Review of Capitaland REITs

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With 3 REITs under the Capitaland umbrella, investors get to pick and choose which they want exposure to.

Given a choice of CapitaLand Commercial Trust, CapitaLand Mall Trust and CapitaLand Retail China Trust, which should an investor look at?



Here are a few things to consider as we do a comparison of these 3 Capitaland REITs.

Gross Revenue

Capitaland REITs Gross Revenue
Capitaland REITs Gross Revenue

In terms of gross revenue, CapitaLand Mall Trust is the standout performer with S$640m of gross revenue collected from their retail tenants in 2016.

With their 16 malls dotted around Singapore, CapitaLand Mall Trust is effectively the largest shopping mall landlord in Singapore.

Their malls such as Westgate near Jurong, Tampines Mall in the East, Bugis Junction and Plaza Singapura in Central Singapore, CapitaLand Mall Trust effectively grabs much of Singaporean’s share of spending.

On average, each mall is therefore producing S$40m of gross revenue.

Not far behind is CapitaLand Commercial Trust with S$459m of gross revenue. Many of their properties such as Capital Tower, Asia Square Tower 2 and CapitaGreen are in Singapore’s CBD.

CapitaLand Commercial Trust has a total of 10 office buildings.

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Tenants include blue chip names like GIC, JP Morgan and Citibank.

CapitaLand Commercial Trust also has a small stake in MRCB-Quill REIT, a commercial REIT listed on Bursa Malaysia Securities Berhad.

On average, each office building is producing S$45.9m of gross revenue.

In China, Capitaland has the CapitaLand Retail China Trust that holds shopping malls primarily in Beijing.

Some of these include Xizhimen, Wang Jing and Grand Canyon malls.

In total, these 3 REITs contribute S$1.3 of gross revenue.

It is good that gross revenue for these REITs is on an upward even through the global financial crisis. This shows that these Capitaland REITs are well run and providing value for investors.

One thing to note is that CapitaLand Commercial Trust’s gross revenue has risen more than 5 times since 2004, translating into a 13% annual increase.

On the other hand, CapitaLand Mall Trust and CapitaLand Retail China Trust’s gross revenue hasn’t risen as quickly.

This could be due likely that the retail and shopping mall sector is more competitive, so value is harder to be derived from there.

However, the trends show that Capitaland is getting a very steady stream of income from these 3 REITs.


Net property income

Capitaland REITs Net Property Income
Capitaland REITs Net Property Income

After deducting for expenses, the 3 REITs provide S$972m of net property income.

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The net property income margin is therefore 74% on a blended basis.

Net property margin for CapitaLand Commercial Trust is 76%, 75% for CapitaLand Mall Trust and 65% for CapitaLand Retail China Trust.

For the Capitaland parent company, it is good that CapitaLand Retail China Trust takes up a smaller proportion of the company because their net property income margin is on the lower side.

For some REITs, such as those having industrial and business park assets, the net property margin can be as high as 90%.

Distributable income

Capitaland REITs distributable income
Capitaland REITs distributable income

Distributable income is the main thing to look out for investors because it shows whether the REIT managers are adept at producing value.

The 3 REITs produce a total of S$750m of distributable income.

As a percentage of gross revenue, distributable income is 57%.

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As a percent of gross revenue, CapitaLand Commercial Trust’s distributable income is 59%, CapitaLand Mall Trust’s is 62% and CapitaLand Retail China Trust’s is 41%.

The most efficient is therefore CapitaLand Mall Trust, followed by CapitaLand Commercial Trust and CapitaLand Retail China Trust.

On a whole therefore, these 3 Capitaland REITs are fairly efficient.

This is to be expected given the blue chip nature of Capitaland.


Total assets

Capitaland REITs total assets
Capitaland REITs total assets

Total assets are a balance sheet item. For REITs, the largest contributor to total assets is the investment properties held on their books.

A small amount would be cash and account receivables that may temporarily rise if the REITs sell a property and have not recycled the cash into a new acquisition.

Generally, the total assets of the REITs have been on an uptrend. CapitaLand Mall Trust shows the highest increase from S$2.3b to S$10.3b, due mainly to the acquisitions the REIT has done over the years.

CapitaLand Mall Trust started with 3 properties, Tampines Mall, Junction 8 in Bishan and Funan the IT Mall. They have 16 as of end-2016.

Over the same period of 2004 to 2016, CapitaLand Commercial Trust’s total assets has grown from S$2b to S$8b, or a 12% increase on an annual basis.

Even though CapitaLand Retail China Trust’s total assets looks like it has grown at a slower rate on the chart, it actually grew the fastest on an annual basis.

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Their growth from S$810m to S$2.8b since 2007 is a 15% annual increase.

The growth is expected to slow over the next few years due to the base effect.

In our view, these 3 REITs have been well run, with growth rates more or less in tandem with each other.

This also suggests that the parent company has had a coherent strategy on running the 3 REITs.

NAV

Capitaland REITs NAV
Capitaland REITs NAV

The net asset values of all 3 REITs are more or less in the same range as of end 2016, between S$1.7 and S$1.86.

One thing to note is that the 2 Singapore REITs, CapitaLand Commercial Trust and CapitaLand Mall Trust both experienced sharp increases in NAV before the GFC.

At that time, NAVs rose to the S$2.40 to S$3 range, before falling to S$1.5 thereafter.

Looking forward to today, the NAVs have not recovered by a lot.

This shows that a financial crisis has the potential to erase a lot of wealth and cause irreparable damage to company balance sheets.

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One reason analysts put forth for the sharp rise in NAV is the meteoric rise in property values before the global financial crisis. The other reason is the low cost of debt caused by low interest rates in the lead up to the financial crisis.

CapitaLand Retail China Trust was spared from the carnage because it IPO’d in 2006 shortly before the global financial crisis. The REIT’s properties therefore did not experience the sharp rise in values like in the other 2 REITs.