CRCT mindful of downturn’s impact

THE mall business in China has held up so far but CapitaRetail China Trust (CRCT) is mindful of the economic downturn’s impact on rents and occupancies.

The trust shared this view yesterday as it reported a net property income of $19.1 million for the first quarter ended March 31, 2009 – a 33.5 per cent increase from a year ago.

Income available for distribution rose 51.3 per cent to $13.3 million. This results in a distribution per unit (DPU) of 2.14 cents, exceeding the 1.55 cents in Q1 2008.

On an annualised basis, CRCT’s DPU in Q1 2009 was 8.68 cents, providing a distribution yield of 11.8 per cent based on the unit closing price of 73.5 cents on March 31. The trust gained half a cent to close at 92 cents yesterday.

CRCT attributed the stronger results to the rise of the Chinese yuan against the Singapore dollar; the acquisition of Xizhimen Mall in Beijing; and year-on-year rental growths at three other malls.

Shopper traffic and same-store sales have ‘held up well’ despite challenging economic conditions, registering year-on-year growth of 2 per cent and 2.2 per cent in Q1 2009 respectively, the trust said. New leases and renewals were also committed at rents which were 1.8 per cent above their preceding rates.

Nevertheless, trust manager CapitaRetail China Trust Management Limited’s CEO Wee Hui Kan highlighted that the trust is mindful of the global slowdown’s effect on consumer sentiments.

‘Retailers have also become more cautious in their expansion plans, and this would have an impact on rental growth and occupancy levels at our malls,’ he said.

The trust manager’s focus this year is to maintain occupancy levels at its malls, and to work closely with tenants to drive shopper traffic and sales. The ‘proactive management strategy will serve to ensure a stable and sustainable distribution to unitholders in 2009, and position us in good stead for an economic upturn’, added Mr Wee.

CRCT’s gearing ratio as at March 31 stood at 33.1 per cent, and it has borrowings of $65.2 million maturing in 2009.

Challenging Outlook

CRCT FY08 distributable income grew by 43% to S$45.9m (DPU of 7.53 Scts), mainly due to contribution from its acquisition of Xizhimen asset. We view that share price performance could be capped by potential equity raisings, given its current gearing of 33%, which is near the 35% regulatory gearing cap. Maintain HOLD, TP$0.66. CRCT currently is trading at c.12% FY09-10 DPU yield.


4Q08 results are in line with expectation. Distributable income of S$14.1m was 23% above forecast and a 64% growth from a year ago. Gross revenues grew 75% yoy to S$31.3m, helped by contribution from the acquisition of Xizhimen. FY08 distributable income came in at S$45.8m (+43.4%), translating to a DPU of 7.53 Scts. Portfolio asset revaluation was 2.5% higher, pulled up by Xizhimen (+10%), but offset by declines in values for most of its other properties.

Lower than consensus DPU estimates. We believe that rental growth is peaking on the back of an uncertain outlook in China. As such, our DPU estimate of 7.3 in FY09, which is at the lower end of consensus estimates, reflects a 10% decline in asking rents combined with increased vacancies at its multi-tenanted malls by 5-10% in 2009. In addition, potential downside risks to our DPU estimates exist if CRCT reduces its current payout ratio, against our estimated 100% payout.

Gearing level cap of 35% could mean possibility of equity raisings. While CRCT’s gearing remains relatively low amongst S-REITs at 32%, its current non-rating means that its debt-funding capacity is limited to a cap of 35%. This might lead to a possible overhang over the share price performance in the near term with unitholders facing a possible equity raising when (i) trust purchases a further asset, (ii) further devaluations in 2009, leading to the trust bursting the 35% regulatory limit.

CRCT sees China business remaining resilient

Trust’s net property income for Q4 jumps 76% to $20.4m; DPU at 2.27 cents

CAPITARETAIL China Trust (CRCT) expects its mall business in China to remain fairly resilient even as the country’s economic growth slows this year.

The trust shared this outlook yesterday as it unveiled a 76 per cent year-on-year jump in net property income to $20.4 million for the fourth quarter ended Dec 31, 2008.

As a result, income available for distribution rose 64 per cent to $14.1 million. This translates to a distribution per unit (DPU) of 2.27 cents, exceeding the 1.80 cents in 4Q 2007.

On an annualised basis, CRCT’s DPU in Q4 2008 was 9.03 cents, generating a distribution yield of 15.1 per cent based on the unit closing price of 60 cents as at Dec 31, 2008. The trust gained 3.5 cents to close at 66 cents yesterday.

For FY2008, income available for distribution also improved 43 per cent from a year ago to $45.9 million. This led to a DPU of 7.53 cents, higher than the 6.72 cents in FY2007. The distribution yield reached 12.6 per cent.

According to Barclays Wealth Research, China’s GDP growth could slide to 7.5 per cent this year and the slowdown has raised doubts on whether internal consumption will hold up.

‘We may not be immune to possible slowdowns in consumer spending,’ said Victor Liew, chairman of trust manager CapitaRetail China Trust Management yesterday. But ‘the large proportion of mass-market retailers selling basic necessities at our malls will provide some resilience for our portfolio’.

The top retailers in CRCT’s mall portfolio are Beijing Hualian Supermarket and Beijing Hualian Department Store, which accounted for 29 per cent of gross rental income as of December last year.

‘We are seeing limited impact from the crisis, especially at second-tier cities,’ said the trust manager’s CEO Wee Hui Kan at a briefing yesterday. ‘Now and then, some tenants may not be doing so well relative to before . . . but we have not seen a significant deterioration.’

CRCT’s focus is to ‘preserve stability’ this year by maintaining occupancy levels, fine-tuning the tenancy mix and driving shopper traffic and sales, he said.

This means that acquisitions are not on the cards yet. According to Mr Wee, distressed retail assets have yet to surface and capital for purchases would not come easily.

But he noted that China’s credit environment has improved in the last few months. At the government’s encouragement, banks are more willing to extend loans and costs may be lower than those for offshore funds. ‘We will put some focus on trying to tap the onshore market,’ said Mr Wee.

CRCT’s gearing as at Dec 31, 2008 was 32.8 per cent, and it has $61 million of debt maturing this year.

CRCT’s Q3 distributable income rises

CAPITARETAIL China Trust (CRCT) reported a 52.6 per cent jump in its distributable income for its 2008 third quarter yesterday and said it has secured refinancing for a US$105 million loan facility maturing soon.

Thanks to strong revenue growth, CRCT reported a distributable income of $12.4 million for the three months ended Sept 30, against $8.2 million for Q3 2007. Gross revenue surged 48.8 per cent to $28.3 million, helped by the $7.8 million in revenue contribution from Beijing’s Xizhimen Mall, which was acquired in February this year.

Distribution per unit (DPU) for the quarter stood at 2.01 cents – or 8.01 cents on an annualised basis – 0.3 cent higher than the DPU from a year ago. Its distributable income for the quarter also beat the Reit management’s $11.3 million forecast by 10.5 per cent.

But CRCT missed its Q3 gross revenue forecast by 2.9 per cent, due to poor performance of the Saihan Mall, which has been undergoing asset enhancement works. Saihan Mall’s Q3 revenue of $883,000 was 60.8 per cent lower than projected.

‘Under the current volatile market conditions, the management will focus on driving organic growth through pro-actively managing our portfolio of assets and prudent cost management,’ said chief executive of CRCT management Wee Hui Kan in a media statement. He added that the company will continue to manage its debt conservatively and has secured ‘comfortable refinancing terms’ for the US$105 million loan facility that is maturing late next month.

The refinancing terms of the loan are based on an interest rate that is ‘within the forecast’ of 5 per cent, and the next major term refinancing is set at 2010, the company said. CRCT’s gearing is 31 per cent and has an interest cover of eight times. Total borrowings stand at $344.2 million, including the US$105 million loan.

The trust’s average portfolio rental rates for new leases and renewals registered 16.9 per cent above forecast, CRCT said, adding that the phase 2 acquisition of Xizhimen mall is still set for completion by Q1 of next year. But CRCT said it expects demand to decline in the second half as many retailers have expanded or leased new space prior to the Olympic Games. CRCT said it has retained $400,000 of its Q3 distributable income to ‘help negate any fluctuating income flow in Q4’.

9 for ’09: China retail property looks like the place to be

• Refocus on property fundamentals: CRCT has de-rated more than 40% over the last 3 months, reflecting the stock’s relatively small market cap and illiquidity, and pricing in what we believe are extreme pessimistic assumptions. We think the era of virtual cycle fueled by cheap funding has ended, and we expect the market will start to re-focus on property fundamentals. In our view, CRCT will stand out given high quality management, resilient cash flow and strong organic growth. We believe the trust offers one of the best and purest proxies for the exposure to China retail and retail property sectors, and we add CRCT to our Asia Analyst’s Focus List.

• REIT model is not broken despite higher cost of capital: Part of CRCT’s share price underperformance could be attributed to concern about the REIT business model in a high-cost-of-capital environment. We believe, however, that CRCT will be able to withstand the current situation given a much higher asset yield and rental growth in China. We expect, on a normalized basis, the trust to acquire assets at 6-8% net yield, funded with capital cost about 4-6%, and to generate 3-4% longterm growth. In our view, it is also in CapitaLand’s interest to ensure CRCT maintains a competitive cost of capital.

• Private-equity-like return: Our Dec-09 price target is S$1.55/share, based on DDM. We estimate that even on an ungeared basis, CRCT’s portfolio offers a private-equity-liked five-year IRR of 20% (assuming exit cap rate of 7%). Furthermore, the long-term dual listing or listing restructuring potential should help to ensure the long-term valuation of the underlying properties.

• We reiterate our OW rating on CRCT. Key risks to our call include: 1) a significant decrease in retail rents or withdrawal of tenants due to a severe economic downturn in China; 2) a higher-than-expected cost of borrowings upon refinancing.