Today I've initiated a long position in Mapletree Greater ChinaCommercial Trust (MGCCT) at a price of $0.81.
This is my second additions to the Mapletree Reits family which I have in my portfolio after the purchase of Mapletree Log last month.
I've long been impressed with the quality of the assets that MGCCT has when it launched its IPO last year.
Festive Walk - one of the highly sought retail components in the strategic location of Kowloon. Even during the epidemic of SARS and the GFC in 2008/2009, rental revenue has managed to creep up higher, giving a CAGR of 5.8% over the past 10 years.
Gateway Plaza - One of the grade A office located in strategic Beijing area. As seen from past history, occupancy rate has stayed well above 95% for the past 2-3 years, with office rent climbing back up after improvement in the global economy.
So why do I buy?
Back during the IPO, the stock was priced at the higher range end at $0.93 which yield investors at about 5.3%. It is easy to look back now given that at that point in time, news of Fed tapering are not even at the slightest concern on the back of investors' mind and we have the US 10 YR bond treasury yielding around 2%.
Given today's impending interest rate increase situation (US 10 YR bond treasury yielding 2.87%), it is natural that investors are generally seeking a higher required rate of returns on riskier assets. I decided to purchase it at $0.81, yielding me about 6.9% for FY2014 and 7.3% for FY2015 and beyond.
Another interesting news for MGCCT investors is that they have performed well that exceeded their forecasted numbers in terms of their Distribution per Unit (DPU) by as much as 10.4% when they announced their 2nd Quarter results back in Nov 13. Their next scheduled result announcement is due on the 22nd January and I do expect a similar strong performance.
The management has also announced that 95% of the expiring leases for Festive Walk for FY2013/2014 have been successfully renewed with rental uplift of approximately 22%. For Gateway Plaza, 78% of the expiring leases have been renewed with a rental uplift also. Through these actions, investors can expect a stronger performance for years to come and this will give a strong foundation for the stock price to hold.
Some investors have raised concerns regarding the high gearing the stock has. For me, this is not so much of a concern.
First of all, management has taken initiative to reduce debt such that gearing has been reduced to 40.1% at the moment. Since I do not expect them to acquire any major asset acquisitions in the next 2-3 years, there will not be any equity raised by the company for the short term. Perhaps the more concerning situation is the probability of a property bubble in HK which will devalue its asset prices and hence affects the gearing upwards.
Second, MGCCT has a debt expiry profile that averages about 3.5 years to maturity, with no refinancing risk for the next two years. The management has also prudently hedged their earnings against interest rate increase volatility (71% is fixed rate) as well as forex risk, thereby reducing any earnings downward surprise to investors.
Conclusion
We know that Reits are no longer as popular to investors as previously were. But given the pessimistic comes great opportunity for me to accumulate stocks that can still yield good returns. The numbers look decent to me in terms of price and earnings. Depending on your risk flavor, this could be one to look out for.
