Company Review - CapitaLand China Trust

 


For Singaporean readers, the word CapitaLand would be synonymous with retail malls, as it's hard to miss the huge "CapitaMalls/CapitaLand" signs plastered on many of their malls and properties. However, other than being one of the more dominant property players in Singapore, the CapitaLand group also managed a ton of properties all over the world. In this review, we'll focus on CapitaLand China Trust (CLCT), formerly known as CapitaLand Retail China Trust (CRCT).


Segments broken down into:
1. Portfolio Overview
2. Retail Segment - Occupancy
3. Retail Segment - Revenue/NPI
4. Retail Segment - Rental Reversion
5. Business Park Segment
6. Asset Recycling
7. Financial Performance
8. Outlook 
9. Conclusion


Portfolio Overview

From her listing in 2007 till recently, CLCT used to manage a pure retail portfolio (hence the old name, CRCT). Unlike other locally listed REITs such as Frasers Centrepoint Trust (FCT), CLCT has no local properties, but instead focuses exclusively in China properties.

From her seed portfolio comprising 7 malls in 2007, CLCT has gone through many acquisitions and divestments, with a final mall count of 11. Recently, CLCT expanded her mandate to include investments into other property types. With this new mandate, CLCT quickly snapped up a few business parks, giving it the following distribution to date.



Here is a timeline of their acquisitions and divestments to date. 




Retail Segment - Occupancy

 For the past few years, retail occupancy rates have fluctuated between 95% and 99%, with a sharp decline in 2020 due to the pandemic. While recovery seems slow (compared to FCT, which have reverted to pre-pandemic rates), it is worth noting that there could be geographical differences at play here.

More importantly, comparing based off occupancy alone would not be fair, as other factors such as rental reversion and/or rental support is important as well in determining occupancy.

As of 31st Mar 2021, retail occupancy rates have recovered slightly to 94.4%.



A breakdown of occupancy rates for each mall is shown below, with 'orange' being years where the occupancy rate experienced a dip of more than 1%, and 'red' flagging years with lower than 95% occupancy.

In terms of occupancy rate, less the effect of COVID, most properties look healthy, with the exception of CapitaMall Qibao

* Note that only currently held properties are shown here (eg. divested properties not included), whereas the overall trend above includes all properties in that financial year.



Retail Segment - Revenue/NPI

Overall, Revenue and NPI saw consistent year on year growths in the past few years before COVID threw a spanner in the works.



In this breakdown, 'red'/'green' signifies a significant (more than 1%) change over the preceding year. Less the effects on COVID, CapitaMall Qibao along with CapitaMall Grand Canyon recorded unstable trends in both Revenue and NPI. 

* Again, note that only currently held properties are shown here (eg. divested properties not included), whereas the overall trend above includes all properties in that financial year.



Retail Segment - Rental Reversion

As mentioned previously, occupancy rates go hand in hand with rental reversion. Managers can opt to reduce rent to attract and/or retain tenants. In recent years, CLCT averaged a positive rental reversion of 7% annually, up till 2019.


In this breakdown, 'red'/'green' signifies a significant (more than 1%) change in rental rates. CapitaMall ShuangJing is largely under a Master Lease Agreement with a predetermined rental rate adjustment in the contract. Again, CapitaMall Qibao and CapitaMall Grand Canyon stands out, with Grand Canyon recording a relatively steep drop of 32.8% in 2020.

* Again, note that only currently held properties are shown here (eg. divested properties not included), whereas the overall trend above includes all properties in that financial year.



Business Park Segment


The newly acquired business park portfolio consists of 5 properties, with an simple average occupancy rate of 92.8%



Taking a look at a basket of other business parks' performance in late 2020, a simple average rate of ~93% was computed. CLCT's occupancy rate seems rather reasonable in this regard. However, there are lease durations and geographic differences that isn't accounted for here.

* List of properties included for comparison: one-north, Changi Business Park, SSP1, SSP2, Portland, Raleigh, San Diego, Alexandra Technopark, Farnborough Business Park, Maxis Business Park.


Asset Recycling

Since IPO, CLCT has divested 5 properties (mostly from IPO), channeling the freed up capital towards more acquisitions, lowering debt and sometimes redistributing them to shareholders. On top of freeing up capital and rejuvenating the portfolio, CLCT also consistently racked up divestment gains in the double digits.


Apart from looking at past recycling activities, the trend in valuation of existing properties over the years could show whether future divestments can come with a gain as well. CapitaMall Qibao remains a drag, with valuations far below acquisition costs (recent drop was due to a new assumption that leases will be terminated in 2024). Apart from that, CapitaMall Aidemengdun has a flat valuation compared to acquisition costs, while all the other properties are valued higher than initial costs.



Financial Performance

CLCT has been on an acquisition spree of late, growing her AUM by 54% in 4 years. However, number of units outstanding grew from 860 million at the end of 2016 to 1250 billion at the end of 2020. The increase in units helped fueled the acquisitions (through preferential offerings etc.), but also caused DPU to remain pretty stagnant.


As of March 2021, CLCT has a gearing ratio of 35.1%, an average cost of debt of 2.51% and an interest coverage ratio of 4.1 times, which are all pretty average and healthy numbers.

Outlook

With a 1Q 2021 NPI roughly equal to that of 1H 2020, the near-term recovery seems promising. However, the COVID situation is still rather dynamic, and flare ups in infections could lead to more restrictive measures that could stunt recovery. 

In the coming years, CLCT plans to further reduce her reliance on Retail, by adding on more diversified asset classes such as: Business Park, Commercial, Industrial, Data Centre, Logistic and Integrated Developments. 


As she ingests more and more assets from her sponsor (CapitaLand Group), it remains to be seen whether the progress can translate to strong and consistent DPU growth. 


Conclusion

CLCT currently trades at $1.38. Based on 2020's DPU of 6.35 cents, that translates to a yield of 4.6%. Assuming that DPU can recover to 2019 pre-COVID levels, the current price could yield approximately 7.2%. 

Personally, I don't see any giant red flag from the information I've reviewed. There's more things that I've not covered in a "short" post such as sponsor pipeline, lease expiry, lease types, RI/POs, so please check out the Annual Reports if you're interested! 

There are some underperforming properties, but they don't have a high weightage, especially considering the acquisition drive that CLCT has been undergoing. DPU growth isn't as consistent as other counters, but that could stabilize after CLCT finishes her repositioning from a China Retail focused to a general China REIT.

CLCT is also exposed to currency fluctuations, even with a form a hedging policy in place. CNY has been weakening from 2016 to 2019, which could explain for the stagnant DPU which is reported in SGD. Looking ahead, if CNY continues to strengthen against SGD like it's been doing since 2020, it could help to propel the growth in DPU alongside the acquisitions.



Looking forward to the new asset mix, as well as capital recycling initiatives.

Cheers,

InvestingNugget



Author's note:

At the point of writing (2/5/2021), I am not a shareholder of CLCT. I have put in my best effort to ensure that the facts are accurate, but I do not guarantee it. Opinions are my own and do not constitute any recommendations.


Data Sources: 
Annual Reports, Quarterly Updates, Analyst Reports

Abbreviations:
Xizhimen - XZM
Rock Square - RS
Wangjing - WJ
Grand Canyon - GC
Xuefu - XF
Xinnan - XN
Nuohemule - NHML
Yuhuating - YHT
Aidemengdun - ADMD
Qibao - QB
Shuangjing - SJ













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