19 JULY 2013
CRCT’s 1H13 Financial Results Come In Strong; New Beijing Mall Acquisition
By Nicholas Tan and Shane Goh
Following the recent sell-off in S-REITs, CapitaRetail China Trust (CRCT) has declined from its peak of $1.875 in February 2013 to $1.32 at its lowest before rebounding to close at $1.485 on 18 July 2013. Bolstered by positive performance for 1H13 and a recent announcement of a potential addition to its portfolio, can we expect further price upside from CRCT?
CapitaRetail China Trust (CRCT), the first and only pure play China shopping mall Real Estate Investment Trust (REIT) in Singapore, released its six months result for 2013 on 18 July 2013. This comes fresh after its recent proposed acquisition of Grand Canyon Mall, in South Beijing, to add to its growing $1.6 billion asset portfolio, of which, the bulk is located in the Chinese capital city.
For the first half ended 30 June 2013, CRCT reported an increase in gross revenue of 4.3 percent year-on-year (y-o-y) to $79.3 million and net property income climbed 3.9 percent y-o-y to $52.3 million. Increases in both gross revenue and net property income were mainly due to good tenancy adjustment at CapitaMall Xizhimen, CapitaMall Wangjing and CapitaMall Saihan, which led to higher portfolio rental reversion, as well as better tenant sales and shopper traffic. However, it was dragged by lower contribution at CapitaMall Minzhongleyuan which is currently undergoing asset enhancement initiative (AEI) works. Excluding CapitaMall Minzhongleyuan, gross revenue and net property income would have grown 7 percent and 8.3 percent y-o-y (in Rmb terms) respectively.
Distributable income grew 5.9 percent y-o-y to $35.2 million while distribution per unit (DPU) fell 2.7 percent y-o-y to 4.69 cents from 4.82 cents. This translates to an annualized distribution yield of 6.4 percent based on CRCT’s closing price per unit of $1.485 on 18 July 2013. Excluding the 57 million units issued through a private placement in October 2012, DPU would have been 5.08 cents, 5.4 percent higher y-o-y.
CRCT’s financial position remains reasonably strong with gearing at 23.5 percent, down from 25.4 percent a quarter ago, and interest coverage ratio of 9.1 times. Average all in cost of debt marginally increased to 2.58 percent from 2.51 percent, but remains below the 3 percent mark. As at 30 June 2013, cash and cash equivalent stands at $98.2 million while net asset value per unit is at $1.47.
CapitaMall Minzhongleyuan AEI
Planned AEI works at CapitaMall Minzhongleyuan is underway and will commence in July 2013. Notably, occupancy rate has fallen to 65.2 percent, as at 30 June 2013, due to non-renewal of existing tenants to facilitate the AEI.
The mall’s interior will benefit from the initiative with an uplift to enhance its shopping environment and strengthen its competitive advantage, and is expected to complete by May 2014.
CRCT’s management is projecting a boost in CapitaMall Minzhongleyuan’s gross revenue and net property income upon completion of works as similarly experienced with CapitaMall Saihan after it successfully transformed from master-leased to a multi-tenanted mall in 2010.
Newly Acquired Mall In China
On 15 July 2013, CRCT proposed an acquisition of Grand Canyon Mall, South Beijing, from CapitaMalls Asia for a total investment cost of Rmb1.82 billion or about Rmb26,000 per square metre (sqm), based on a total gross floor area (excluding car park) of 70,000 sqm. Based on the purchase price, the mall currently has an annualised net property income yield (NPI) of approximately 3.5 percent.
As of April 2013, the committed occupancy rate is 92.7 percent and is expected to reach close to 100 percent next year. Leases accounting for 27 percent of the monthly gross rent are expiring between this month and the end of the year, presenting CRCT with potential upside through rental reversion as currently the average rent of these leases are over 90 percent below the market rate. The target NPI is about 7 percent to 8 percent in the longer term.
More importantly, the asset purchase provides an opportunity for CRCT to deploy its balance sheet with a goal of enhancing returns. While part of the acquisition will be funded through proceeds obtained from the private placement exercise in October 2012, additional capital will have to be raised via new debt and equity financing. With the purchase, CRCT will boast ten malls in China with five malls residing in Beijing. The transaction is estimated to be completed by 1H14.
Macroeconomic wise the management does not express a deep concern pertaining to a negative impact arising from the recent credit crunch in China, and remains unperturbed by the potential competition it might face from a supply glut – Wahaha Group announced its plans to develop 100 new shopping malls across China over the next three to five years.
Publish date: 19/07/13