Would Warren Buffett Buy CapitaMall Trust?

Ser Jing - Shopping for CapitaMall Trust's First Quarter Results (picture)We don’t normally associate Warren Buffett with property investments. But we would be quite wrong to assume that Buffett doesn’t invest in bricks and mortar.

In fact, the Sage of Omaha recently revealed some little-known gems about his property-investment strategy.

He advised investors to think carefully about what the property is capable of producing rather than the prospective price change of the property. He said to focus on the latter would be speculation but focussing on the former is investing.

With that in mind, what would Warren Buffett make of CapitaMall Trust (SGX: JS8), which is Singapore’s first quoted income-producing Real Estate Investment Trust (REIT).

From an investor’s perspective, CapitaMall Trust (CMT) can be viewed as a steady income generator. Over the last four years, bottom-line profits have risen progressively from S$270m to S$574m. Investors have benefitted directly through distributions, which a REIT is obliged to make. Annual dividends have been around S$0.10 per share over the last ten years.

CapitaMall Trust is also a high-margin business, which is something else that Buffett would look for specifically. In 2010, Net Income Margin stood at 45%. Last year it had improved to 76%.

The company is not especially efficient, though. Its Asset Turnover of 0.08 is about six times lower than the market average. But Asset Turnovers do not tend to be high with REITs. CapitaMall Trust’s Asset Turnover is in line with other REITS that include Mapletree Commercial Trust (SGX: N2IU) and Fortune REIT (SGX: F25U).

Although Buffett takes a dim view of borrowings, the use of leverage is almost unavoidable for REITs. In the case of CMT, its Leverage Ratio of 1.4 is not particularly excessive. It is even below the average for Singapore’s blue chips. The median Leverage Ratio for the 30 companies that make up the Straits Times Index (SGX: ^STI) is around 1.7.

Currently, with the shares at S$1.95, CMT has a market value of S$6.7b. This is marginally above its book value.

Ideally, Buffett would want to buy an asset below its book value. But he might just make an exception with CapitaMall Trust. Over the last ten years, CMT has delivered a total return of about 10%. Just over a quarter has come from capital growth, with the remainder coming from reinvested dividends. It just goes to show why it is so important to reinvest those distribution units.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.