Will I sell Mapletree Pan Asia Commercial Trust? DPU drops 11.6%, pays 6.04% dividend yield?

Long time readers will know that one of the first articles I wrote on FH was titled “Why I plan to never sell Mapletree Commercial Trust”.

Well, there’s a lesson in there to never say never in investing.

Because yes if Mapletree Commercial Trust had stayed as Mapletree Commercial Trust we wouldn’t be having this discussion today.

But as fate would have it, Mapletree Commercial Trust bought over Mapletree North Asia Commercial Trust to create today’s Mapletree Pan Asia Commercial Trust (MPACT).

And boy… things have only gone downhill since then.

2Q Financial Results for MPACT are a disaster – DPU down 11.6%

Let’s not mince words.

MPACT’s 2Q financial results is nothing short of an unmitigated disaster.

DPU is down 11.6% on a year on year basis.

Yes if you strip out one-offs from a property tax refund the DPU is down 9.6%, but hey that is still a disaster.

Why are things so bad?

It comes down to 2 reasons.

First – the overseas portfolio is underperforming (which we already knew and is not new). 

But whereas previously this was mainly limited to the Hong Kong Festival Walk and the China properties, this has now spread to the Japan properties.

And to make things worse – some of the Singapore properties, in particular Mapletree Business City, is starting to show some weakness.

Let’s discuss each.

MPACT’s Overseas portfolio is underperforming

This one should come as no surprise, as it has already been the case for a while.

But the overseas portfolio that MPACT acquired from MNACT (used to be Mapletree Greater China Commercial Trust a long time ago) is not doing great.

You can see the revenue and net property income (NPI) numbers below.

For Hong Kong’s Festival Walk, the worst looks to be over for now, as we see NPI stabilising around last year’s levels.

Meanwhile the Korea, Japan and China properties are reporting NPI declines, with the biggest percentage decline actually coming from Japan.

Why is the Japan property performing so poorly for this Mapletree REIT?

The occupancy numbers provide further colour.

The Japan properties saw a massive decline in occupancy from 97.3% last year to only 82.3% this year.

Per MPACT:

Fujitsu Limited, the single tenant of Fujitsu Makuhari Building, has expressed intention not to renew its lease upon expiry on 31 March 2026. This property accounted for approximately 1.2% of the portfolio’s FY23/24 NPI

Ouch.

Big drop in valuations for Japan assets

Because of the weakness in the Japan properties, MPACT went out to do an interim valuation.

And boy… the numbers are not pretty.

For the Fujitsu Makuhari building where Fujitsu has expressed intention not to renew, we’re seeing a whopping 39.9% fall in the valuation.

This has led to a 17.2% drop in valuation for the Japan properties across the board.

According to MPACT:

Makuhari’s market weakness has manifested through: 

▪ Pressure on occupancy levels and market rents 

▪ Change in valuation basis for Fujitsu Makuhari Building following the expressed intention by its single tenant, Fujitsu Limited, not to renew its lease upon expiry on 31 March 2026 

As to what they plan to do:

Actively assessing strategic options, including but not limited to: 

▪ Intensifying leasing and marketing efforts, including re-letting to new tenants 

▪ Exploring change of use (subject to government approvals) 

▪ Pursuing divestment opportunities and other mitigating initiatives

Pulling up the map of the Makuhari, you can see how it is located outside of Tokyo, which means that location wise it may be challenging to find new tenants.

A bit more about Makuhari:

Makuhari is a commercial district just outside central Tokyo along the shores of Tokyo Bay in Chiba Prefecture… 

In the late 1980s, the district was built on reclaimed land in a modern style of architecture and city planning that includes elevated walkways and wide, well designed streets. The district’s attractions include a convention center, baseball stadium, lots of shopping and dining and an expansive seaside park.

Makuhari’s main attraction is the Makuhari Messe International Convention Complex (幕張メッセ), the second largest convention center in Japan behind Tokyo Big Sight. The center’s eleven exhibition halls, conference hall and 9000 seat event hall host major tradeshows and technology exhibitions such as the Tokyo Game Show, CEATEC and the Tokyo Auto Salon, along with dozens of other events, conventions and concerts.

But… Singapore assets are also underperforming now?

So just when you thought the worst was over for the Hong Kong and China properties, then this Japan news comes along.

And if things weren’t bad enough, it now looks like the Singapore portfolio is starting to show some weakness.

Mapletree Business City looks to be underperforming

The 2 crown jewels for this REIT are Vivocity and Mapletree Business City.

Vivocity still remains very strong.

But it’s the other crown jewel, Mapletree Business City that looks a bit concerning.

Occupancy has fallen from 96.8% last year to 92.5% this year.

Meanwhile rental reversions is a measly 2.5%, compared to 8.8% at the other Singapore properties.

Tenant retention rates are also much lower.

Why is the crown jewel, Mapletree Business City, underperforming?

I could be wrong on this, but my suspicion is that it is due to the type of tenants that Mapletree Business City caters to. 

MBC today primarily caters to tech tenants, and you can see how their major tenants are Google, IMDA, SAP, Samsung etc.

But in recent years, many of the tech giants have decided to rent in the CBD instead.

Think Meta (Marina One), Bytedance (ORQ), Cloudflare (Frasers Tower) and so on.

Again I could be wrong, but I suspect the weakness from MBC is because they cater primarily to tech, and tech tenants have been preferring Grade A CBD office space of late (not to mention they have also been “right sizing”).

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Is this a problem for Mapletree Pan Asia Commercial Trust?

For what it’s worth, I’m a lot less worried about Mapletree Business City.

The way I see it, the location and the quality of the real estate is good enough that I think any weakness will be temporary.

Once you give the market time to adjust, (and Mapletree to rejig the tenant mix), I do think MBC will recover in the longer term.

But keyword being longer term.

This could still be a problem in the short term if the numbers continue to come in weak.

Is MPACT selling winners to buy losers?

You know the saying in investing that you want to cut your losers fast, and let your winners run?

It’s pretty obvious that for MPACT’s portfolio the weakness is the overseas assets, and the winners are the Singapore assets.

And yet MPACT has been selling down Singapore assets, and using it to pay off debt, while retaining the overseas assets.

This definitely troubles me a bit.

Yes, I know that they sold Mapletree Anson which is not necessarily best in class.

And yes, I know that had they tried to sell Festival Walk or the China/Japan properties the price would have been terrible and it would have been even worse.

But this kinda strikes me as selling your good stuff to keep the not so good stuff.

Mapletree Pan Asia Commercial Trust pays a 6.04% DPU (annualised)

Annualising the latest DPU, and using market price of 1.31.

Gives us a 6.04% dividend yield for MPACT.

Are valuations for this Mapletree REIT attractive?

Valuations wise I have switched to using an effective cap rate analysis these days – basically taking the net property income and dividing that by the market cap + outstanding debt.

I’ve been using this because I find the book value of REITs have little meaning these days (as much of the valuations have not really adjusted to the new paradigm of higher interest rates).

MPACT’s effective cap rate today is about 5.12%.

Which means that for every $100 you put into the REIT today, the underlying property will pay out $5.12 in net property income each year.

For a portfolio where 61% of the NPI comes from Singapore, 22% from Hong Kong, and the rest from a mix of China, Japan, and Korea.

Is that good value?

Let’s be generous and say the Singapore portfolio is valued at a 4.75% cap rate, and the rest of the portfolio is 6% cap rate.

That gives us a blended cap rate of 5.25% – and MPACT today is more expensive than that.

So to be honest I don’t think MPACT is that cheap on a valuations basis today.

Best case you can say MPACT is fairly valued.

What about Technical Analysis for MPACT?

What about Technical Analysis.

Things were actually looking pretty good before the latest earnings results.

Share price broke above the 1.36 range, and broke above 50, 150, 200 day moving averages.

But after the latest earnings result, share price has gapped down and fallen back below the 1.36 range, and below key moving averages.

Doesn’t look good.

I suppose the only good news is that the REIT is very oversold here, and if you were inclined to add a long term position or play a bounce, this could be interesting for you. 

Will I sell Mapletree Pan Asia Commercial Trust? DPU down 11.6%, pays a 6.04% dividend yield?

With the results coming in this terrible, and the charts not looking pretty, would I sell this REIT?

My previous thinking was that the Hong Kong Festival Walk would stabilise at some point, and the Singapore portfolio would prop up the rest of the portfolio.

In fact the Festival Walk did indeed stabilise, and the haemorrhaging has stopped.

But what has changed is that the Japan properties surprised on the downside, and at the same time weakness from Mapletree Business City meant that the Singapore portfolio couldn’t offset losses elsewhere.

So that turned out to be wrong.

Tailwinds from interest rates? Can this benefit REITs?

What about tailwinds from interest rate cuts?

Market has priced in 5 interest rate cuts (1.25%) over the next 12 months.

If this plays out that would be bullish for REITs, as it could help funding costs stabilise at current levels (and maybe even drop).

The complexity of course is that if the Fed cuts, and Trump wins and runs a huge budget deficit, that might be inflationary in 2025.

And if the market continues to price in the return of inflation, boy that won’t be pretty for REITs.

But for what it’s worth, this kind of macro analysis should affect your portfolio asset allocation to REITs, and not the single stock analysis for Mapletree Pan Asia Commercial Trust.

So if you think 2025 will not be good for REITs you want to hold less REITs in your portfolio in general.

But as to whether to buy MPACT or CICT for example, that’s still more of a single stock analysis.

So FH… Will you sell Mapletree Pan Asia Commercial Trust?

Mapletree Pan Asia Commercial Trust is not my largest REIT position (you can see my full portfolio breakdown on FH Premium).

But it is still a position.

To be absolutely honest, I have not made up my mind on this.

I don’t see myself adding to MPACT at this price.

And as the saying goes, if you don’t see yourself adding, then you should be selling.

So who knows maybe the right decision really is to close the position and redeploy the funds elsewhere where it has a better chance of future growth.

It’s sad because I really like the Singapore portfolio for the ex-Mapletree Commercial Trust.

But there is no doubt that the overseas portfolio from Mapletree North Asia Commercial Trust is dragging down the portfolio.

And for now, it’s very hard to see where the bottom is.

Throw in some short term weakness from (potentially) Mapletree Business City, and it might not be pretty.

So for what it’s worth, I have not made up my mind just yet.

I want to mull on this further, and watch the price action the next couple of days.

As always, I’ll share updates on FH Premium on what I decide to do with MPACT, and whether I finally sell (or add) to this REIT.

This post is written on 1 Nov 2024 and will not be updated going forward. My latest views on markets, my Stock watchlist and full Personal Portfolio, are shared on FH Premium.