Investor notes: Mapletree Greater China Commercial Trust

SINGAPORE - When faced with a economic slowdown in the world's second largest economy, a little retail and commercial magic might help.

At least that is what the Mapletree Greater China Commercial Trust has come up with, after it reported its latest set of results on Tuesday.

MGCCT, also known by its Bloomberg ticker name as MAGIC:SP, showed that even though the headline economic figures in China are down, businesses with the right formula can still thrive in the country.

MGCCT is a real estate investment trust that has commercial properties in both Hong Kong and China.

Its portfolio comprises Festival Walk, a premier retail and office building in Hong Kong, Gateway Plaza, a premier Grade-A office development with a podium area in Beijing, and Sandhill Plaza, a premium quality business park property in Shanghai. The portfolio value stands at $5.82 billion.

Q2 2015 Q2 2014
Net property income $69.5 million $55.1 million
Distributable income $49.5 million $43.5 million
DPU 1.808 cents 1.606 cents

1) Income up

China is experiencing a weird sensation nowadays, called slowing down. It is expected to log growth of just under 7 per cent this year.

Most other economies would gladly snatch a 7 per cent growth number. But for the Chinese, which has been growing in double digit terms for the better part of the past two decades, it is slow.

For MGCCT however, the slowdown has not yet affected the performance for its properties, as it recorded better performance across most of its metrics.

Gross revenue was higher at by quarter, rising to $84.6 million.

Net property income also jumped 26 per cent to $69.5 million, driven by positive rental revisions ib Festival Walk (FW) and Gateway Plaza (GP). Sandhill Plaza which was acquired in June also contributed a full quarter of earnings to the Reit.

These led to distributions per unit rising 12.6 per cent to 1.808 for the quarter.

At current prices, yield is about 7 per cent.

2) Domestic consumption remains strong

One reason for the strong performance is simply that even though growth is slowing in China and Hong Kong, domestic consumption remains steady.

The Reit manager said that Hong Kong's retail sector does face headwinds, from both austerity measures in China as well as fewer tourist arrivals.

"However, low unemployment rate and steady domestic consumption in Hong Kong are expected to continue to support the suburban shopping malls," it said.

Economists have also blamed the slowdown in the restructuring of the economy in China, where it shifts from an export-driven model towards more domestic consumption.

That, plus the growth of the middle class there, will continue to support domestic activities, such as as commercial activities.

3) Hedging works

For Reits, the biggest worry remains the interest rate hikes.

Not only will it impact its ability to service loans, an interest rate hike will also make reits' yields less attractive overall.

On top of that, Reits in foreign countries also have to take into account foreign exchange risk.

In August, China suddenly devalued its currency, sparking off a round of another intense bout of volatility.

That is many Reits have started to do hedging, both on the interest rates they have to pay as well as the FX risk they take on.

What about MGCCT?

This is what they said:

"As part of the Manager's prudent capital management strategy to mitigate interest rate and foreign exchange volatilities, interest cost on 86 per cent of MGCCT's debt for FY2015/2016 has been fixed and about 81 per cent of the amount distributable arising in FY2015/2016 has been hedged. The Manager will continue to proactively monitor and manage these exposures."

It added that it had an weight average debt maturity of 2.45 years, healthy interest coverage of 4 times and debt cost of 2.64 per cent.

4) One worry

If there is one worry, it is that its gearing is high at 41 per cent, which was significantly higher than the 36.2 per cent last year. On average, Reits here have a gearing of about 35 per cent.

A key reasonwhy why MGCCT had a higher than average debt burden was because the Reit borrowed to buy Sandhill Plaza in June.

And while it has a big part of its interest payments at fixed rates, the high debt burden does mean that there is little headroom for further acquisitions.

The Monetary Authority of Singapore said that borrowings for Reits are to be capped at 45 per cent.

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