This research note is on three of the pure-retail commercial REITs listed on the SGX, Frasers Centrepoint Trust, Fortune REIT and CapitaRetail China Trust. They are all in the business of acquiring and managing retail properties within their respective geographical mandates and paying out 90% or more of their distributable income, as per standard REIT rules. This note will be the first of a series analysing the commercial REITs in Singapore
These three trusts operate in different geographical jurisdictions and do not compete directly against each other. They compete with other trusts and retail malls within their respective geographical areas. Because the market for retail space is relatively fragmented on the supply side, lease and occupancy rates depend on the macroeconomic performance of the region.
CapitaRChina – The majority of CapitaRetail
“Some pessimists may point to the fact that
B ’s double-digit vacancy rate of 15.5% in 2Q07 is already a clear indication of an over-supply condition. We hold a different opinion, viewing this as a structural problem, due to the existence of a pool of stock that cannot meet the requirement of tenants, and as such contributing to the high tenancy levels. … The implication from this is that new quality buildings with the right specifications should not have a problem finding tenants to fill the space.” – Lee Wee Liat of Jones Lang Lasalle eijing
Fortune REIT – A recent report by Colliers on
“Essentially, asking rentals were raised by vendors in view of the positive market sentiment attributed to the record-breaking stock market prices and the positive consumption sentiment. Meanwhile, retailers were impressed by the stronger-than-expected business volume registered in late 2006, thus becoming even more aggressive in securing their outlets. Individual retailers were found to raise their rental offer for a shopping unit in the prime districts by as much as 40% in an attempt to outbid rivals during 1Q 2007.”
Quality of Accounting
CapitaRetail China – The first thing confronting the analyst is the page long note explaining the lack of historical comparative statements for various reasons such as “ownership period is too short,” “period of operations is too short,” and “relevant information to prepare the historical pro forma financial information is unavailable to the manager.” While these are valid reasons to exclude comparative preceding year statements, the lack of comparatives makes it slightly difficult to gauge the performance of CapitaR relative to its peers.
Another thing to note is that in the cashflow statement CapitaR starts the calculation of CFO using net income after tax, instead of using net income before tax as is usually the case for the other REITs. CapitaR also does not exclude the asset revaluation figure from its starting net income after tax, making it harder for the analyst to make comparisons while excluding non-recurring items. The
The quality of disclosure of CapitaR is quite high, although not as detailed as
Fortune REIT - Shortest report of the 3, by far. While length of disclosure is not necessarily indicative of quality of disclosure, this is still a point of notice. However, compared to the CapitaR financial statements, the footnotes are more detailed than CapitaR.
A couple of things to note regarding
Financial & Profitability Analysis
Operating Efficiency – Fortune REIT appears to have the greatest operating efficiency amonst the three REITs by a substantial margin, while CapitaR has the lowest operating margin. However, due to taxation, Fortune REIT yields a lower net margin compared to FrasersCT, with CapitaR having the worst performance.
Cash Flow Quality – The numbers show that CapitaR has the worst cash flow quality of the three REITs, by a substantial margin. There has been a marked increase in accounts receivable and this has had the effect of lowering operating cash flows. The CFO numbers for the other REITs are quite normal, with FrasersCT having the best cash flow quality.
Leverage – In terms of leverage, CapitaR has the greatest amount of debt, at 37% of assets. Fortune at 27% has the greatest capacity to take on debt in order to make yield-accretive acquisitions. Frasers is somewhere between the two.
The numbers clearly show that CapitaR is the worst performer, from a financial analysis standpoint. It has the highest leverage, the lowest margins, and the poorest cash flow quality. Yet the bizarre thing is that it has the highest valuation, by a mile. The projected payout ratio based on latest share prices is a mere 2.52%. Yet it has the highest leverage. Furthermore, it has a P/B of 2.48. This looks like an insane valuation.
Fortune REIT appears to be the most reasonably priced of the three. With a yield of 6.16% and a P/B of 0.67, it looks like a relative bargain. Furthermore, its balance sheet has much greater room to take on debt for accretive acquisitions
FrasersCT is somewhere in the middle, and looks fairly priced on a comparative basis. It’s yield of 4.18% is somewhat below what you would expect from a REIT, but is not too low as compared to CapitaR
What is keeping CapitaR up high in the sky? Is it the expectation that the REIT will find an opportunity to unload assets at a significant gain? Or is it because rentals are expected to soar overnight? I really don’t understand.
As far as I’m concerned, I’m staying away from CapitaR for the time being, and I’ll keep Fortune on my watchlist.