CapitaLand China Trust (CLCT) is Singapore’s first and largest China-focused REIT. It currently owns a portfolio of 11 retail properties, 5 business parks, and 4 logistics properties located across 12 cities in China. As of 31 December 2021, its portfolio was valued at S$4.9 billion.
With its assets located in the most populous nation in the world, CLCT’s long-term growth potential remains promising. However, China’s zero-COVID strategy is likely to slow the country’s eventual exit from the pandemic. How will CLCT navigate itself amid the uncertainty and lockdowns? I attended its recent 2022 annual general meeting to learn more.
Here are eight things I learned from the 2022 CapitaLand China Trust AGM.
1. Net property income grew 85.2% to S$250.4 million in FY2021. This is the CLCT’s highest NPI since its listing in in 2006. The growth in NPI is mainly due to the completed acquisitions of five business parks and four logistics parks during the year.
2. Distributable income grew 70.0% to S$135.5 million in FY2021, while distribution per unit (DPU) increased 37.5% to 8.73 cents. The growth in distributions is due to the new acquisitions which were all DPU-accretive. CLCT’s distribution yield is currently at 7.3% (as of 22 April 2022).
3. Gearing ratio is at 37.7% as of 31 December 2021, well below the regulatory limit of 50%. Average cost of debt is 2.62% and average term to maturity is 3.4 years. Seventy-seven percent of CLCT’s debt is at fixed interest rates which will provide stability in the current rising interest rate environment. As an illustration, CEO Tan Tze Wooi explained that an increase interest rate of 10 basis points will impact DPU by 0.2 cents.
4. Portfolio occupancy rate is 96.4% as of 31 December 2021. Business parks and logistics parks saw positive rental reversions of 7.0% and 2.7% respectively. However, the retail portfolio recorded a negative rental reversion of 3.4%, albeit an improvement from negative 4% in FY2020. The retail portfolio started the year on a positive note due to Chinese New Year, but the spike in COVID cases in China from March onwards led to operating restrictions and mall closures. CLCT will continue to work closely with local authorities to review conditions for reopening.
5. CLCT’s acquisition of business and logistics parks increased its portfolio exposure to the ‘new economy’ which comprises high-growth sectors such as biomedical, electronics, engineering, e-commerce, information and communications technology and financial services. Moving forward, CLCT intends to focus on acquiring more new economy assets in the near term and diversify its portfolio across retail, new economy, and commercial/integrated developments.
The management believes that this will allow CLCT to better align itself with China’s economic priorities and capture domestic consumption trends in the country.
6. A unitholder asked how current inflationary environment would impact CLCT. The CEO said that rising inflation will directly translate to higher operating, utilities, and wage costs. To mitigate this, CLCT will continually review its budget spending to ensure that it maintains its operating margins as best as they can.
7. China’s zero-COVID strategy will continue to affect CLCT in the near term. A unitholder asked about the impact of the current Shanghai lockdown on the REIT’s performance. The CEO said that CLCT has one retail mall – CapitaMall Qibao – and one logistics park – Shanghai Fengxian – located in Shanghai. The mall is currently closed and business activity at the logistics park is at a standstill. However, these two properties comprise about 3% of CLCT’s portfolio and is not a large material impact at this juncture. The CEO added that the any lockdowns will largely affect the retail sector, but business and logistics parks will remain more resilient.
8. The CEO admitted that China’s regulatory crackdown and geopolitical climate have weighed down CLCT’s share price performance. However, he said that a REIT is ultimately valued based on its portfolio quality and income resilience. He believes that investors will see the value of CLCT over the longer term and its share price should trade in a more normalised manner.
The fifth perspective
CLCT’s recovery from the pandemic holds a lot of promise for the REIT moving forward, and its long-term potential in China is hopeful. However, CLCT’s DPU growth has been rather lacklustre; its DPU has hovered between 9-10 cents over the last 10 years. Coupled with the foreign exchange risk that naturally comes along with its China-focused portfolio, income investors should demand a higher margin of safety before investing in CLCT.
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