Can Mapletree Commercial Trust maintain steady DPU as VivoCity ages?

The mall, which contributes 45-50% of MCT’s NPI, is already twelve years old.

Mapletree Commercial Trust Management’s moves to undertake asset enhancement initiatives (AEIs) to partially future-proof VivoCity against other competing malls and the online realm may boost the Mapletree Commercial Trust’s (MCT) distribution per unit (DPU) compound annual growth rate (CAGR) to 2% over the coming three years, according to a report by DBS Equity Research.

Higher contribution from VivoCity drove up MCT’s net property income (NPI) 2.2% YoY in Q3 to $87.87m from $85.96m, the firm’s financial statement revealed. Revenue also inched up 2.6% YoY to $112.54m from $109.67m. Likewise, distribution per unit (DPU) advanced 1.3% YoY to $0.0233 from $0.023.

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VivoCity maintained its robust financial performance in Q3 with revenue and NPI growing 4.6% and 3.9% YoY to $55.4m and $42m, respectively. The uplift in earnings was largely attributed to slightly better occupancy of 99.9% to 98.2% in Q3 and the impact of the prior quarter’s positive rental reversions, DBS analysts explained.

“On that front, VivoCity delivered 4% rental reversions for 9M19, slightly down 4.1% in Q1 and better than the 2.1% reported for H1 2019,” the analysts noted. “Nevertheless, the uplift in signing rents has been stronger this financial year, with an increase of 1.5% recorded for the whole of FY 2018.”

Meanwhile, Q3 foot traffic and tenant sales were down 1.4% and 2.1% YoY respectively, the report highlighted, on the back of the MCTM’s rigorous management of tenant mix which resulted in some units being temporarily closed as new tenants moved in.

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“For the first half of calendar 2019, tenant sales may remain soft as FairPrice takes over from Giant supermarket,” the analysts added. “Whilst the the decline in tenant sales may cause disappointment amongst some investors, we believe the deliberate attempt to curate the right mix of tenants will lengthen the runway for growth at VivoCity.”

This was echoed by Maybank Kim Eng’s report which added that together with the 24,000 sqft bonus gross floor area (GFA) extension in VivoCity’s Basement 1 level, the property should further entrench its position as a destination mall.

Maybank Kim Eng’s analyst Chua Su Tye also highlighted how the potential deals with Mapletree Business City II (MBC II) could pose as a possible frontrunner amongst MCT’s sponsored assets, given that the development could add up to 10% to the firm’s DPU.

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MCT’s office and business park portfolio also delivered a healthy set of results in Q3 with the firm’s other main asset Mapletree Business City I (MBC I) delivering 2.4% and 3.2% YoY increases in underlying Q3 revenue and NPI, DBS’s analysts revealed.

“The property continues to benefit from inbuilt rental escalations and actual occupancy increasing to 97.5% from 93.3%,” the analysts explained.

Chua warned however that a prolonged slowdown in economic activity could reduce demand for retail, office and business park space, resulting in lower occupancy and rental rates. “Termination of long-term leases contributing to weaker portfolio tenant retention rate and sharper-than-expected rise in interest rates could increase cost of debt and negatively impact earnings, with higher cost of capital lowering valuations.”

Nevertheless, the analysts agreed that given MCT’s stable capital structure and portfolio, the firm should be on track to accord a premium rating.

“We believe MCT is the Fort Knox of REITS holding the ‘gold’ or ‘crown jewels’ in the form of VivoCity and MBC I, the best in class retail and office/business park assets,” the analysts highlighted.