• Capital recycling efforts continue
• Results within expectations
• FV increases to S$1.50

DPU Down 5.8% YoY on Lower Capital Distribution

CapitaLand Retail China Trust's (CRCT) results were within expectations. In RMB terms, 1Q19 revenue grew 4.5% YoY due to stronger rental growth from core multi-tenanted malls, offset by lower revenue from CapitaMall Wuhu which is in the process of being divested. In SGD terms, 1Q19 revenue grew by a more muted 1.1% YoY to S$56.0m due to a weaker RMB.

There was a full-quarter contribution from the Rock Square joint venture of S$2.6m vs. the partial quarter distribution of S$1.2m in 1Q18. Income available for distribution to unitholders grew 4.9% YoY to S$24.9m.

Meanwhile, capital distribution fell from S$3.0m in 1Q18 to S$1.0m. As a result, total distributable amount to unitholders fell 3.1% YoY to S$25.9m. 1Q19 DPU before capital distribution grew 2.0% YoY to 2.49 S cents, while DPU after capital distribution dropped 5.8% YoY to 2.59 S cents or 25.3% of our initial fullyear forecast.

Continued Efforts to Strengthen the Portfolio

We are positive on the capital recycling efforts by the REIT manager to strengthen the portfolio. On Mar 29, the REIT manager announced the divestment of 51.0% interest in CapitaMall Wuhu. While CapitaMall Wuhu makes up less than 1% of the portfolio, we see the sale as a positive given that the asset has been posting NPI losses since FY15.

In addition, we are looking forward to the bundle deal announced earlier this year: the divestment of CapitaMall Saihan and the acquisition of another Hohhot asset, Yuquan Mall, located across the street. The new mall is double the size of CapitaMall Saihan and has a longer land lease balance tenure. Disruption to cash flows will be minimized as the divestment of CapitaMall Saihan will take place after the new mall is operational in 2H20.

Strong Rental Reversions for the Portfolio

Portfolio occupancy remained high at 97.4%. Growth in shopper traffic remains healthy at +14.0% YoY. For the quarter, rental reversions for the portfolio remained strong at +9.5% for leases signed during the quarter (which made up 3.2% of the portfolio’s NLA). This figure excludes leases involving new concepts and area reconfiguration – including these, the rental reversion for the quarter would be +0.6%. 

Looking ahead, we find recent operational figures reassuring, but note that the weaker RMB YoY will negatively affect results in SGD terms for the second quarter. Currently, about 80% of CRCT’s debt is on fixed interest rates, while ~80% of distributable income is hedged into SGD. As at 25 Apr’s close, CRCT is trading at a FY19F yield of 6.8%.

After adjustments and using a lower risk-free rate of 2.3% (2.7% previously), our fair value increases from S$1.42 to S$1.50. We maintain HOLD on CRCT.

Source: OCBC Research - 26 Apr 2019