Review of CapitaLand China Trust FY2021 Results

CapitaLand China Trust (CLCT) is another counter of mine which has released their full year financial results last week. 

This is one counter whose result I am keen in following closer as I have high expectation for it in terms of growth due to the expanded mandate approved by unit holders last year.

I have ran through the results and made some observations and views as follows.

 

Summary

 

Overall great results with huge jump in incomes YoY which is expected with the expanded mandate.

 

Distribution announced is 1.80 cents per unit and will be paid out on 7th March 2022, Monday.

 

This is on top of the 2.70 cents per unit of advance distribution paid in November 2021.

Total DPU for FY2021 is 8.73 cents per unit.

Based on today's close price, yield is 7.28%.

 

The Good

 

Diversified asset class of the traditional retail malls and the new economy - business parks and logistics parks located in Tier 1 and 2 cities.

 

Clear plan laid out by the management with their 5-year acquisition growth roadmap which resonates pretty well with what I had in mind.

 

 

Record high revenue and NPI.

 

Huge jump in DI and DPU YoY (though base unit is also enlarged).

 

NAV increased to $1.54 from $1.48 YoY.

 

Interest coverage increased to 4.9 times from 3.9 times YoY.

 

With interest rates expected to rise this year, it is good to see 77% of borrowings on fixed rate.

  

Portfolio WALE by GRI of 2.2 years and 2.6 years by NLA.

This is similar to CLCT's WALE historically even when they were a pure retail play.

A short WALE can be a double edge sword but in this case, it is beneficial for CLCT as more than 80% of the logistics park leases have rental escalation of 3% - 5% built in.

 

The relatively short WALE also allows the Reit to be more nimble in handling the market dynamics of the retail segment.

All three asset classes reported higher occupancy.

 

96.3% occupancy for retail portfolio.

 

96.2% occupancy for business park portfolio with 7% positive rental reversion.

 

97.4% occupancy for logistics park portfolio with 2.7% positive rental reversion.

 

As mentioned, I particularly like that >80% of the logistics park leases have rental escalation of 3% - 5% built in. 

It is also a big plus point when the Reit manager's interest is aligned with the unit holders'.

 

The manager's management fee comprises of two components - base fee and performance fee.

 

The base fee is 0.25% per annum of the deposited properties value while the performance fee is 4% per annum of the NPI.

The manager may elect to receive the fees in cash or units or a combination of both.

 

For this FY, the manager has elected to receive $14.3 million (out of $21 million payable) in new units. In other words they share the same confidence in the prospects of the Reit as the other common unit holders.

 

Also, since the bulk of the management fees is tied to the NPI, it would do them and us good to grow the income year on year.

 

The Not So Good

 

Gearing increased from 31.8% to 37.7% YoY.

 

This is not surprising given the borrowings for the acquisitions from the past year.

 

 

Cost of debt of 2.62%. Could have been lower.

 

Negative rental reversion (-3.4%) for the retail portfolio points to the continual pressure faced in this segment.

 

This would be a major cause of concern in the past but is now somewhat mitigated by the diversification of the Reit into other asset classes which provided positive rental reversions.

This is the power of diversification - to reduce concentration risks.

Management has guided that the leasing environment for retail to continue to be competitive.

Other than that, the main risk I can see here is the political environment in China which is somewhat unpredictable and the danger is often not visible until it hits you.

Conclusion

CLCT is a Reit that has been growing organically (through AEIs) and inorganically (new acquisitions) aggressively over the past year.

 

This is the first full financial year after the mandate to diversify into other asset classes was approved by unit holders.

 

Subsequently, CLCT invested into 5 business parks and 4 logistics parks located in 12 cities in China.

 

Together with the 11 retail malls, it is not surprising that this enlarged portfolio with diversified asset classes achieved the highest gross revenue and NPI for CLCT since listing.

In fact anything less would be a damper isn't it?

Based on the closing share price of $1.20 today, CLCT is still trading at a 22% discount to its NAV.

 

With a more than 7% yield and a solid growth plan ahead, I would say this is a no brainer addition for serious income investors.

 

I last added to my holdings in August 2021 and depending on the share price, I am looking to add some in the coming days.