Hello, savvy investors! Welcome back to ‘The Dividend Uncle’. Today, we’re diving into Mapletree Pan Asia Commercial Trust (or MPACT), a real estate investment trust that has generated significant interest and fear among us. Every time Mapletree Pan Asia Commercial Trust seems to have hit a bottom, and we move in, the price falls again. Its share price has plummeted from $1.60 all the way down to $1.18 recently. However, whenever we visit its prized asset, VivoCity, we are often impressed by its performance and attracted to the Trust. Given this mixed sentiment, it’s time to take a closer look at Mapletree Pan Asia Commercial Trust’s current valuation. The results of this closer look are startling, revealing some surprising insights into whether the Trust might be an attractive opportunity at its current price.

Before we dive in, I must let you know that this content is for informational and educational purposes only and does not constitute financial advice. The opinions expressed are based on publicly available information and personal analysis, and they are not tailored to your specific financial situation. The REITs and institutions mentioned are cited purely as examples. While I have no affiliations, sponsorships, or financial relationships with any of them, I may personally hold positions in some of the investments discussed. Before making any investment decisions, you are strongly encouraged to consult a licensed financial adviser.

Market Context and MPACT’s Performance

Mapletree Pan Asia Commercial Trust has been under significant selling pressure this year, with its share price plummeting by 25% year-to-date, recently hitting a low of $1.18. A primary concern for investors is the poor performance of its Hong Kong asset, Festival Walk, which accounts for about 22% of the Trust. As of Q1 2024, Festival Walk’s occupancy rate remains stable at 99.7%, but it faces challenges in a low tenant retention rate of 63.2% and a negative rental reversion of 8.7%.

Shopper traffic and tenant sales has also been under pressure, remaining flat over the past year when the removal of Covid restrictions should have been a substantial boost. This is partly due to a trend of Hong Kong residents crossing over to Shenzhen, China, for their shopping needs, especially during weekends, as it is cheaper there. This trend has negatively impacted the business of Festival Walk and, consequently, investors’ sentiment towards retail stocks in Hong Kong.

In contrast, Mapletree Pan Asia Commercial Trust’s Singapore assets, particularly VivoCity, have been performing exceptionally well. VivoCity continues to attract shoppers, with shopper traffic up 10.7% year on year, and maintain a 100% occupancy rate, contributing significantly to the Trust’s overall performance. Despite the strong performance of VivoCity and other high-quality Singapore assets, the overall sentiment towards Mapletree Pan Asia Commercial Trust has been dampened by the underperformance of Festival Walk and the recent removal from the MSCI Global Standards indexes, which led to further selling pressure.

Given the current market dynamics and investor concerns, it’s crucial to consider Trust’s valuation. Even a poorly performing stock can be attractive at the right price. By breaking down Trust’s assets into three categories, Singapore assets, Festival Walk, and other assets in China, Korea, and Japan, we can gain a clearer perspective on its value proposition.

Valuation Breakdown Assessment for MPACT

One way to value a real estate investment trust is by examining its price to net asset value (or N.A.V.) ratio. Different segments of a Trust’s assets can have varying price to N.A.V. ratios, reflecting the underlying risks and performance of those assets. Higher quality assets typically trade at higher price to N.A.V. ratios due to their stability and strong performance. Let’s break down Mapletree Pan Asia Commercial Trust’s assets into three categories: Singapore assets, Festival Walk, and the rest of the assets in China, Korea, and Japan.

Singapore Assets: High-Quality and Stable

Mapletree Pan Asia Commercial Trust’s Singapore assets, particularly VivoCity, are among the top performers in its portfolio. VivoCity is a premier shopping destination with high foot traffic and occupancy rates, reflecting its strong market position. For the purpose of valuation, assigning a price to N.A.V. ratio of 1.0 to these assets seems reasonable. This ratio is in line with comparable real estate investment trusts like Frasers Centrepoint Trust, which has a price to NAV ratio of 0.96, and CapitaLand Integrated Commercial Trust, with a ratio of 0.93. These comparables underscore the quality and performance of Mapletree Pan Asia Commercial Trust’s Singapore portfolio.

Other Assets

The remaining assets in Mapletree Pan Asia Commercial Trust’s portfolio, other than Festival Walk, are spread across China, Korea, and Japan. These assets include a mix of retail and commercial properties with varying degrees of performance. Using an average price to N.A.V. ratio of 0.78, which reflects the broader market average for REITs in Singapore, provides a balanced approach to valuing these assets. This ratio accounts for the mix of both high-performing and underperforming properties within this segment.

Now comes the most important part that you have been waiting for. By applying these valuations, we get a startling result. Combining only the valuations we calculated for the Singapore assets at $0.97, and for the other assets at $0.26, we already get a valuation of $1.23. This is almost exactly at the current share price of Mapletree Pan Asia Commercial Trust. And you know that means that the implied valuation of Festival Walk based on the current share price is zero! In other words, at current prices, we have fully discounted the troubled asset, Festival Walk! This may present a potentially attractive entry point for investors.

The Dividend Uncle’s Take

As investors, it’s crucial to remember that even assets perceived as bad can be good investments at the right price. This principle is particularly relevant when considering Mapletree Pan Asia Commercial Trust, which boasts top-quality assets like VivoCity and a strong sponsor in Mapletree Investments. The substantial fear surrounding Festival Walk has driven the Trust’s share price down, creating a scenario where the market might be overvaluing the negatives.

The current valuation already reflects significant discounts. A simple exercise to calculate the reasonable price of Mapletree Pan Asia Commercial Trust based on the price to net asset value is telling. While this exercise is not as sophisticated as other modeling methods, its simplicity and the clear outcome it provides are significant. It shows that the price of Mapletree Pan Asia Commercial Trust has factored in a substantial discount on its troubled asset, Festival Walk.

While I’m not calling a bottom for Mapletree Pan Asia Commercial Trust’s price, I believe the current valuation has already absorbed much of the potential downside risk associated with Festival Walk. This presents a potential margin of safety for investors.

In conclusion, Mapletree Pan Asia Commercial Trust presents an intriguing case for value-focused investors. Despite the significant downturn in its share price, driven primarily by concerns surrounding Festival Walk, the underlying value of its diverse and high-quality asset portfolio suggests potential upside. The current market valuation seems to have heavily discounted the issues at Festival Walk, to the extent that this asset could be considered almost “free” at the present trading levels.

While it’s important to acknowledge the risks, particularly the ongoing challenges in Hong Kong’s retail sector, the strength of Mapletree Pan Asia Commercial Trust’s Singapore assets, particularly VivoCity, and its robust backing from Mapletree Investments offer a solid foundation. The simplicity of the price-to-NAV valuation exercise underscores that the current price provides a margin of safety for investors willing to look beyond the immediate concerns.

As always, investing requires careful consideration of both risks and opportunities. For those who believe in the long-term potential of high-quality assets and are looking for a dividend investment with a discounted valuation, Mapletree Pan Asia Commercial Trust could be a compelling addition to your portfolio.