CapitaLand Retail China Trust (CRCT), another position of mine, reported their latest FY2019 financial results this week. Given that this REIT is operating in the epicentre of the Coronavirus outbreak, there was an added push for me to dive into the results announcement and analyst briefing recording.
As usual, here are some highlights.
Q4 DPU flat y-o-y, FY2019 DPU grew 2.1%
While DPU was flat in Q4 and only up 2.1% year on year (excluding capital distribution), if study the financials closely, you can see that the REIT has opted to retain $5.25m or about 5% of income available for distribution this year. This is in contrast to FY2018 where payout was 100%.
On the analyst briefing, management explains that this step was taken to support DPU in tough trading conditions arising from the coronavirus outbreak and income lost from the divestment of CapitaMall Erqi.
If you were to assume a 100% payout for comparability, Q4 and FY2019 DPU would have been about 2.41c and 9.87c respectively. This represents an increase in DPU of 3% and 2.8% in Q4 and FY2019 respectively.
A commendable set of results.
Unitholders can expect 3.61c of DPU payout with an Ex-date of 14 February. Make sure you hold own the units on 13 February to be entitled to the distribution.
Prudent capital management
Strong portfolio fundamentals and rental reversions in core properties
The REIT’s core properties of Xizhimen, Wangjing, Grand Canyon, Xinnan and Rock Square recorded valuation gains during the year, indicating good management and market fundamentals. Cap rates appear reasonable.
Excluding newly acquired malls and malls held for sale, only CapitaMall Qibao and CapitaMall Minzhongleyuan is concerning.
On the analyst briefing, management says that the REIT is actively working with the local government to sell Minzhongleyuan. The mall is also being shopped to potential buyers, just the situation in Wuhan is not helping.
The REIT is revamping the tenant mix at Qibao away from fashion to children focused activities. This will result in negative rental reversions and valuation going forward in the short term.
In terms of portfolio impact, these 2 malls are insignificant thankfully.
Rental reversions in core malls remain positive, excluding Qibao and Minzhongleyuan.
The REIT’s lease profile is slightly concerning as 35% of its leases are due for renewal this year. Given the Coronavirus outbreak this year, investors will need to keep an eye on rental reversions this year.
CRCT has been undergoing aggressive reconstitution in 2019, with a couple of divestments of underperforming malls and acquisitions from the Sponsor CapitaLand. 2020 started no different with the…
CapitaMall Erqi Divestment
Here is a summary of the divestment:
- This mall was master-leased to a departmental store operator who terminated the master lease early in October 2019.
- Net gain on divestment is $12.7m with the implied value of the property being 20.5% above valuation.
- The building is quite old and is in need of significant capex soon. The sale effectively avoids these expenditure.
- On the analyst briefing, an analyst asked if redevelopment was considered as an option. Management’s reply was that redevelopment ROI doesn’t seem attractive given the short land lease and extension of the payback period on investment.
Pro-forma DPU and NAV impact is stated above, with FY2019 DPU dropping to 9.33c and NAV increasing to $1.58.
Management will need to rotate the sale proceeds and find an accretive acquisition soon to support the DPU loss. In the near term, the income retained and termination fee will help cushion the drop in DPU.
Acquisitions from CapitaLand pipeline
There was a question on the analyst call on further acquisitions and growth, whether it would be from the Sponsor pipeline or 3rd party.
Management reiterated CapitaLand’s giant platform in China and their desire to recycle capital, as expressed in their Investor Day last year, and CRCT’s desire to grow. As such, these 2 objectives are aligned.
Naturally, Management has kept mum about specifics.
Naturally, there was much discussion on the analyst briefing regarding the potential impact of the virus on various aspects of mall operations. Here is a quick summary of what I found interesting about the discussion:
- Government financial relief packages – Currently there are some discussions at central government level, no hard details.
- Customer footfall impact – hit since lockdown started on 23 January. Important to observe footfalls next week when…
- Government mandated holidays – In light of the virus, the central government had extended the CNY holiday to 2 Feb. Local governments has requested company to stop work till this week. As such, next week will be key for footfalls when most Chinese return to work.
- Insurance coverage – Management did not have a definite answer. Management is working this out with the insurer. They did state that they do have insurance on things like general commercial and business interruption.
- Impact on plan for acquisitions – no anticipated impact, business as usual.
On the results
Overall, a good set of results. DPU grew in spite of the churn in the portfolio, unlike recent results like AREIT and Manulife US REIT that saw drops in DPU post acquisition.
On the CapitaMall Erqi divestment
Again, a good divestment. Erqi was under performing for some time. It is no wonder that the master lessee terminated their lease. The only thing is that hopefully, management will recycle the capital into a new accretive mall acquisition.
On the situation in China
Short-term mall traffic and business conditions will likely be difficult. Given how early it is to determine impact, I will trust that the REIT manager and Sponsor continues to do what’s right for unitholders for now.
Long term, I still believe in China’s growth story. CRCT should also be well supported in growth and operations support in light of CapitaLand’s giant China platform.
On current valuation
Given an adjusted DPU of 9.87c and NAV of $1.58 (inclusive of DPU), CRCT trades at a yield of 6.5% and price to book of 0.96.
At current valuations, value is emerging in this REIT. Depending on your level of patience, I think investors with no position in the REIT can consider an initial postion in the REIT.
However, given the way things are going in China, we should maybe hold off on buying for now. I think an interesting entry point will be in the low $1.40s, close to my cost basis. Whether the unit price will drop that low remains to be seen.
Personally, I wont add to my position due to position sizing and a desire to rebalance my portfolio towards growth. However, I won’t sell either.
Do you agree with my assessment of CRCT’s latest results? Do let me know your thoughts.