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What Investors Need to Know about CapitaRetail China Trust’s Latest Third Quarter Earnings

CapitaRetail China Trust (SGX: AU8U) released its third quarter results last Friday. The real estate investment trust, which focuses on retail malls in China, is partly owned and managed by property outfit CapitaLand Limited (SGX: C31).

CapitaRetail China Trust’s portfolio currently consists of 10 shopping malls which are collectively valued at more than RMB10billion (around S$2 billion). The malls, which are located in six Chinese cities, include CapitaMall Anzhen in Beijing, CapitaMall Qibao in Shanghai, and CapitaMall Erqi in Zhengzhou.

A significant portion of the properties’ tenants are major international and domestic retailers such as Wal-Mart and Carrefour.

The basic numbers

For the quarter ended 30 September 2014, gross revenue surged 30.2% year-on-year to S$51.42 million. Net property income increased by 29.2% to S$32.27 million as a result. The solid growth on both fronts can be attributed to contributions from CapitaMall Grand Canyon (the mall was acquired by the REIT on 30 December 2013) and rental reversion of 22.6% for CapitaRetail China Trust’s portfolio.

The top-line growth flowed to the bottom-line as income available for distribution climbed 14.1% to S$19.48 million compared to a year ago. Due to a slightly larger unit count, CapitaRetail China Trust’s distribution per unit (DPU) rose by a less-impressive 10.3% to 2.35 Singapore cents. This translates into a distribution yield of 5.9% for CapitaRetail China Trust based on its closing price of S$1.59 last Friday.

Financial strength & operational performance

As of 30 Sept 2014, CapitaRetail China Trust’s gearing ratio stood at 30.8%, a meager rise from the 29.8% ratio seen at the end of the second quarter. Unit-holders of the REIT might be happy to know that the all-in average cost of debt for the REIT is low at 3.47%, although the average term to maturity of only 2.16 years might suggest that the REIT could  have higher interest rates to worry about if rates do rise in the near future.

On the operational side of things, CapitaRetail China Trust’s portfolio occupancy decreased to 97.6% from 98.3% seen a year ago. There were a number of improvement works going on at some of the REIT’s malls which helped to partly explain the decline in occupancy. There were also external factors, like road closures leading to some of its malls, which contributed to the dip.

On a brighter note though, shopper traffic at the REIT’s malls showed an increase of 3.8% and 6.3% on a year-on-year and –quarter-on-quarter basis, respectively. The increase in average monthly sales of tenants were also eye-catching at 16.1% and 5.7% on a year-on-year and quarter-on-quarter basis. It is noteworthy that these robust numbers may indicate more room for further rental reversions in the future, which can further boost CapitaRetail China Trust’s net property income.

Outlook and valuation

Victor Liew, Chairman of the REIT’s manager, gave some long-term outlook for the REIT:

“In the third quarter of 2014, China’s economy expanded 7.3% year-on-year and in the first nine months of the year, the country’s retail sales rose by 12.0% year-on-year to RMB18.9 trillion. Despite headwinds, China’s economy has maintained its momentum due to growth-enhancing stimulus, and we can expect more of such measures as the Chinese government works towards achieving sustainable growth. CRCT therefore remains positive on China’s long term economic prospects and consumption growth.”

CapitalRetail China Trust’s units last changed hands at S$1.59 on Friday. Based on its latest net asset value, the REIT is valued at a price-to-book ratio of 1.

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