CRCT buys Beijing mall’s basement extension

CAPITARETAIL China Trust (CRCT) has entered into a conditional agreement to acquire Xizhimen Mall Basement 1 Extension (Phase 2) for 163.5 million yuan (S$32.7 million).

CRCT said yesterday it will acquire the property from Beijing Finance Street Construction Development Co for a total consideration – including the purchase price, capital expenditure and related costs – of about 195 million yuan.

In February, CRCT acquired Xizhimen Mall for $336 million. This involved an agreement for it to purchase, when completed, the planned Phase 2 from the vendor, subject to conditions.

CRCT said the acquisition will be fully funded through external debt and internal cash reserves.

Following the acquisition, CRCT’s gearing is expected to be 32.3 per cent.

Wee Hui Kan, deputy CEO and CEO designate of CRCT manager CapitaRetail China Trust Management, said Xizhimen Mall’s total gross rentable area will increase to 83,074 sq m. The mall is expected to benefit from, ‘higher shopper traffic and enhanced rental income growth over time’, he said.

Assuming 100 per cent occupancy and current average rental rates commanded by Basement 1 of Xizhimen Mall, Phase 2 is expected to achieve a net property income yield of 9.1 per cent. Phase 2 will add 9,217 sq m of gross rentable area to the existing Basement 1.

The acquisition is expected to be yield-accretive to CRCT unitholders compared with CRCT’s implied net property income yield of about 8.8 per cent, based on the trust’s closing unit price of $0.725 on Sept 26.

Xizhimen Mall is part of Xihuan Plaza, a mixed-use development that comprises three office towers, a small commercial block and a seven-level retail podium.

CRCT’s Q2 distributable income rises 30.4%

CAPITALAND unit CapitaRetail China Trust (CRCT) yesterday said that its second-quarter distributable income rose 30.4 per cent to $10.5 million, from $8.1 million a year ago, on the back of a new acquisition.

Distribution per unit (DPU) was 1.70 cents – the same as in Q2 2007.

CRCT decided to retain $900,000 of its income available for distribution in Q2 2008 ‘to be prudent’, it said. This is meant to help negate the fluctuating income flow in the second half of 2008, thereby providing unit-holders with stable half-yearly distributions in 2008. If the trust had distributed 100 per cent of its income, the DPU in Q2 2008 would have been 1.84 cents.

For the whole of the 2008 financial year, CRCT ‘remains committed to distribute 100 per cent of its income available for distribution’, the trust said.

Net property income for Q2 2008 was $16.6 million, an increase of 33.1 per cent over the $12.4 million recorded in the corresponding three months in 2007 – partly due to income from Xizhimen Mall, the newest addition to CRCT’s portfolio.

The real estate investment trust (Reit), however, saw its net property income for Q2 2008 come in slightly under its own forecast, which it attributed to the strengthening Singapore dollar.

Net property income of $16.6 million was 0.5 per cent lower than the forecast $16.7 million. But in yuan terms, the trust outperformed its forecast. Net property income was 84.4 million yuan (S$16.9 million), 0.4 per cent higher than the forecast 84.1 million yuan.

For the first six months of 2008, CRCT’s distributable income rose 26.8 per cent to $19.3 million, from $15.2 million for the corresponding period in 2007. DPU for H1 2008 rose 1.2 per cent to 3.25 cents, from 3.21 cents a year ago.

The trust increased the occupancy at its malls to 97.1 per cent as at June 30, 2008, from 95.6 per cent at the beginning of the year.

Lim Beng Chee, chief executive of CRCT’s manager, acknowledged that China’s inflation rate, which is estimated to reach 6.5 per cent in 2008, is a concern.

But the trust is still confident of keeping operating expenses within forecasts, he said.

‘Most of our costs have been locked in earlier, so for 2008, we will still be able to meet (earnings) forecasts,’ Mr Lim noted. But the cost of utilities, one of the biggest expenses for the Reit in China, remains a concern, he added.

The trust’s current $1.2 billion portfolio consists of eight retail malls located in five cities in China.

CRCT’s shares closed two cents down at $1.14 yesterday. The stock has shed 47.0 per cent since the start of the year.

CAPITARETAIL CHINA TRUST’S PROPERTIES IN CHINA NOT AFFECTED BY EARTHQUAKE IN CHINA’S SOUTHWEST SICHUAN PROVINCE

CRCT income for distribution 8.5% higher than forecast

CAPITARETAIL China Trust (CRCT) has announced income available for distribution to unit-holders of $6.3 million for the period Feb 5 to March 31 – $0.5 million or 8.5 per cent higher than its forecast of $5.8 million.

Available distribution per unit (DPU) for the period is 1.02 cents (6.66 cents on an annualised basis), which is 8.5 per cent higher than its forecast of 0.94 cents (6.14 cents on an annualised basis). This translates to 9 per cent year-on- year DPU growth.

Based on the unit price of $1.50 on April 23, the distribution yield works out to 4.44 per cent.

CRCT explained that the last distribution was scheduled to take place in respect of its semi-annual distributable income for the period July 1 to Dec 31, 2007. ‘In order to ensure fairness to unit-holders in issue on the day immediately prior to Feb 5, 2008, the day on which the new units are issued under the equity fund-raising for the acquisition of Xizhimen Mall, the manager has made a cumulative distribution of 4.04 cents for the period July 1, 2007 to Feb 4, 2008,’ it added.

Lim Beng Chee, CEO of CRCT manager CapitaRetail China Trust Management, said: ‘Following a year of proactive asset management of our portfolio, the malls have registered robust top-line growth, with Wangjing Mall and Qibao Mall delivering a year-on-year revenue increase of 18.8 per cent and 45.6 per cent respectively. Tenants have also enjoyed remarkable sales growth, with same-store sales at Wangjing Mall, Qibao Mall and Xinwu Mall growing 30.9 per cent, 27.4 per cent and 51.8 per cent respectively.’

Gross revenue for Q1 2008 was 116.3 million yuan(S$22.5 million), representing a y-o-y increase of 29.8 million yuan or 34.4 per cent. This was mainly attributed to revenue from Xizhimen Mall, which was acquired on Feb 5, as well as occupancy growth at Wangjing Mall and Qibao Mall. Excluding Xizhimen Mall, gross revenue for Q1 2008 was 95 million yuan, a y-o-y increase of 8.5 million yuan or 9.8 per cent.

Net property income (NPI) for the quarter was 72.7 million yuan, a y-o-y increase of 18.5 million yuan or 34.2 per cent. Excluding Xizhimen Mall, NPI for the quarter was 59.2 million yuan, a y-o-y increase of 5 million yuan or 9.2 per cent.

CRCT’s unit price closed 10 cents higher at $1.60 yesterday.

Discounting the pace of acquisition growth; maintain Sell

What’s changed
Since its placement and maiden acquisition of Xizhimen Mall (Beijing) in early Feb 08, CRCT’s stock has fallen ~22% and is now trading below the placement price of S$1.36; it has declined ~62% from its Oct 07 peak. Higher funding costs and uncertainty in realizing the value of an impressive acquisition pipeline have weighed on the shares, in our view. Across the SREIT universe, we continue to favor stocks with strong organic growth over those for which acquisition growth is a key driver. Maintain Sell.

Implications
For much of its trading history (Dec 06 listing), CRCT, fueled by investors focused on its acquisition growth prospects, has traded at distribution yields (i.e., funding cost) that have facilitated accretive acquisition growth. However, with CRCT trading at a 6% 08E yield, we believe it will be difficult for the company to raise equity to fund growth. We view CRCT’s exposure to Chinese domestic consumption as positive and see value in its right of refusal to about 65 malls from CapitaLand and its funds, of which 16 malls are operational. But we think the challenge of raising equity could cast doubt on CRCT’s target to grow portfolio size from S$1.1 bn today to S$3 bn by 2009. We note CRCT’s leverage of 31.6% vs. regulatory cap of 35%
means acquisition growth needs to be largely equity funded. Also, S$171 mn of debt is due for refinancing end-08.

Valuation
We have removed acquisition premiums in setting TPs for most REITs under our coverage, but not for CRCT. Our new DCF-based 12m TP of S$1.46 (vs. S$1.80 previously) comprises a base-case S$1.25 (unchanged) and premium of S$0.21 (vs. S$0.55), reflecting a 50 bp rise in funding costs and slowdown in the pace of acquisitions to S$450-500mn p.a. till 2010.

Key risks
Performance of the underlying malls could surprise on the upside.