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3 Reasons Why CapitaLand Retail China Trust Can Grow Its Distributions In The Future

Recently, I wrote an article on two REITs that have exposure to the fast-growing China real estate space. CapitaLand Retail China Trust (SGX: AU8U) was one of the two REITs I listed.

In this article, I will underline three more reasons why I think this REIT has potential to grow its distributions and provide good return to unitholders in the future.

Strong rental reversion

The rental reversion rate is an indicator of whether the REIT has been able to secure higher rents from its tenants. In the first quarter of 2018, a total of 126 leases were either renewed or newly signed. This was the equivalent of about 2.7% of total net lettable area.

On average, the leases were signed at 12.8% premium to previous leases. The positive rental reversion from previous leases showcases the growing demand for retail space in the trust’s portfolio of malls and also suggests that the REIT has strong pricing power with its tenants. Below is the full table of leases signed during the first quarter of 2018.

Source: CapitaRetail China Trust 2018 First Quarter Earnings Presentation

Capitalise on strong tenant demand

With the positive trend of higher rental reversions in the first quarter of 2018, it is encouraging to see that another 692 leases or 28.1% of rental income are due for renewal later in the year. This will provide a good opportunity for the trust to take advantage of the strong tenant demand to increase its rent by negotiating higher leases when these contracts are up.

Furthermore, another 425 leases or 22.8% of rental income are due for renewal in 2019. Likewise, the REIT can capitalise on the positive economic conditions to renew or sign new contracts at a much higher rental rate when these contracts expire next year.

Capacity for more acquisitions

As of 31 March 2018, the REIT had a gearing ratio of 32.5%, which is well below the 45% regulatory limit set by the Monetary Authority of Singapore.

With a low gearing ratio, there is plenty of room for the REIT to increase its borrowings in the future. It also has a relatively low cost of debt compared to other China-focused REITs, which has resulted in a safe interest cover ratio of 6.3 times. All these point to the high likelihood that the management will take advantage of its strong financial position to make another debt-funded acquisition that can boost its bottom line and increase its distribution per unit.

The Foolish bottom line

There are indeed plenty of reasons to like CapitaLand Retail China Trust as an investment. Not only does it have exposure to one of the fastest growing property markets in the world, it also has plenty of room for organic and inorganic growth. Moreover, at its current price of S$1.49 per unit, it trades at an 8% discount to its book value and has an attractive distribution yield of 6.56%.

 

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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 CapitaLand Retail China Trust. Motley Fool Singapore contributor Jeremy Chia doesn’t own shares in any companies mentioned.