3 Things You Should Know About CapitaLand Retail China Trust

CapitaLand Retail China Trust (CRCT) is Singapore's first and largest China Retail REIT with a market capitalization of $1.4 billion at its current share price of $1.14. CRCT is one of Singapore's smaller REITs and its share price has declined by more than 25% at $1.60 pre-COVID to its current share price of $1.14. It was one of the largest hit retail REIT initially during the COVID-19 pandemic as all of its properties were located in the epicenter of the pandemic. It has since recovered gradually from its lowest at $0.97 during March due to China easing most of its COVID-19 restrictions and China's ability to contain the pandemic well. You may be wondering if its a good time to load up on CRCT due to its cheap share price at the moment. Here are 3 things you should know about CRCT.

1. High But Relatively Unstable Dividends

CRCT has a 13-year dividend history and has been consistently paying out dividends since 2007 to shareholders without fail. This attracts investors as they can be assured that they will always be receiving their dividend payouts. Their average dividend yield for the past 5 years is 10.3% which is much higher than the average retail REIT (4-6%). However, the tradeoff for this high average dividend is that CRCT's dividend yield over the past 5 years fluctuated and has not been very stable (9.34% in 2016, 5.5% in 2018, 15.41% in 2019). This may not be ideal if you are looking for a stable source of dividend income for your retirement or expenses. Due to the COVID-19 pandemic which severely affected retail REITs, CRCT's distributable income for 1H 2020 decreased by 26.2% year-on-year to $37 million, and their 1H 2020 distribution per unit also decreased by 40.0% year-on-year to 3.02 cents. Nevertheless, I feel that the worst is over for CRCT's portfolio as China has begun to ease its restrictions and there has been a sharp rebound in shopper traffic (Termed 'China's revenge shopping'). CRCT's performance in 2H 2020 is definitely going to be much better than its 1H 2020 performance. CRCT's dividend yield for 2020 is 6% which is still not bad compared to other retail REITs. The upside of CRCT's dividends is that you may receive potentially high dividend yields in certain years but the downside is that its dividend yields are not very stable in recent years.  

2. Prudent Capital Management

CRCT has a debt gearing ratio of 33.6% as of 30 June 2020 which is well within the appropriate levels (<40%). REITs often use debt as leverage to acquire more properties and investments to expand their portfolio at a faster rate. CRCT has a well-distributed debt maturity profile with no significant amounts of debt due in any one year and their average term to maturity for their debt is 2.75 years. Moreover, CRCT exercises proactive interest rate and forex management to ensure they will not be significantly affected by the exchange rate or interest rate changes in the economy. They have a debt headroom of $1.3 billion to a 50% debt gearing ratio (Monetary Authority of Singapore recently increased the allowed debt gearing ratio for REITs from 45% to 50% due to the COVID-19 pandemic) which allows them to have financial flexibility for stability and growth. Additionally, CRCT has a strong balance sheet with total assets worth $3.8 billion and total liabilities at $1.8 billion. CRCT is unlikely to run into any major cash flow problems in the future with their excellent prudent capital management. This helps to boost investors' confidence in CRCT's portfolio and performance in the future. 

3. Diversified Tenant Portfolio and High Occupancy Rate

CRCT's portfolio consists of 14 properties located in different municipalities in China with a total valuation of RMB $19, 386 million. They are not overly reliant on any one property for a majority of their portfolio's net property income and their tenants come from many different sectors across the economy. Furthermore, CRCT has a wide tenant base with no single tenant being responsible for a huge portion of its portfolio revenue. CRCT had 389 new leases and renewals from 1 Jan to 30 June 2020 and their weight average lease expiry is 2.2 years by gross rental income. This helps to protect CRCT's portfolio in challenging economic times such as the current COVID-19 pandemic and reduce the risk of CRCT running into cash flow problems in the future. Additionally, CRCT's portfolio has a high occupancy rate of 91.5% as of 30 June 2020. This is pretty impressive considering the massive impact COVID-19 had on China's retail sector due to the imposed restrictions and lockdowns. This means that they are maximizing their properties to generate as much income as possible which would translate to higher dividend payouts to shareholders.  CRCT's diversified tenant portfolio and the high occupancy rate is one of the reasons it can generate a high average dividend yield for shareholders. 

Verdict

In my opinion, I personally feel that Mapletree NAC Trust is a better option than CRCT if you are looking for REITs that invest in the China Region. Mapletree NAC Trust has a more diversified portfolio and its properties span across 3 countries (Japan, China, Hong Kong), unlike CRCT which is concentrated only in China. I personally prefer Mapletree NAC Trust's stability and performance in recent years compared to CRCT and I feel that Mapletree NAC Trust is more reliable in the long run. Moreover, I do not really like CRCT's unstable dividend yield as I prefer a stable source of dividends which gives me reassurance. However, if you are looking for REITs with potentially high dividend yields at a higher risk, you can definitely consider CRCT. 

Source: CRCT Financial Results 1H 2020

What are your thoughts on retail REITs focused on China?