCT to do any equity funding at this gearing ratio.

However, the cost of borrowing has creeped up by a fair bit in recent years, which puzzled me. Given the size, stability and reputation of MCT, I am thinking it should be able to negotiate for a lower interest rate. Maybe it is because the management wants to peg more of its debt at fixed rate. The % of debt that is pegged to a fixed rate has increased from 2014 of 64% to 2017 of 81%. The increase in interest rate is perhaps to buy the insurance of a fixed interest rate.

At 2.66%, it is still quite ok given that its dividend rate is typically 5-6%.

Interest coverage ratio remains very healthy at 5% (the higher the better) and only about 18-19% of its operating cash flow is used to pay interest rate. So, the risk of default is very low.

2016 2015 2014 2013 2012
Cost of Debt 2.66% 2.52% 2.28% 2.17% 2.18%
Gearing Ratio 36.3% 35.1% 36.4% 38.7% 40.9%

 

  • MCT is trading at close to its historical fair value currently

The table below shows the historical highs and lows of MCT’s Price to Book ratio and Dividend Yield for the last 3 years. The average P/B and Dividend Yield for those 3 years are 1.1 and 5.8%.

At last Friday share price of $1.55, trailing P/B ratio is 1.12 and dividend yield is 5.56%, which are close to historical averages.

2016 2015 2014
Price to Book Ratio: Highest 1.16 1.28 1.29
Price to Book Ratio: Lowest 1.00 0.96 0.98
Distribution Yield: Highest 6.2% 6.5% 6.6%
Distribution Yield: Lowest 5.4% 4.9% 5.0%

Screen-Shot-2016-07-05-at-17.13.03

My forward plan :

I did my own calculations and have decided to accumulate (significantly) more shares of MCT when it comes down to $1.47 or below. This ensures I have a safety margin that meets my requirements.

From now to then, I will probably nibble a bit here and there given that I see so many strengths in this company and the dividend yield is very decent.

Some of you may not like the fact that MCT had tapped the investors for money last year with the rights issue to purchase MBC-1. I know it can irk some of you who are investing for income and may not have the excess cash to subscribe for the rights and any excess and thus you would have gotten your stakes diluted and forgo some of the promised future dividends.

However, in the case MCT with MBC-1, I am actually very impressed that MCT was able to price its private placement only at 1.4% and a bigger (and relatively small compared to other Reits rights issuance) discount of only 3.5%. And both the placement and preferential offer were fully subscribed despite having only a small discount.

It goes a long way to say the interest and the confidence that investors have in MCT and its ability to generate positive cashflow to reward its shareholders with decent dividends in the coming years. I am a believer too.

Hope you find the above useful. Any comments are most welcome.

For this quarter’s Dividend declared: click here

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2 thoughts on “Accumulating MapleTree Commercial Trust

  1. If MCT can continue to increase DPU for another 5 years, it will become a Dividend Achiever liao (at least 10 years of consecutive dividend increases).

    Quite rare for any local stocks, even the blue chips big banks, to achieve. Usually whenever got recession, the DPU or DPS gets cut.

    Liked by 1 person

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