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Does CapitaLand Retail China Trust Have the Financial Muscle for Acquisitions?

CapitaLand Retail China Trust (SGX:AU8U), or CRCT for short, is the first REIT in Singapore’s stock market that focuses on shopping malls in China. It currently has a portfolio of 11 shopping malls located across seven major cities in China.

An important consideration for REIT investors is the strength of the REIT’s balance sheet. This can be the difference between a REIT that can grow its portfolio and distributions, versus one which has limited growth prospects. With that, I want to take a look at CRCT’s gearing ratio, interest cover, and borrowing cost, to get a better idea on the REIT’s ability to gun for yield-accretive acquisitions.

Gearing ratio

The gearing ratio is simply the ratio of a REIT’s total debt to its total assets. As of 31 March 2018, CRCT had a gearing ratio of 32.5%. This is well within the 45% gearing ratio ceiling set by the Monetary Authority of Singapore.

CRCT has assets valued at S$2.99 billion, and total borrowings of S$998 million. This gives it an additional S$347.5 million in debt-headroom to make more acquisitions in the future before it reaches the gearing limit of 45%.

Interest coverage

The interest coverage ratio measures the interest cost against the net property income of a REIT. The higher the interest coverage ratio, the more leeway the REIT has to take on more debt and still maintain a healthy profit.

In the first quarter of 2018, CRCT had net property income of S$37.2 million, and interest expenses of S$5.8 million. This gives the REIT an interest coverage of 6.4. I consider an interest coverage ratio of 5 or more to be safe. Once again, CRCT demonstrates prudence in maintaining a relatively high interest coverage ratio.

Borrowing costs

A REIT’s ability to negotiate low borrowing costs is important as it could determine its capacity to expand. So far, CRCT has managed to keep its aggregate interest costs low, at just 2.51%. This is below other China-focused REITs’ aggregate cost of borrowing.

Moreover, CRCT has hedging measures in place, which is useful amidst the current rising interest rate environment.

The Foolish bottom line

CRCT’s debt profile looks well managed in my view. It has a low gearing ratio, a healthy interest coverage ratio, and low borrowing costs which have been hedged.

However, it is important that investors not look at a REIT’s debt profile in isolation. There are other aspects of the REIT to consider, like the strength of its management team, its current valuation, and its ability to grow its distributions per unit. Only by taking everything into consideration can we make a holistic investment decision.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has a recommendation on CapitaRetail China Trust. Motley Fool Singapore contributor Jeremy Chia doesn’t own shares in any companies mentioned.