Mapletree Pan Asia Commercial Trust Earnings: Portfolio Metrics Improving; Risks From China Remain

Mapletree Pan Asia Commercial Trust’s N2IU first-quarter fiscal 2024 (ending March) net property income grew 1% quarter on quarter to SGD 179.2 million on the back of 1.6% quarter-on-quarter revenue growth. These are largely driven by higher contributions from Mapletree Business City and VivoCity, offset by increased utility costs. However, distribution per unit fell 3.1% quarter on quarter to SGD 0.0218 due to higher borrowing costs. The results are largely in line with our expectations and we retain our fair value estimate of SGD 1.82. We think the trust is fairly valued at current prices, trading at a fiscal 2024 dividend yield of 5.3%. Within the sector, we prefer Keppel REIT, which is trading at a more attractive 2023 dividend yield of 6.6%, underpinned by its high-quality grade-A office assets and exceptional tenants register.

The trust’s China office portfolio improved its occupancy rate to 87.3% this quarter from 86.5% in the previous quarter. However, this was achieved through a negative 3.6% rental reversion. Management shared that China’s office market remains soft and the benefits of receiving lower rents immediately outweigh the benefits of holding out in exchange for slightly higher rents. This is especially so, as it may take up to 18 months to find a new tenant in the current soft market. In our view, this strategy makes sense as it could improve the returns of unitholders through better utilization of vacant spaces. However, we think the soft China office market will persist over the next 18 months due to elevated supply and weak demand. This may eventually lead to pressures on the trust’s China asset values during the fiscal year-end valuation exercise. We have factored this impact into our fair value estimate through our computed terminal value.