Mapletree North Asia Commercial Trust
In the previous article on Mapletree North Asia Commerical Trust (MNACT), we talked provided an overview of its business operations and it property overview.
In this article, we are going to focus specifically on the events that transpired in November and whether MNACT is attractive at today’s valuation.
As readers will know, Hong Kong has been rocked by months of unrest. There was hardly a week without seeing headlines of tear gas being fired and violent protests breaking out across Hong Kong.
Violence hit the mall in November when radicals broke damaged the mall. Notably, a petrol bomb was hurled at its signature Christmas Tree that went up in flames.
This vandalism ultimately forced it to close on November 13.
Impact on Maple Tree North Asia Commerical Trust
As mentioned in my previous article, Festival Walk unfortunately makes up the bulk of MNACT’s total portfolio at 65.3%.
A theoretical discussion on why concentration can be deadly suddenly becomes very real when your main revenue producing asset is slated to be shut down for months.
Up till then, share prices of Hong Kong facing property counters were already trending down because of the unrest. Mapletree North Asia Commercial Trus was no exception. The closure of Festival Walk saw its share price plunge almost 10% more.
Whats Happened in Hong Kong Since Then
I wrote an article reviewing the political situation in Hong Kong which I highly recommend you check out:
A Review Of The Situation In Hong Kong And Its Implication For Hong Kong Stocks
Investors are taking on real political risk in Hong Kong and its acutely important to be aware of this when investing there.
I ended the article then in November 26th with the following comments
“In the old legend the wise men boiled down the history of mortal affairs into the single phrase, “This too will pass.”
We believe that these words will likewise apply to Hong Kong in the time to come.”
I have been in Hong Kong for the past month for work and things have calmed down considerably on both sides.
My own opinion is that Hong Kong is a remarkably resilient place. There is certainly talk by many people of immigration, sending their kids overseas, opening bank accounts.
At the same time, life has gone on and things are returning to normalcy.
Of course there are still unresolved political tensions which may flare up from time to time but there is reason to be optimistic that the worst of this storm has come to past.
More importantly, Hong Kong’s role as a financial hub as largely remained undiminished for all intents and purposes as of now with no real viable offshore alternative.
So What Now for Mapletree North Asia Commercial Trust?
Investors looking at MNACT have several considerations to take note off.
Firstly, I sincerely believe that Hong Kong people as a whole do not have any specific ill will to Singaporeans nor was the mall targeted specifically for the reason that it was majority owned by a government linked corporation.
It was rather unfortunate that only Festival Walk was targeted and damaged so badly that it was forced to shut down for months.
The question is then whether the last quarter was a blimp. A dividend lost in the mail so to speak.
The closure of the mall for extensive repairs and the loss of income during that time period is sure to have an impact on its distributions for the preceding months.
The manager has expressed confidence that a substantial loss of its income and repairs can be claimed although the timing of the insurance payout remains to be finalised.
Secondly, the question is whether the fundamental earnings power of the mall is intact.
I believe this to be the case.
Festival Walk (having actually visited the mall prior to the events) is a fantastic mall with a prime catchment area.
That being said, it would be right to say that rental reversions would moderate in the short run with the mall having to revamp up its mall business and general weak retail sales in the city.
The Importance of the REIT Manager
When it comes to REITs, investors are often focused on the potential yield. Not enough care and consideration is placed on the quality and competence of the manager.
As Churchill once said, never let a good crisis go to waste.
Since the closure, the manager has moved quickly to announce several strategic initiatives to alleviate the concerns of investors such as:
- Proposed acquisition of office property in Japan to fuel its DPU growth in light of weak rental versions in Hong Kong
- Announcement of distribution top up of 40% of Festival Walk Retail avenue from Nov 2019 to June 2020
Notably, there is strong support from the sponsor, Mapletree Investment which is a reaffirmation of continued support for Mapletree North Asia Trust. This should also help to mitigate concentration risk.
As of 31st December 2019, Temasek Holdings has increased in stake in MNACT from 34% to 36% (its stake as of end July 2019 was 34%).
Final Thoughts on Maple Tree North Asia Commercial Trust
One final issue to deal with is the issue of concentration risk that is still inherent in MNACT for now.
This is absolutely a valid concern that MNACT is now moving to address.
Another way that investors can also mitigate the concentration risk is to reduce their position sizing. For example, if a full-size position in your portfolio was 5%, you could reduce it to 2% to 2.5%.
Finally, the Manager has announced that all efforts are being made to re-open the mall on the 16th January 2020 before the Lunar New Year festive season.
If this does happen, I will certainly pay a visit and report back!
