Mapletree Commercial Trust - Mixed results

2Q performance boosted by better retail contributions
MCT’s 2Q and 1HFY3/18 DPU of 2.24 Scts/4.47 Scts was in line with our projections, accounting for 25.6%/51.2% of our FY18 forecast. The 9.3% rise in DPU was due to a 22%/23% expansion in revenue and NPI respectively, thanks to the acquisition of Mapletree Business City 1 (MBC1) and better performance at VivoCity. This was partly offset by weaker contributions from Merrill Lynch Harbourfront (MLHF), PSA Building (PSAB) and Mapletree Anson. Portfolio occupancy stood at 97.6%, slightly weaker qoq.  
 
Robust performance at VivoCity
VivoCity posted a 4% rise in revenue to S$102.2m in 1HFY3/18 (+3.2% in 2Q) led by positive rental reversions of 2% from new and renewed leases post the completion of AEI at B2, L1 and 3. Tenant sales rose 1.1% yoy in 1H while shopper traffic held steady. The uplift in rents was slightly higher than the 1.7% reported in 1Q. It has a remaining 2.5% of retail income expiring in 2HFY3/18 and another 18.4% in FY3/19. We expect rental outlook to remain positive but modest over the medium term.
 
Office revenue could stabilise in coming quarters
Office/business park portfolio saw a 9.2% decline in 1H. Excluding MBC1, other office assets experienced a 4.4% dip in re-contracted rents. Inclusive of rents from a replacement tenant for a pre-terminated lease, office portfolio rental reversion would have been +0.1%. Looking ahead, we believe office rental revenue should remain relatively stable on higher pre-committed occupancy of 97.4-100% (vs. 91.6-94.4% 
as at end 2Q). The trust has 0.6% of office lease to be renewed in 2HFY3/18 and 7.2% in FY3/19

Healthy balance sheet
Gearing is at a healthy 36.4% with no refinancing needs for the remainder of FY18. About 78% of its debt is in fixed rates and all in cost of debt is at 2.7%. MCT plans to conduct a new AEI to add a 3,000 sq m library on L3 of VivoCity. This will free up some bonus GFA for the property which can be used to extend the leaseable area at B1. This exercise is expected to cost c.S$10m and can be funded with its robust balance sheet. When completed in 3QFY19, this could further boost earnings and property returns at VivoCity.  
 
Retain Add rating
We tweak our FY18-20 DPU estimates post results as we update the portfolio lease expiry profile. Accordingly, our DDM-based target price is lowered slightly to S$1.75. We believe MCT’s earnings are likely to remain stable underpinned by better performance at VivoCity and office rental income. In the longer term, a lack of new business parks supply should be supportive of rents. Risks are continued drag on retail and office rents.