Mapletree Commercial Trust Tragic Preferential Offering Still Higher Than Market Price.

The tragic Preferential Offering exercise for Mapletree Commercial Trust ("MCT") has commenced on 12 July 2022 and will close at 5.30pm on Wednesday, 20 July 2022. The offer basis will be 306 Preferential Offering Units for every 1,000 existing MCT Units held by eligible unit-holders at the issue price of S$2.0039 per unit. It is a tragedy as the current market traded price as at 18 July 2022 is S$ 1.790 per unit hence no one in the right frame of mind will be subscribing for this particular rights issue which is at a premium of +12% to the market traded price on SGX. Mapletree Investments Pte Ltd will be taking up all the unsubscribed rights and losing as much as S$200Mil immediately in unrealised losses.  

Time table for Preferential Offering

Offered price way higher than last market trading price

While I have previously sold off my entire Mapletree North Asia Commercial Trust ("MNACT"), I am still holding on to MCT and as a matter of fact, I have been adding more units into MCT with the recent dip in pricing. With the previous January sudden outbreak of Omicron variant of COVID in Hong Kong being brought under better control, much of the restrictions previously imposed has been relaxed and this bodes well for its key asset Festival Walk acquired from MNACT. The negative rental reversion for Festival Walk should turn-around eventually.

Last but not least, I am sure that the incumbent property manager will continue to maximise the potential of all the newly acquired assets given its good track record of growing its portfolio under the management of the Mapletree branding. In addition, Mapletree Investments Pte Ltd seems to be of the view that the newly merged entity is worth at least S$2.0039 per unit and willing to undertake all the rights issue at this exorbitant price. 

(Note: Since I am being heckled as well as being trolled online these days whenever my past few posting relating to REITs is put up on a Facebook group, I need to state here that having a liberal mind on discussion of 2 sides of a coin should never be perceived to be "filmsy" or "airy". It is also perfectly ok to disagree with my views but one should not be overly confrontational, in particularly, through harassing or trying to disconcert others with challenges or gibes.)

The Merger Into Mapletree Pan Asia Commercial Trust- What Should Existing Mapletree Trusts Investors Do?

The talk of the town this week is the proposed merger between Mapletree Commercial Trust ("MCT") and Mapletree North Asia Commercial Trust ("MNACT") into a combined behemoth known as the Mapletree Pan Asia Commercial Trust with S$17.1 billion worth of assets under management. Through the proposed merger, MCT will gain ready access to footholds in key gateway cities across Asia, tapping on the established network, strong local expertise and on-the ground presence of both MNACT and their Sponsor, Mapletree Investment Group. Wider geographical exposure will also provide the combined entity a new trajectory for overseas growth. While the marketing materials make it seems everything is perfect, I will try to elaborate more on the elephant in the room for the upcoming merger: Yes- my thoughts are that this deal unfortunately does not bode well for certain group of unit-holders.

1. Existing downside risk for unit-holders of MNACT being transferred to MCT

(i) The biggest headache here is that the China and Hong Kong are still pursuing a zero COVID tolerance approach while many other countries have already started opening up and adopting a live with COVID strategy. Furthermore, Sinovac vaccines has been found in a recent Hong Kong study that it does not provide sufficient anti-bodies to neutralise the Omicron variant. It will be some time before things get back to normal before the pre-covid days. We can already see many negative rental reversion in the crown jewel Festival Walk of MNACT. Most Hong Kong retailers have remained conservative and cautious on committing to long-term leases.

There were 35 leases at Festival Walk in 1st half of 2021 that were renewed at an average -30% rental rate

Gateway Plaza at Beijing also have 13 office leases being renewed at an average negative rental reversion of -24% during the most recent results announcement.

Beijing office also performed badly with -24% rental reversion

(ii) Let me explain further here on another blip on the radar. Eventually, China and Hong Kong will have to open up their borders fully. This will lead to a stage whereby their healthcare system will be initially overloaded with many COVID cases and death rate will go up. This is similar to European countries and Singapore which have already went through this initial stage. Hence, there will be enhanced control measures in place which is obviously bad for business. I expect the opening up to be somewhere end of 2022 or even in 2023 which means that MCT will be picking up the tab for this issue while paying NAV price for MNACT. 

2. MNACT properties are not in the same league as MCT's Vivocity and Mapletree Business Parks

Compare Festival Walk, the China and Japan commercial office properties to Vivocity and Mapletree Business City- I don't think we need to discuss this further to know that existing MCT unit-holders will be getting the shorter end of the stick here. 

Vivocity

3. Should Unit-holders of MNACT sell off their units upon resumption of trading?

Well, this is the fun part which needs some form of mental acrobatics given that once the trading halt is lifted, the market price will fluctuate. Due to point 1 and point 2 as aforesaid mentioned, there is a very high probability that MCT will dip below S$2 as MCT unit-holders will most likely be frowning at being given the shorter end of the stick. As such, MNACT trading price will be below S$1.19 along with the fact that this deal is not done yet.

In short, we can expect MNACT to be trading in the range between S$1.11 per unit (the last traded price) to S$1.19 per unit. My guess is that it will hover around S$1.15 per unit for now. Of course, if the price of MCT suddenly shot up instead to more than S$2.0039 per unit (the offered consideration to MNACT), then one can consider keeping it.

To sell or not for existing MNACT unit-holders will ultimately depend on your own entry price, concentration of your own portfolio and other investment criteria.  For me personally, I maybe looking at exiting my MNACT current holdings as my entry price was around S$1.00 per unit for an immediate realization of my profits and re-deploy them to other undervalued commercial REITs. 

    

4. Should Unit-holders of MCT sell off their units upon resumption of trading?

As alluded to the above points, there are some short term downside risks being transferred over to MCT from MNACT. This has no doubt some short term repercussion. But current medical advancements against COVID is picking up pace. The long term picture still bodes well for unit-holders of MCT in terms of assets and geographical diversification. 

I plan to carry on holding my units in MCT to maintain sufficient portfolio diversification in my margin investment account portfolio. 

Mapletree Business City

Parting thoughts:

There will certainly be some unhappy unit-holders who would have preferred their own plain vanilla REIT focusing entirely on either overseas or Singapore. Another point that I want to bring up to everyone is that from long term perspective, I believe that the merged entity of Mapletree Pan Asia Commercial Trust will have economies of scale and more diversity of assets. Last but not least and most importantly, the sponsor is Mapletree and behind it is the financial might of Temasek supporting it- this is a premium factor in itself.  

P.S: I am currently an unit-holder of both MCT and MNACT units.

Trading Halt For Both Mapletree Commercial Trust and Mapletree North Asia Commercial Trust

Trading halt was called since this morning for both Mapletree Commercial Trust ("MCT") and Mapletree North Asia Commercial Trust ("MNACT"). Looks like a possible merger and acquisition involving the two REITs to build up its size for greater synergy? Yesterday, I was trying to buy additional Mapletree North Asia Trust due to its high distribution yield of around 6.5% but was very surprised to see the price keep shooting upwards and have to give up. SGX  regulators ought to do better in preventing leakage of important information from leaking out before major announcements. In the end, I decided to invest the extra cash into Capitaland Integrated Commercial Trust (this is another story that I will share on another day). Let's keep our fingers crossed that Mapletree will come up with some value adding initiative in their upcoming announcement for all investors.

(Note: I am currently vested in both MCT and MNACT).