CapitaLand Retail China Trust (CRCT) Q3FY16 Review

Property Tax changes

Due to the change in property tax basis by the local tax authority (Beijing) with effect from 1 July 2016. This has impacted Beijing malls where CapitaLand Retail China Trust (CRCT) derive more than 80% of it is NPI.

This changes has cause 3QFY16 NPI to drop by 6.9% and together with the SGD appreciation against RMB, this has impact the DPU to drop 10.6% from 2.64 cents to 2.36 cents, property tax changes contribute 0.2 (7%) cents drop. Compare against Q2FY16, the disputable income drop about $3m.

Rental Reversion

Rental reversion has been dropping, comparing to 2015 where it has 8.1% rental reversion, for Q3FY16 the rental reversion is 5.6%. Together with the new shopping mall coming alive, this might be one warning sign on the pressure for the rental and occupancy. For Q3FY16, Tenant sales has been up 1.9% yoy excluding 2 non performing mall which might translate to higher rent depending on the rent structure.

Galleria Acquisition

In Q3FY16, the gearing has increased from 29% to 36.7% due to the additional loan to acquire Galleria. Based on the pro forma DPU if it is acquired in 1st Jan 15, it would increase the dpu by 0.34 cents and about $3m attributable income . Galleria will start to contribute to the Q4FY16.

Quoted from the CapitaLand Retail China Trust (CRCT) announcement
“The subject mall is one of the most popular malls in Chengdu. Its existing tenant profile comprises a good selection of popular international brands that will serve as a strong base for CRCT to further enhance the overall tenant mix. Notably, leases accounting for about two-thirds of the mall’s total rent are up for renewal by 2018, presenting us with an excellent opportunity to uplift the rental income through tenant mix adjustments"

With this acquisition, it will minimize some of the drop in DPU due to the Property tax changes.

CapitaMall Minzhongleyuan

With Zhongshan Avenue to reopen on 28 Dec 2016, together with the new Subway Line 6 commencement of operation, this will provide the growth of revenue to CRCT and potential positive rental reversion, currently Minzhongleyuan is contributing to the loss of -2M in NPI in FY2015 and in FY2012, it was contributing around 5m to the NPI.

As for CapitaMall Wuhu, we will need 1-2 years to see the improvement in the occupancy rate based on last AGM. As of end of 2015, the occupancy was 65.3% and as of Q3FY16 it is 64.1%. It is almost a year and we do not see any improvement.

CRCT Manager

The manager will be awarded CRCT unit instead of CapitaLand shares which will align with the unitholder interest and few of the directors own CRCT units and has been participating with DRP.

Lease Expiry FY17

Majority lease expired in 2017 likely will have positive rental revision, below are the lease expiry profile based on the malls

Mall rental reversion for YTD FY16

Mall rental reversion for Q3FY16

Summary of CapitaLand Retail China Trust (CRCT) Q3FY16 Review

With the property tax changes in effective, one of the risk has been materialized. The DPU for FY2016 and moving forward likely will be below FY2015 due to impact of the property tax changes and the growth of the DPU might be limited due to the trend of the rental reversion is getting lower and lower, new shopping mall supply come into the picture (especially CapitaMall Grand Canyon which contribute about more than 10% in NPI). DPU growth likely be supported by the annual step up of the base rent or percentage of the sales turnover, CapitaMall Minzhongleyuan, Galleria and positive rental reversion.

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