1.) Revenue and NPI to be severely impacted in Q4

If we take a look across the results for Q3 (1 Oct to 31 Dec 2019), GR dropped by 36.3% YoY to S$67.3m and NPI dropped by 40% to S$50.8m.

This is due to the closure of the Festive Walk mall since 13 November 2019 due to the HK riots and was only reopened on 15 January 2020. From a reporting point of view, that would mean a "lost" of 1.5 months of rental, even though they did receive the Distribution Top-Up due to the closure. Rental relief was also given to tenant because of the closure.

Barely after the mall was reopened on the 15 January 2020, it was impacted by the double whammy of Covid-19, hence the mall was once again had to be closed (limited opening) and rental relief once again be given to tenants.

The impact for Q4 looks to be greater than 1.5 months (Q3), if we take the impact to start from mid Feb onwards.

In other words, GR will look to drop much worse than the 36.3% YoY comparison reported in Q3, and NPI to drop by more than 40% YoY comparison reported in the same period.

2.) DPU Likely To Be Halved

I've tabulated across the last 3 years valuation for their properties and it looks like this.

For FY2019, I've worked backward by taking a haircut of 15% revaluation drop for Festive Walk, 5% for Gateway Plaza and 5% for Sandhill Plaza, using the average of the respective actual exchange rate.

If my above guestimate is true, the Reits are likely to book a total of S$733m revaluation loss on their investment properties (including translation loss/gain) which is likely to push their Q4 into negative loss position.

$733m downward revaluation will represent an NAV loss of about 22 cents/share. So we are likely to see NAV drop from $1.41 to $1.20 post revaluation.

4.) Gearing To Increase

MNACT has been able to navigate their gearing well due to their revaluation surpluses in recent year, but they are likely to deteriorate and struggle this year due to their revaluation losses.

Using the same above estimates, gearing is set to increase from the current gearing of 36.2% to above 40%. This will limit their ability to take on further loans either for working capital or acquisitions, and the likely scenario is a higher retained distributional income or placement/rights issue.

Conclusion

MNACT is not a bad investment because I think their properties and tenant quality are pretty solid over the long term but there are big overhang in the short to mid term.

If we use Wharf Reic and Hongkong Land as our closest benchmark, both companies have reported huge reversion and revaluation losses for their retail and commercial properties and we are likely to see the same fate for MNACT, which at the moment, I don't think the market has fully priced them in yet.




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