MAPLETREE COMMERCIAL TRUST OR STARHILL GLOBAL REIT?

Mapletree Business City, Source: MCT website

I've been looking at Mapletree Commercial Trust (MCT) and Starhill Global REIT recently, so I'll be writing on how these two REITs stack up against each other. Our local REIT sector has performed well this year, with many REITs surpassing their 52-week highs during the past month. Unfortunately, I've largely missed out on this rally. However, I believe that some REITs still present some value, together with a decent dividend yield.

For some background, the first two stocks that I purchased were Ascendas REIT and CapitaMall Trust, back in 2015. When there were fears of imminent interest rate hikes, I sold off these two positions for a small gain. As it turns out, even though interest rates have been raised a few times, our REIT sector has still performed strongly. I'll recommend that you read this very informative article regarding the relationship between REITs and interest rates, by Kyith at InvestmentMoats:

Basically, what the article concludes is that the performance of REITs have little correlation with interest rates. In theory, rising rates would hurt REITs in two ways. Firstly, because of the higher cost of borrowing, REITs incur higher interest expenses, which reduces their distributable income. Since REITs usually take on a significant amount of debt, their finance costs could be substantial. Secondly, rising interest rates increases the risk free rate, and assuming that the risk premium demanded by investors remains constant, the dividend yield of the REITs would have to increase. Correspondingly, the share prices of REITs would have to decrease. Therefore, rising interest rates are seen as a threat towards income stocks.  

However, the strength of the economy could offset these negative effects. For example, if economic growth is strong, property prices are rising and increases in dividends are supported by positive rent reversions, then the REIT sector can still perform well despite the rising interest rates. We are probably experiencing this phenomenon now. With this in mind, I'll elaborate on the details of these two REITs.

Both Starhill Global REIT and MapleTree Commercial Trust own a mixture of commercial and retail assets. Some notable properties that MCT owns include VivoCity, Singapore's largest shopping mall, and MapleTree Business City, an integrated commercial hub. For Starhill, we would probably be more familiar with Ngee Ann City and Wisma Atria.

For the past 5 years, MCT has been on an uptrend, due to its rising distribution per unit (DPU), whereas Starhill has largely been trading within a range.

Geographical Diversification 

In this aspect, Starhill's portfolio probably offers more geographical diversification, because it owns properties beyond Singapore. It owns properties across 6 Asia-Pacific cities - Singapore, Kuala Lumpur, Adelaide, Perth, Chengdu and Tokyo. However, a large portion of its assets are still located in Singapore, which accounts for 61% of Starhill's gross revenue. 

Whereas for MCT, its portfolio is restricted to 5 properties located in Singapore's southern region, namely VivoCity, MBC 1, PSA Building, Mapletree Anson and Bank of America Merrill Lynch Harbourfront.

Diversification reduces country specific risks, however, it would also expose us to foreign exchange fluctuations.

Customer Concentration


Starhill's portfolio faces significant tenant concentration risks, because Toshin, which is a wholly owned subsidiary of Takashimaya Company Limited, contributes 20.8% of its gross rental revenue. Toshin occupies all retail areas that Starhill owns in Ngee Ann City. However, this concentration risk is slightly mitigated because Toshin is the master tenant, and sublets its units to other tenants. Toshin's Takashimaya department store's lease is not under Starhill's portfolio.  Currently, Takashimaya pays $8.78 per square foot per month for rental, which is well below the market rate of approximately $19.83 psf. Takashimaya had recently won a lawsuit against its landlord, Ngee Ann Development, who had intended to raise the rental to market rates. (http://www.straitstimes.com/singapore/takashimaya-wins-rent-dispute-with-landlord-ngee-ann-development

Starhill charges Toshin around $15 psf for its lease, thus there may be some potential upside for rental rates during the next review in two years time. (http://www.businesstimes.com.sg/companies-markets/starhill-reit-raises-rents-under-ngee-ann-citys-toshin-master-lease)



For MCT, its top tenant by gross revenue is Merrill Lynch, which accounts for a mere 3.7% of gross revenue. MCT's top 10 tenants together contribute 25.2% of its gross revenue. In this aspect, MCT's diversified tenant mix lowers the concentration risk from any single tenant.


Capitalisation Rates



The cap rates for Starhill's properties are higher than that of MCT's. Cap rates are calculated by taking the net property income divided by the asset's valuation. Therefore, a cap rate compression does not necessarily mean the asset is earning a lower return, as it could be due to the asset's value appreciating. 

Dividend Track Records





Starhill's dividend record for the past 5 years has been flat, while MCT has consistently increased its DPU since 2012.


Financial Ratios


I've also complied the important financial ratios to compare when we are analysing REITs. Since REITs rely heavily on debt, we should be more cautious especially with the expected December rate hike. 




MCT has a slightly stronger financial position, with a lower average cost of debt and higher interest coverage ratio.

My Verdict


In conclusion, MCT offers more quality assets, but less geographical diversification. At the moment, I'm leaning slightly towards Starhill because I believe that the downside is rather limited, given that it is current trading at a price-to-book ratio of 0.82. Starhill has also been trading range bound for the past few years. 

Furthermore, Starhill also offers a slightly more attractive dividend yield of 6.3% compared to MCT's 5.7%. This probably compensates for the lower quality of its properties. Nonetheless, I would continue to watch MCT, because I like its superior track record of growing its distributable income, and the potential of acquiring MBC ll, another quality asset. I would look to accumulate MCT if it falls below $1.50. 


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Note: As of writing, I do not have positions in MCT or Starhill Global REIT.

Update: It was incorrectly stated earlier that Toshin's master lease includes the Takashimaya department store. This error has been corrected, as Starhill's portfolio does not include Takashimaya.




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