Yahoo Finance CapitaLand China Trust's results trigger relook at capital management
CLCT's sound capital management strategy should be a template for other Chinese S-REITs
Among the S-REITs and property trusts with Chinese assets, CapitaLand China Trust (CLCT) is - apart from being the largest among them, and sponsored by a Singaporean company - the only REIT with a sound capital management strategy.
Sound assets, a diversified portfolio with diversified tenants and good tenant covenants coupled with stable cash flow, the ability to show decent interest coverage ratios and the lack of financial engineering are some of the metrics that bankers may study when looking to finance or refinance properties - in general.
On July 26, CLCT’s manager indicated that it had refinanced all its debt due in FY2022 (CLCT has a Dec year end). Since the manager staggers debt expiries with an average term to maturity of 3.1 years, only 7% of total debt or $130 million was due this year. This has been refinanced with $91.4 million unsecured offshore loan and $58.6 million secured onshore loan, expiring in 2027. With this refinancing out of the way, CLCT's manager has started to look at 2023's debt expiries.
CLCT’s financing structure has changed over the years as the Chinese financial sector has developed from emerging market to a more developed financial sector. As a result, Chinese policy rates have fallen over the years. In May this year, the People’s Bank of China (PBOC) lowered loan prime rate (LPR) to 4.45% from 4.6%.
“We have moved from 100% offshore financing to 80% offshore, and 20% onshore. We will look at increasing onshore financing when we look at acquisitions because acquisition structuring requires onshore LTV (loan-to-value) for tax shield onshore,” says Tan Tze Wooi, CEO of CLCT’s manager.
Onshore loans are more restrictive, and loan proceeds may only be deployed for the certain purposes. “We are looking at possibility of grouping onshore borrowings whether to satisfy AEI or ongoing capex needs,” Tan says.
“In the longer term we may move to 70% offshore and 30% onshore. The cost of onshore loans have come down to 4.5% as LPR is 4.45% while offshore loans for 3-5 years on fixed rates is 3.5% so they are converging and we want to balance the capital structure so we are competitive in terms of cost of debt,” he elaborates.
Similarly, Tan indicates that foreign exchange hedging will be such that at least 50% of income is hedged. As at June 30, 2022, 77.1% of income has been hedged into Singapore dollars. “Each quarter, there will be hedging contracts that will be rolling off and [we] continue to hedge 50% of what we are declaring. We are 77% hedged currently. Some will fall off in the next two quarters. This is so we don’t subject ourselves to market volatility,” Tan says.
Although CLCT’s policy is to have at least 60% of debt on fixed rates, as at June 30, some 71% of CLCT’s loans are on fixed rates. Should interest rates rise by 0.1% p.a for the debt on floating rates, distributions would be negatively affected to the amount of $500,000. CLCT announces distributions of $72.3 million in 1HFY2022 before retention ($3.6 million has been retained).
This REIT refinanced successfully
BHG Retail REIT is the only other Chinese S-REIT that has successfully refinanced its debt. All of its debt expired in March this year. Its FY2021 annual report had a footnote that said “Subsequent to the reporting date, the Group and the REIT finalised the refinancing of offshore and onshore secured borrowing facilities of $240.0 million and RMB232.0 million respectively, secured new offshore and onshore borrowing facilities of $12.0 million and RMB65.0 million respectively. The facilities mature in March 2025.”
With this, BHG Retail REIT’s borrowings have been fully refinanced, and the new facilities mature in March 2025, says a spokesman for BHG Retail REIT’s manager earlier this year.
BHG Retail REIT’s manager is indirectly owned by Beijing Hualian Group, one of fhe fifteen large national retail enterprises in China, supported by the Ministry of Commerce and the only Chinese retail enterprise member of the International Department Store Association. BHG Retail REIT’s direct sponsors, Beijing Hualian Department Store and Beijing Hypermarket Co are listed on the Shenzhen and Shanghai Stock Exchanges respectively. In a REITAS presentation, in May, BHG has been described as a financially strong and committed sponsor.
Sasseur REIT’s debt maturity based on its 1QFY2022 business updates indicates its offshore and onshore debt expire in March 2023.
Refinancing problems
China-focused S-REITs are facing refinancing issues, says RHB Research in a July 21 report. “The stringent policy measures targeting the real estate sector (especially three red lines policy) has resulted so far in one S-REIT and one property trust facing issues upon refinancing – Dasin Retail Trust and EC World REIT – with both managing to roll over their debt only for a shorter time period. In addition, banks have imposed additional conditions to reduce their overall debt (25% repayment in ECW REIT’s case). Looking ahead, Sasseur REIT has its debt refinancing due next year, which will be keenly watched by the market, in our view. These are unlikely to impact China focused S-REITs with a strong sponsor backing like CapitaLand China Trust in our view,” RHB Research says.
ECW REIT’s manager managed to refinance its onshore and offshore loans till April 30, 2023 on condition that 25% of the loans are repaid by Dec 31, 2022.
In a press release on July 6, Goh Toh Sim, CEO of ECW REIT’s manager says, “the Manager is exploring various fund-raising options including the potential divestments of non-core assets.”
In replies to the Singapore Exchange on June 29, Goh had said in an announcement “If at least 25% of the aggregate principal amount of the outstanding Offshore Facilities is not repaid by 31 December 2022, EC World REIT faces an event of default which will trigger mandatory prepayment of the Offshore Facilities.”
Interestingly, Goh said via the July 6 press release: “The sporadic Covid lockdowns in China for the past two and half years did not materially impact the financial performance of ECW, and Unitholders continued to enjoy stable DPU. Even in early 2020 when the whole of China was in lockdown ECW provided only a one-off rental rebate to its tenants, equivalent to approximately half month rental income only.”
Forchn Holdings, the sponsor and master lessee of EC World REIT is the main tenant, accounting for some 84% of rental revenue.
The REITs themselves need to be - and are usually - transparent with disclosure. The G in ESG stands for governance. Notably, in an ESG score, RHB Research lowered its ESG score and its price target for ECW REIT because of its intermittent disclosures around its refinancing.
Material valuation uncertainty clause
On July 26, in a results announcement by CLCT, the manager stated valuation reports for certain properties contain a “material valuation uncertainty” clause due to the ongoing market disruption caused by the pandemic. Given the unprecedented set of circumstances on which to base a judgement, less certainty, and a higher degree of caution, should be attached to their valuations than would normally be the case, the statement says.
“The material valuation uncertainty clause is an industry-wide clause in China, in respect of the Covid situation because of the uncertainty and the way things are evolving. I don’t think by itself it would result in any project having any difficulty accessing funding based on our experience,” says Tan of CLCT.
At any rate, CLCT has always been very conservative in its valuations and Tan uses Grand Canyon in Beijing as an example. “Over the years if you follow Grand Canyon, in the last two years, valuations have been marked down to reflect lower passing rental. We are not overvaluing our assets. If you look at our weaker assets, we have taken valuations down,” he explains.
Another Beijing mall, CapitaMall Shuangjing, is being held at very low valuations because of two anchors with master leases at lower-than-market rents. “Shuangjing is an asset we are holding at very low cost. That cycle is coming to an end in 2024 and we internally look at the possibility of repositioning the mall to a hybrid retail and office property, but we could renegotiate rents. That property is definitely an upside story for us because the low cost allows us to capture redevelopment potential, likely in 2024,” Tan elaborates. The timeline for redevelopment is 1.5 to two years.
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