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As Chinese retail REITs struggle, CRCT's Tan outlines plans to stabilise DPU

The Edge Singapore
The Edge Singapore  • 8 min read
As Chinese retail REITs struggle, CRCT's Tan  outlines plans to stabilise DPU
CapitaLand Retail China Trust (CRCT), along with other real estate investment trusts with Chinese shopping centres such as Sasseur REIT and BHG Retail REIT are facing a challenging first quarter of the year.
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SINGAPORE (Feb 21): CapitaLand Retail China Trust (CRCT), along with other real estate investment trusts with Chinese shopping centres such as Sasseur REIT and BHG Retail REIT are facing a challenging first quarter of the year.

China has been slow get-ting back to work after the Lunar New Year period (Jan 25- Feb 9) and many companies continued to encourage people to continue working from home, even after Shanghai and Beijing officially ended their stay-away-from-the-workplace policy at midnight on Feb 9.

In a press release on Feb 7, Tan Tze Wooi, CEO of CRCT’s manager, said: “The extended Spring Festival break and other measures taken to contain the spread of the coronavirus have affected our business sector. As a long-term business partner of our retailers, we are engaging them closely and will put in place targeted policies to support them through this period.”

CRCT has closed Minzhongleyuan (MZLY), its solitary mall in Wuhan. “MZLY comprises 2.5% by valuation of our portfolio, and its net property income (NPI) contribution is 0.5%. From a business standpoint it’s not going to be core to CRCT. Our longer-term thinking would be to look for an exit,” Tan says during a results briefing on Feb 7.

Other locally listed Chinese retail REITs have closed malls as well. BHG Retail REIT has had to temporarily close all stores other than some F&B outlets providing delivery services and the supermarkets in Hefei Mengchenglu Mall and Hefei Changjiangxilu Mall, as recommended by Hefei’s authorities’ “Notice on the Strengthening and Prevention and Con-trol of the Epidemic Situation in Commercial Enterprises” on Feb 6. Altogether, BHG Retail REIT has six malls in China, with one each in Chengdu, Beijing, Dalian and Xining (Tibet) and the two in Hefei.

“As a socially responsible owner of retail malls that operate in the community space, BHG Retail REIT may explore various strate-gies to support and reinforce its relationship with stakeholders,” its manager said.

Sasseur REIT’s manager announced in Jan that it has closed all its four outlet malls in Chongqing, Bishan, Hefei and Kunming from Jan 26 and 27 to help prevent the spread of the coronavirus. “It is currently difficult for the manager to ascertain the full financial impact of the crisis on the financial performance of Sasser REIT,” the announcement said.

Sasseur REIT has what is called an entrusted manager agreement (EMA) with its sponsor. The EMA in turn has lease agreements with the malls’ tenants which are based on their sales and can comprise of 10% to 16% of sales. The EMA or sponsor then gives a fixed component of revenue to Sasseur REIT. In FY2018 this was around 70% of the REIT’s total revenue. The remaining 30% of Sasseur REIT’s revenue was based on sharing the variable component pegged to the sales of the malls. This should protect the downside, said Anthony Ang, during a teleconference on Jan 28.

Tan pointed out that CRCT’s rent structure is not totally dependent on tenant sales. “We have fixed rental, and only 3% of rent is based on tenant sales,” he says. Still, as a landlord, the well-being of its tenants is important. “As a reasonable landlord there is some form of relief [for the tenants] we would consider. It depends on how things unfold. The first order is to support the government to contain the virus so we do see a significant drop in our [shopper] traffic.”

In addition, CRCT has an insurance policy in place, but Tan says claiming insurance de-pends on “technicalities”. “This is something we and the insurance brokers are [discussing] and I wouldn’t want to jump the gun. We do have an interruption policy,” Tan says.

Demand-supply shock, says Nomura

Nomura’s economists point out that China’s economy is experiencing the rare case of simultaneous demand and supply shocks.

“Because [the coronavirus outbreak] in China is far worse than SARs in terms of breadth and speed of infections, the ‘fear factor’ among China’s population is palpable, with people shunning crowded places like shopping malls and restaurants, crimping consumption, which contributed nearly three-fifths of China’s GDP growth last year,” Nomura states in a recent report.

The Chinese government’s draconian controls to contain the coronavirus outbreak have blocked transportation and disrupted factory production, made worse by the extended Lunar New Year holiday, stranding tens of millions of migrant workers at home and causing the supply shock.

Nomura is forecasting 3.0% GDP growth in the first quarter of this year, “with the risk firmly skewed to an even lower number. Too much damage has already been done and initial policy stimulus will not be very effective”.

‘Dry powder’ to support DPU

Last year, CRCT raised $279.4 million to part fund three acquisitions and their impact is like-ly to be felt this year. It acquired CapitaMall Aidemengdun, CapitaMall Xuefu and CapitaMa-ll Yuhuating, from sponsor CapitaLand, which completed in August. Aidemengdun and Xuefu are in Harbin, and Yuhuating is in Changsha.

It also divested CapitaMall Saihan and its 51% stake in CapitaMall Wuhu. Saihan, in Hohhot, Inner Mongolia, was divested in part-ex-change for CapitaMall Yuquan which will only be ready for operation at the end of this year.

On Feb 7, CRCT announced plans to di-vest CapitaMall Erqi in Zhengzhou, Henan, for RMB777.0 million, 20.5% above independent valuation, resulting in a gain equivalent to $13 million.

As at Dec 31, 2019, CRCT had $139.92 million in cash. Some of this would be set aside for asset enhancement initiatives (AEIs). “We are preparing AEI for Yuhuating so that in 2021 it will have a good upside,” Tan says.

“We have reserves, we have dry powder and a few bullets to ride through this challenge,” Tan adds. When asked if he would use gains from asset sales to support DPU, he says: “We will look at it holistically. We know people buy us for the yield so [supporting DPU] is some-thing I would consider.”

All in, CRCT had around $45 million in gains from divestments. “We still have a bal-ance of $26 million to $27 million from the di-vestment of Anzhen [in 2018], coupled with $13 million from Zhengzhou and $5 million from retained earnings,” Tan says, giving the manager $45 million in “dry powder”.

CRCT’s income available for distribution in 4QFY2019 was $33.64 million, of which it only distributed $28.39 million, translating to a DPU of 2.34 cents, unchanged y-o-y.

In 4QFY2019, NPI rose 25.3% y-o-y to RMB227 million ($45 million). The increase was primarily driven by the first full-quarter contribution from the newly-built CapitaMall Xuefu, CapitaMall Yuhuating and CapitaMall Aidemengdun.

NPI for FY2019 rose 15.5% y-o-y to RMB835 million. CRCT’s distributable amount to unitholders rose 12.6% y-o-y to $105.6 million in FY2019, while DPU rose 2.1% to 9.8 cents in the same period. DPU after capital distribution (including proceeds from the sale of Anzhen Mall in 2018) for FY2019 was 9.90 cents.

Unitholders will receive their DPU on March 30 this year along with their DPU of 1.27 cents for the period Aug 14, 2019 to Sept 30, 2019, totalling 3.61 cents. Annualised, the DPU of 2.34 cents translates into a yield of 6.2%.

A secret weapon

There is no change in plans for the opening of Yuquan Mall at the end of this year, Tan reiterates. It is positioned as a new generation one-stop shopping destination with experiential retail concepts, including edutainment spaces and an indoor sports zone catering to young families.

SINGAPORE (Feb 24): CRCT’s secret weapon is Shuangjing Mall, valued at just RMB12,332 psm as at Dec 31, 2019. Shuangjing Mall is situated in the heart of Beijing, in Chaoyang district, home to the capital’s famous Silk Street, foreign embassies and of course Olympic Park with the Bird’s Nest and Water Cube.

“Two anchor tenants’ leases are [up] in 2023. Now is the right window for us to plan and re-look into the whole building. We won’t let them extend on current terms. We will study how we can take back space and release it. This one’s is an upside story. The valuation is low because it is capped by rent,” Tan says.

Valuations of REIT assets depend on their cash flow, and Shuangjing Mall’s anchor ten-ant rents are lower than multi-tenanted malls, hence its valuation is lower than malls in Bei-jing’s city centre. With a rental uplift, Shuang-jing Mall is likely to be worth more than its cur-rent valuation of RMB610 million.

Shuangjing Mall’s land has 24 years of lease left and an extension is not confirmed. So a com-plete redevelopment may not be feasible at this junction. “We [tried to] talk to the government and convince them we have a good proposal but it’s very hard to push at this juncture be-cause we have 24 years of lease left,” Tan says.

When asked about CRCT’s “dominant” malls – the Xizhimen, Wangjing and Grand Canyon malls in Beijing, and Rock Square in Guangzhou – Tan says: “We continue to extract rental reversions of high single-digits to double-digits, and this is exactly what pro-active asset management can achieve. We can take early action and pockets of opportunities continue to be there. We can look at trades that are weakening or trades that are trending.

“In 2020 we will continue AEI. We will try to sequential these activities such that the downtime is limited, with upside from rental reversions. Rock Square, which achieved successive years of double-digit rental reversion, will be an asset that we continue to extract value through AEI. These dominant malls will continue to grow.”

Excluding Erqi, CRCT owns 12 malls. CRCT’s gearing as at Dec 31, 2019 stood at 36.7%. About 80% of CRCT’s debt is on fixed interest rates, providing certainty of interest expenses. To mitigate the impact of foreign currency fluctuations, CRCT hedged approximately 62% of its undistributed income into Singapore dollars.

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