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.