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Perennial China Retail Trust: Progress in Q3.

Wednesday, November 6, 2013

In my blog post of 10 August, I mentioned that current DPU is being sustained by earned out deeds which will be exhausted by end 2014. So, we really need to see stronger occupancy and evidence of improved cash flow from operations in the coming quarters.

The latest report shows that the Trust's operations have improved with occupancy in Shengyang Longemont Shopping Mall increasing to 85% and with occupancy in Shenyang Red Star Macalline Furniture Mall at 93%. Shenyang Longemont offices saw occupancy improving from 33% to 41%, quarter on quarter.

Perennial Jihua Mall which opened in August has hit an occupancy of 95% while Perennial Qingyang Mall which is slated for opening in 1Q 2014 saw leasing commitment improving from 67% to 75%.

All in all, it seems that the management have been working hard to secure tenants. However, there is still much to be done. So, I believe that it is still relatively risky investing in PCRT compared to a plain vanilla retail or commercial S-REIT.

Therefore, I would ask to be adequately compensated for the risk that I would be taking on if I were to invest in the Trust.

For now and the next few quarters, the Trust would probably continue to draw on those earned out deeds in order to sustain the income distributions at current level to unit holders.

Will the Trust be able to maintain its current DPU without the earned out deeds from 1Q 2015? It would depend on the progress that they make in the next 15 months. If the Trust keeps up the momentum we see in Q3 and with the opening of a new mall with a relatively high level of leasing commitment in early 2014, it could happen.

Bearing in mind that another mall, Perennial Dongzhan Mall, could open its doors in 1Q 2015, things could further improve if there is, again, a relatively high level of leasing commitment. However, we do not want to count our chicks before they are hatched as the management have just started to market this new mall to prospective tenants.

Assuming that no further improvements are forthcoming which, I believe, is rather unlikely, then, I have estimated in an earlier blog post that DPU could reduce by at least 50% from 1Q 2015.

With an entry price that gives me approximately an 8% yield, a 50% reduction would bring the yield down to 4%. Although this is unlikely to be the case, if it should happen, it is still acceptable to me.

What about anyone who is thinking of buying in at 54c a unit today? Well, that would mean a yield of 7% and a worst case scenario yield, by my reckoning, of 3.5% in 2015.

If distribution yield should decline by 50%, however, it would be optimistic to think that the unit price of the Trust would not decline. This is especially true in an environment of rising risk free rate.

So, before we invest in the Trust, should we not ask ourselves if we are able to stomach what could be the worst case scenario?

Related post:
Perennial China Retail Trust: 1H 2013.


Anonymous said...

Hi Ak,

When factoring the worst case scenario, one should not just look at the yield. You should look at the capital loss as a result of Mr market requesting a higher yield resulting in a corresponding loss in capital and hence any payout thereafter, will be from you own pockets.

Company A give yield of 8%, has a number of risk factors. If yield become 4%, it means the risk factors have materialized, and market will most probably factor in this "lack of competency" in business delivery, should it will be highly possible that market will still demand 8% or even higher yield through lower price.

The company price would have fallen be half if Mr market still demand 8%.

Thus, it is important to calculate would-be yield and the effect on price.

Anyone interested in the nitty gritty, and see how I work out the sums for Sabana(posted at valuebuddies on 5th september). It is just an example, some assumption made no longer hold true:
I assume come:
2014, when the first trance of loan will be refinanced at 1% interest rate higher
2015, the second loan will be refinance at 2.5% interest rate higher.

I also account for dilution of units due to management fees.

I come to the following conclusion:
2014 yield will be 8.1%, dividend =9.2 cents
2015 and 2016 (No refinancing in 2016), yield will be 7.1%, dividend 8.1 cents per year

Assume I do not want to wait for the refinancing that will happen in 2017.

I will get 25.3 cents in dividends.

Assume Mr market still demand 8.5 % in 2016, price will be 95.2 cents.

Net gain is still 25.3 cents - 18.3 cents = 7 cents

Well, 7 cents return for 3 years is ridiculous. But at least there is not capital loss.

I have not take into account the Chai Seng acquisition, so my projection is highly conservative, to guage if there is any MOS for interest rate hike.

I think for SOR to hit 2.5% in 2015 is highly agressive too.

So there is some Margin of safety for capital loss.

AK71 said...

Hi Mike,

Oh, I agree. That is what the last two paragraphs of this blog post are about although I left the calculations to the readers to figure out since everyone will probably make different assumptions.

How you had to make assumptions in your example using Sabana REIT is a good example. ;p

lzyData said...

Why invest in Perennial at 7% yield when you can invest in CRCT at 6.7% yield? I haven't done the nitty gritty research in this area, but it's a jarring contrast.

AK71 said...

Hi IzyData,

Indeed so. I asked a question along those lines when PCRT had its IPO too:Perennial China Retail Trust.

PCRT is not a REIT per se. A possible positive catalyst could be the monetising of some if its assets. The CEO of the Trust mentioned this in the last quarter. I wouldn't hold my breath though. ;)

AK71 said...

We believe the management will be able to fulfil their aim of growing tenant sales, and consequently rental revenue, in time to come.

The earn-out fund, which lasts till end 2014, provides the much-needed time for its assets to stabilise.

Upon its expiration, the management has not rule out the possibility of monetising completed assets to unlock value.

CIMB, 6 Nov 2013.

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