Among the S-REITs and property trusts with Chinese assets, CapitaLand China Trust (CLCT) stands apart. Besides being the largest among this group, it is sponsored by a Singaporean company and is also the only REIT with a sound capital management strategy.
Sound assets, a diversified portfolio with diversified tenants, 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 study in general when looking to finance or refinance properties.
On July 26, CLCT’s manager said it had refinanced all its debt due in FY2022 ending December. Since the manager staggers debt expiries with an average term to maturity of 3.1 years, only 7% of the total debt or $130 million is due this year. This has been refinanced with a $91.4 million unsecured offshore loan and a $58.6 million secured onshore loan, expiring in 2027. With this refinancing out of the way, CLCT’s manager has started to look at debt expiries in 2023.
CLCT’s financing structure has changed over the years as China’s financial sector becomes more developed. As a result, Chinese policy rates have fallen over the years. In May, the People’s Bank of China (PBOC) lowered the loan prime rate (LPR) to 4.45% from 4.6%.
Tan Tze Wooi, CEO of CLCT’s manager, says: “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-tovalue] for tax shield onshore.” Onshore loans are more restrictive, and loan proceeds may only be deployed for certain purposes. “We are looking at the possibility of grouping onshore borrowings whether to satisfy AEI or ongoing capex needs,” Tan says. In the longer term, CLCT may move to 70% offshore and 30% onshore.
Tan observes that the cost difference between these two types of financing sources is converging. The cost of onshore loans has come down to 4.5% as LPR is 4.45% while the cost for offshore loans for three to five years on fixed rates is 3.5%. “We want to balance the capital structure so we are competitive in terms of cost of debt,” he elaborates. Similarly, at least 50% of income is hedged when it comes to foreign exchange hedging, says Tan. As at June 30, 77.1% of income has been hedged into Singapore dollars.
See also: CICT's manager proposes to acquire ION Orchard at $1.85 billion, subject to EGM
“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% per annum for the debt on floating rates, distributions would be negatively affected to the amount of $500,000. CLCT had announced distributions of $72.3 million in 1HFY2022 before $3.6 million was retained.
A successful China case study
See also: CICT's manager proposes to acquire ION Orchard at $1.85 billion, subject to EGM
BHG Retail REIT is the only other Chinese S-REIT that has successfully refinanced its debt which expired in March. 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 million and RMB232 million [$47.6 million] respectively, secured new offshore and onshore borrowing facilities of $12 million and RMB65 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 the fifteen large national retail enterprises in China and supported by the Ministry of Commerce. It is 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, the sponsors have been described as financially strong and committed.
Separately, Sasseur REIT’s debt maturity, based on its 1QFY2022 business updates, indicates its offshore and onshore debt will expire in March 2023. Sasseur owns a portfolio of four outlet malls across southern and central China.
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 the “three red lines” policy) have resulted so far in one S-REIT and one property trust facing issues upon refinancing — Dasin Retail Trust and EC World REIT (ECW REIT) — with both managing to roll over their debt only for a shorter time. 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.
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ECW REIT’s manager managed to refinance its onshore and offshore loans till April 30, 2023, if 25% of the loans are repaid by Dec 31.
In a press release on July 6, Goh Toh Sim, CEO of ECW REIT’s manager, says, “The manager is exploring various fundraising options including the potential divestments of noncore assets.”
In replies to the Singapore Exchange on June 29, Goh said in an announcement: “If at least 25% of the aggregate principal amount of the outstanding offshore facilities is not repaid by Dec 31, 2022, EC World REIT faces an event of default which will trigger mandatory prepayment of the offshore facilities.”
Interestingly, Goh also 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 transparent with disclosure and they usually are given the interest in ESG investing where the “G” stands for governance. Notably, RHB Research had lowered its ESG score and its price target for ECW REIT because of its intermittent disclosures around its refinancing.
Material valuation uncertainty
In its July 26 results announcement, CLCT’s manager said 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 adds.
“The material valuation uncertainty clause is an industry-wide clause used 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 mall 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 rents that are lower than those in the market.
“Shuangjing is an asset we are holding at a 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.
