Due to the outbreak of the Coronavirus (it is now codenamed as Covid-19) in China, many companies with business exposure in the country were affected; one of them was CapitaLand Retail China Trust (SGX:AU8U), where all the retail malls in its portfolio are located in China.

On 29 January 2020, it was reported that CapitaMall Minzhongleyuan in Wuhan is closed and will reopen when conditions permit. As for the other malls located in various cities, they are operating at shorter hours, in-line with local government guidelines.

In the near-term, the REIT’s financial performance will definitely be affected. Its unit price have also plummeted from a high of S$1.70 to S$1.52 as I am writing this post. Having said that, could this be a good opportunity for us investors to invest in this REIT at a 10.6% discount (computed based on the difference between the current unit price and its high of S$1.70)?

To find out if CapitaLand Retail China Trust is worthy of a spot in our portfolio, I have done some research to find out its historical financial performance, portfolio occupancy and debt profile, along with distribution payouts to unitholders over the years, all of which I’ll be sharing with you in my writeup about the retail REIT today. On top of that, I’ll also be sharing with you some of the catalysts and threats I personally feel may impact the REIT’s performances ahead, as well as the REIT’s historical valuations over the years which I have computed based on its closing unit price at the end of the respective financial years.

But before I begin, let me do a quick introduction about the REIT (for the benefit of those who is hearing about this REIT for the first time):

Quick Introduction about CapitaLand Retail China Trust

Listed on the SGX-ST since 08 December 2006, CapitaLand Retail China Trust is Singapore’s first and largest China shopping mall REIT.

As at the end of 31 December 2019, CapitaLand Retail China Trust’s portfolio consists of a total of 14 malls – 4 in Beijing, 3 in Shanghai, 1 in Chengdu, 1 in Guangzhou, 1 in Hohhot, 1 in Zhengzhou, 1 in Wuhan, 2 in Harbin, and 1 in Changsha:

The following are some of the key developments of the REIT I’d like to highlight before we move on:

• In February 2019, the REIT announced the divestment of CapitaMall Saihan in Hohhot (which will be handed over to the new owner in the second half of 2020), and at the same time, they will be acquiring a property in the same city (i.e. Hohhot), which the REIT aims to open in the second half of 2020
• On 07 February 2020, the REIT announced the divestment of another retail mall – CapitaMall Enqi (in Zhengzhou), and they aim to use the proceeds from the divestment to repay debt, finance any capital expenditures and asset enhancement initiatives, capital distribution, and/or to finance general corporate and working capital requirements

Historical Financial Performance of CapitaLand Retail China Trust between FY2010 and FY2019

In this section, I will be looking at some of the REIT’s key financial figures over a 10-year period (between FY2010 and FY2019):

Gross Revenue (S$’mil):

Financial Year	FY2010	FY2011	FY2012	FY2013	FY2014
Gross Revenue (S$’mil)	$119m	$132m	$153m	$160m	$203m
Financial Year	FY2015	FY2016	FY2017	FY2018	FY2019
Gross Revenue (S$’mil)	$220m	$214m	$229m	$223m	$238m

Other than in FY2016 and in FY2018, where its gross revenue suffered from year-on-year (y-o-y) drops, the remaining years saw y-o-y improvements.

The y-o-y drops for the 2 years were due to:

FY2016: As a result of lower revenue from CapitaMall Grand Canyon (in Beijing) due to lower occupancy rate, along with a weaker RMB against SGD

FY2018: Due to lack of income from CapitaMall Anzhen which was divested in July 2017, along with lower atrium revenue from CapitaMall Grand Canyon

Over a 10-year period, CapitaLand Retail China Trust’s gross revenue grew at a compound annual growth rate (CAGR) of 7.2%.

Net Property Income (S$’mil):

Financial Year	FY2010	FY2011	FY2012	FY2013	FY2014
Net Property Income (S$’mil)	$77m	$86m	$100m	$103m	$132m
Financial Year	FY2015	FY2016	FY2017	FY2018	FY2019
Net Property Income (S$’mil)	$141m	$140m	$149m	$147m	$165m

In-line with y-o-y declines in the REIT’s gross revenue (in FY2016 and FY2018), its net property income saw y-o-y dips as well in those two years, while recording y-o-y gains in the other remaining years.

Over a 10-year period, the REIT’s net property income grew at a CAGR of 7.9%.

Distributable Income to Unitholders (S$’mil):

Financial Year	FY2010	FY2011	FY2012	FY2013	FY2014
Distributable Income to Unitholders (S$’mil)	$52m	$57m	$67m	$70m	$81m
Financial Year	FY2015	FY2016	FY2017	FY2018	FY2019
Distributable Income to Unitholders (S$’mil)	$89m	$87m	$91m	$100m	$107m

Except for FY2016, all the other years saw the REIT’s distributable income to unitholders recording y-o-y improvements.

Over a 10-year period, it grew at a CAGR of 7.5%.

CapitaLand Retail China Trust’s Portfolio Occupancy Profile between FY2010 and FY2019

The following table is CapitaLand Retail China Trust’s portfolio occupancy profile over a 10-year period – between FY2010 and FY2019:

Financial Year	FY2010	FY2011	FY2012	FY2013	FY2014
Occupancy Rate (%)	98.1%	98.1%	97.2%	98.2%	95.9%
WALE* (by Net Lettable Area) (Years)	10.4 years	8.8 years	8.3 years	8.3 years	9.0 years
WALE* (by Total Rental Income) (Years)	7.1 years	5.8 years	5.3 years	4.8 years	6.7 years
Rental Reversion (%)	+5.1%	+11.5%	+17.5%	+13.8%	+23.1%
Financial Year	FY2015	FY2016	FY2017	FY2018	FY2019
Occupancy Rate (%)	95.1%	95.9%	95.4%	97.5%	96.7%
WALE* (by Net Lettable Area) (Years)	8.2 years	7.4 years	5.5 years	5.3 years	3.8 years
WALE* (by Total Rental Income) (Years)	6.1 years	5.0 years	3.0 years	2.9 years	2.4 years
Rental Reversion (%)	+8.1%	+3.9%	+5.6%	+10.9%	+14.2%

* WALE = Weighted Average Lease Expiry

Here are some of the positives and negatives from the REIT’s portfolio occupancy profile over the past 10 years:

Positives:

• Its occupancy rate has been maintained at above 95.0% in all of the 10 years I have looked at
• In my opinion, its quite a feat that the REIT has managed to report a positive rental reversion for lease renewals every single year over the past 10 years

Negatives:

• Over the years, the REIT’s weighted average lease expiry has reduced – whether is it by net lettable area or by total rental income, suggesting that tenants are now in favour of shorter lease periods

Debt Profile of CapitaLand Retail China Trust between FY2010 and FY2019

Another area I focus on when I study any company is its debt profile, as I want to make sure that any companies I invest in are not overly leveraged.

With that, let us now take a look at CapitaLand Retail China Trust’s debt profile over a 10-year period (between FY2010 and FY2019):

Financial Year	FY2010	FY2011	FY2012	FY2013	FY2014
Aggregate Leverage (%)	31.1%	28.0%	28.0%	32.6%	28.7%
Interest Coverage Ratio (times)	6.2x	8.0x	7.8x	8.1x	6.2x
Average Term to Debt Maturity (years)	2.2 years	1.3 years	1.4 years	2.4 years	2.8 years
Average Cost of Debt (%)	2.8%	2.6%	2.6%	2.6%	3.3%
Financial Year	FY2015	FY2016	FY2017	FY2018	FY2019
Aggregate Leverage (%)	27.7%	35.3%	28.4%	35.4%	36.7%
Interest Coverage Ratio (times)	6.3x	6.0x	5.8x	5.3x	5.0x
Average Term to Debt Maturity (years)	2.2 years	1.8 years	3.4 years	3.5 years	2.8 years
Average Cost of Debt (%)	3.0%	2.8%	2.5%	2.7%	3.0%

Looking at the REIT’s aggregate leverage over the years, I must say that the REIT has plenty of debt headroom to make further yield accretive acquisitions before it reaches the regulatory limit of 45.0%. That said, between FY2017 and FY2019, I noticed that its aggregate leverage have gone up steadily – from 28.4% recorded in FY2017 to 36.7% in FY2019.

With the increase in the REIT’s aggregate leverage between FY2017 and FY2019, its interest coverage ratio had came down from 5.8x to 5.0x in the same time period.

Another thing to note in the same time period (between FY2017 and FY2019) is that the average cost of debt have been rising steadily. It’s something I’ll be keeping tabs on in the quarters ahead, to make sure it does not go up too much.

Distribution Per Unit Payout to Unitholders over a Period of 10 Years

The management of CapitaLand Retail China Trust declares a distribution payout to unitholders on a half-yearly basis – once when they release their second quarter results, and once when they release their fourth quarter results.

Let us now take a look at the REIT’s distribution payout per unit to unitholders between FY2010 and FY2019:

Financial Year	FY2010	FY2011	FY2012	FY2013	FY2014
Distribution Per Unit (S$’cents)	8.36 cents	8.70 cents	9.54 cents	9.02 cents	9.82 cents
Financial Year	FY2015	FY2016	FY2017	FY2018	FY2019
Distribution Per Unit (S$’cents)	10.60 cents	10.05 cents	10.10 cents	10.22 cents	9.9 cents

One thing to note here is that, the retail REIT’s distribution payout to unitholders have fluctuated over the years, so for those of you who are investing in the REIT because of its distributions, then its one you need to take note of.

Despite the fluctuation, over a 10-year period, the REIT’s distribution payout to unitholders still managed to grow at a CAGR of 1.7%.

Catalysts and Threats Which May Impact CapitaLand Retail China Trust’s Performances in the Quarters/Years Ahead

The following are some of the catalysts and threats I have identified which may impact the REIT’s performances in the coming quarters/years ahead:

Catalysts:

• Reopening of the REIT’s mall in Wuhan, and resumption of normal operating hours and mass activities in all their other malls
• Any announcements relating to the REIT divesting underperforming malls, and channelling the capital into acquiring other malls which are yield accretive

Threats:

• Weaker RMB vs. SGD will impact the REIT’s financial performance, as it reports its financials in SGD. Its distribution payout to unitholders may also be negatively impacted as well
• A slowdown in China’s economy, resulting in lower-than-expected rent upon lease renewal
• Competition from online

Historical Valuation of CapitaLand Retail China Trust over a 10-Year Period (between FY2010 and FY2019)

The following table shows you CapitaLand Retail China Trust’s historical valuations over a 10-year period which I have computed based on its closing unit price on the last trading day of the respective financial years:

Financial Year	FY2010	FY2011	FY2012	FY2013	FY2014
P/E Ratio	6.9	6.3	8.4	7.6	9.2
P/B Ratio	1.1	0.9	1.3	0.9	1.0
Distribution Yield	6.8%	7.6%	5.8%	6.8%	6.1%
Financial Year	FY2015	FY2016	FY2017	FY2018	FY2019
P/E Ratio	10.9	11.1	10.0	10.4	10.5
P/B Ratio	0.8	0.8	1.0	0.9	1.0
Distribution Yield	7.1%	7.3%	6.2%	7.5%	6.2%
Financial Year	Average
P/E Ratio	9.1
P/B Ratio	1.0
Distribution Yield	6.7%

To summarise, the REIT’s historical valuation over a 10-year period is as follows:

• P/E ratio is averaged at 9.1, with the lowest at 6.3 (in FY2011), and the highest at 11.1 (in FY2016)
• P/B ratio is averaged at 1.0, with the lowest at 0.8 (in FY2015 and FY2016), and the highest at 1.1 (in FY2010)
• Distribution yield is averaged at 6.7%, with the lowest at 5.8% (in FY2016), and the highest at 7.6% (in FY2011)

CapitaLand Retail China Trust’s Current Unit Price and Valuations:

At the time of writing, the units of CapitaLand Retail China Trust is trading at S$1.52. Based on its current unit price, its valuations are as follows:

P/E ratio: 11.2
P/B ratio: 1.0
Distribution Yield: 6.5% (computed based on its total distribution payout of 9.9 cents/unit in FY2019)

At its Current Unit Price, is CapitaLand Retail China Trust Considered Cheap or Expensive?

Comparing its current valuations against the REIT’s 10-year average, it seems that, at its current unit price of S$1.52, it is considered to be trading at a premium, due to its higher-than-average current P/E ratio, coupled with a slightly lower than-average current distribution yield.

In Conclusion

As mentioned in the beginning of the post, I feel the negative impact on the REIT due to the temporary closure of their mall in Wuhan, and shorter operating hours in its other malls is just temporary. As soon as the outbreak of the Covid-19 comes under control and the malls resume their normal operations and activities, their revenue will bounce back up again (and the same goes for its unit price as well.)

However, it may be awhile before this happens, so in my personal opinion, if you were to invest in the REIT now, you need to be patient for its unit price to go back up once again (and enjoy capital appreciation.)

Other than its distribution payout being inconsistent over the years (I tend to prefer investing in companies with a more consistent dividend payout), I like the REIT’s financial performance, along with its portfolio occupancy profile over the years.

So, is this an opportune time to invest in this retail REIT at this juncture? I leave that up to you. 😊

Disclaimer: As at the time of writing, I am not a unitholder of CapitaLand Retail China Trust.

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