10 things to look out for in Chinese REITs

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Out of the 37 REITs listed on the Singapore stock exchange, 3 have assets primarily in China.

These REITs are BHG REIT, Capitaland Retail China Trust and EC World REIT. The first two invest primarily in retail malls while EC World REIT invests in industrial and logistics properties.

This post will focus mainly on how these China REITs stack up against each other based on various metrics.


Properties (CRCT most)

CRCT, being the oldest REIT among the 3, has the most number of properties at 10. BHG has 5 while EC World has 6.

Of CRCT’s 10 properties, 6 are multi-tenanted malls, 2 are master leased, and 2 are under stabilization i.e. struggling. For BHG, 3 malls are multi tenanted while 2 are master leased. EC World REIT has 3 properties each that are multi-tenanted and master leased.

Master leased malls’ income upside for the REIT (and therefore unitholders) are not as great as multi tenanted malls because the rental increases are fixed. At the same time, there is protection if there is a downturn.

Gross revenue (CRCT highest)

Based on 3Q2017 figures, CRCT has the highest gross revenue (or gross rental income in CRCT’s financial statements) of S$51.4m followed by EC World REIT at S$23.9m and BHG REIT at S$16.5m.

On a net property income basis, the order is still the same with CRCT having S$36.0m, EC World at S$22.1m and BHG REIT at S$10.5m.

Evidently, the net property income margin of EC World REIT is the highest at 92%, followed by CRCT at 70% and BHG REIT at 64%.

It is no surprise that EC World REIT has the highest net property income margin because of the less management intensive nature of running logistics warehouses than retail malls.

Distribution per unit (CRCT highest)

On a distribution per unit basis, CRCT has the highest at an annualized 9.4 SG cents followed by EC World REIT at 5.7 SG cents and BHG REIT at 5.6 SG cents.

For BHG REIT, only 3Q2017’s distribution per unit was provided and I annualized it using their 1.41 SG cent figure divided by 92 days in 3Q2017 multiplied by 365 days.

For investors looking solely at the income they can get while holding these shares, CRCT provides the highest at S$94 for 1,000 units. EC World and BHG REIT provide approximately the same at S$57 and S$56 per 1,000 units.

Distribution per unit growth (CRCT highest)

Analysts frequently see whether there is growth in distribution per unit because it signifies the REIT is being managed well and is growing.

Based on 3Q2017’s figure and compared to 3Q2016, BHG REIT’s distribution per unit grew the most at 9.3%, followed by 0.4% for CRCT and negative 3.7% for EC World REIT.

At only 15 months after IPO in Aug 2016, EC World REIT is already experiencing a decline in distribution per unit. This is not a good sign.

The reason given for the distribution per unit decline by EC World REIT’s managers is that there was withholding tax incurred during the cash repatriation process.

However, I do not think that is an excuse because both CRCT and BHG would have to pay withholding taxes during the repatriation process.

For investors in REITs with overseas properties, the cash repatriation process is something they need to keep an eye on.

If money cannot come back from China into the investor’s pocket, it is as good as not having been earned.


Dividend yield (EC World REIT highest)

But we know that the distribution per unit isn’t the only metric to be looked at when buying a REIT. The dividend yield is also important.

Based on 3Q2017 figures, BHG REIT provides the highest yield at 7.51% followed by EC World REIT at 7.42% and CRCT at 5.9%.

For investors looking solely at yield levels, BHG REIT provides a good stream of income.

But investors also need to consider that the higher yield may be due to the market being a little more uncertain about the prospects of the REIT. In this case for example, the market may not be familiar with the sponsors BHG andĀ Forchn Holdings Group Co., Ltd (EC World REIT).

Net asset value (CRCT highest)

Net asset value is calculated as all the assets minus all the liabilities on the REIT’s balance sheet.

It is representative of what the company is worth if all the assets were sold and liabilities paid off.

CRCT has the highest net asset value at S$1.63, followed by EC World REIT at S$0.89 and BHG REIT at S$0.83.

Compared to their stock prices of S$1.64, S$0.78 and S$0.74 respectively, CRCT is fairly valued, EC World REIT is trading at the largest discount to net asset value of 13%, while BHG is in the middle and trading at 11% discount to net asset value.

Highest portfolio value (CRCT)

If size signifies strength, then CRCT would be the strongest REIT based on their total value of investment properties at S$2.4b, followed by EC World REIT at S$1.3b and BHG REIT at S$806m.

Gearing ratio (BHG REIT lowest i.e. best)

A low gearing ratio provides the REIT manager with debt headroom with which to utilize in the event they do an acquisition.

A low gearing ratio is better.

EC World REIT has the lowest at 29.2% followed by BHG REIT at 32.5% and CRCT at 35.4%.

As EC World REIT and BHG REIT are recent entrants to the stock market, I would expect the gearing ratio to rise over time as they perform acquisitions.

Even though CRCT’s gearing ratio is the highest at 35.4%, it is not prohibitively high and just slightly over the average of 34.3% for all Singapore REITs.


Cost of debt (CRCT lowest)

Closely linked to gearing ratio and a REIT’s financial health is the cost of debt.

As a homeowner, you want the bank to charge you a lower rate of interest so you have extra income left for you to spend.

The idea is similar for REITs.

As a quasi government linked company (linked to Capitaland and therefore Temasek), CRCT has the lowest cost of debt at 2.42% followed by BHG REIT at 3.66% and EC World REIT at 5.4%.

EC World REIT’s cost of debt is very high and I would be keep an eye out on how they manage the costs. At this point of time when interest rates around the world are low and EC World already has such a cost of debt, they may run into financial trouble when interest rates rise.

Financial engineering (CRCT has none)

Some investors may be aware that there was some financial engineering done to improve the yields of BHG REIT and EC World REIT.

In the prospectus, the financial engineering is namely called a Distributions Undertaking in BHG REIT’s case and a Master Lease arrangement in EC World REIT’s situation.

Specifically, BHG REIT’s dividend yield would be 4.5% instead of 6.3% in projection year 2016 if there were no Distributions Undertaking.

BHG REIT Distributions Undertaking
BHG REIT Distributions Undertaking

For EC World REIT, the dividend yield would have been 6.3% instead of 7.3% without the Master Lease arrangement.

EC World REIT master lease arrangement
EC World REIT master lease arrangement

This financial wizardry is something investors should note because when the financial engineering has run its course, there may be a significant dip in distribution per unit.

D day comes at the end of 2021 for BHG REIT. For EC World REIT, the master leases will expire on 31 Dec 2020 for Chongxian Port Investment, 31 October 2020 for Stage 1 properties of Bei Gang Logistics and 31 Dec 2020 for Fu Heng Warehouse.

 

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