The COVID-19 pandemic has forced businesses to rethink their work processes and office space needs.
Commercial REIT unitholders should take note.
In recent weeks, DBS Group Holdings Ltd (SGX: D05), OCBC Ltd (SGX: O39) and Standard Chartered Bank (LON: STAN) have all announced plans to downsize their physical footprint in Singapore.
With more companies shifting to a hybrid working style, unitholders of commercial REITs may be feeling worried.
An example of a popular commercial REIT is Mapletree Commercial Trust (SGX: N2IU), or MCT.
MCT’s commercial property portfolio consists of Mapletree Business City I and II (MBC I, MBC II), Mapletree Anson, mTower (former PSA Building) and Bank of America Merrill Lynch HarbourFront (MLHF).
The REIT also owns the waterfront mall VivoCity.
Here are five highlights from MCT’s latest financial report for the fiscal year 2020/21 ended 31 March 2021.
Slight dip in revenue and net property income
MCT reported that gross revenue after government grants dipped 0.8% year on year, from S$482.8 million to S$479.0 million.
Without the grants, revenue would have fallen by 1.9% year on year instead.
The REIT’s net property income (NPI) remained almost flat, slipping 0.2% compared to the previous fiscal year, from S$377.9 million to S$377.0 million.
The stable NPI was due to reduced property operating expenses, which fell 2.8% year on year from S$104.9 million to S$102.0 million.
In addition, FY20/21 was also the first which saw full-period revenue contributions from MBC II, helping to soften the impact of the pandemic on MCT’s overall portfolio.
Negative rental reversions
MCT’s overall portfolio experienced negative rental reversions of 3.1%.
On the retail front, the REIT reported negative rental reversions of 9.6%, although committed occupancy stayed strong at 99.1%.
The negative reversion at VivoCity might concern investors as 23.3% of the mall’s gross rental income is up for renewal in the next two years.
MCT’s commercial properties enjoyed a better year, with a small upward rental reversion of 0.4% in FY20/21.
Also of note at MCT’s office spaces is the mutual termination of a lease at mTower before commencement.
However, the compensation MCT received for the termination provides the REIT with more than 16 months lead time for backfilling.
In addition, there was an expiry of a major tenant’s short-term lease at mTower.
Without the pre-termination and ignoring the effects of the short-term lease, MCT’s office spaces would have had better positive reversions of 4.5%.
MCT announced a distribution per unit (DPU) of S$0.0532 for 2H FY20/21, a year on year increase of 57.9%.
The rise in DPU brings MCT’s distribution for the full fiscal year to S$0.0949, an 18.6% hike from the fiscal year before.
However, FY20/21’s distribution included the release of S$28 million from cash retained in FY19/20 in order to conserve liquidity in light of the pandemic.
If we adjust the figures by placing the S$28 million back into FY19/20’s distribution, MCT’s distributable income would still have risen, albeit at a more conservative 5.4%.
Recovery on the cards
Having suppressed the virus outbreak and initiating a rollout of vaccines, Singapore has once again proven itself to be an ideal location for businesses to set up operations.
Several Chinese technology firms, including Tencent Holdings (SEHK: 0700), Alibaba Group Holdings Ltd (SEHK: 9988) and ByteDance have announced plans to take up office spaces in Singapore.
Together with demand from the technology industry, real estate company CBRE Group Inc (NYSE: CBRE) also expects that demand for office space will be supported by a tight supply pipeline.
With safe distancing measures at workplaces easing, MCT should also gradually see an uptick in demand and lease renewals.
At VivoCity, monthly tenants sales in 4Q FY20/21 has recovered to more than 86% of pre-pandemic levels, outpacing the rebound in shopper traffic.
However, investors should note that with a resurgence of COVID-19 community cases, the government has implemented measures for further crowd control.
Malls are limited to one person per 10 square feet, down from one per eight square feet previously.
These measures will affect the mall in the short-term but hopefully, as the spread eases, the authorities will relax them once again.
A reinvigorated VivoCity
MCT has also taken proactive steps to refresh its tenant mix at VivoCity to attract shoppers.
Fresh off the opening of popular restaurants like Afuri Ramen and Shake Shack (NYSE: SHAK), the mall has added Tamago-EN and Riverside Grilled Fish to its list of offerings.
International sportswear brand Adidas AG (ETR: ADS) has also quadrupled its floor space at VivoCity, with the launch of its flagship outline for its Performance line of products.
MCT believes that its growing collection of flagship outlets at VivoCity can strengthen its position as a key destination mall.
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Disclosure: Herman Ng does not own shares in any of the companies mentioned.
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