What Do You Need To Know About CapitaLand Commercial Trust Before Investing
CapitaLand Commercial Trust (CCT) (SGX:C61U) ([stock_quote symbol=”SGX:C61U” show=”name” nolink=”1″ class=”1″]) is a Singapore-listed commercial real estate investment trust (REIT) that invests in high quality income-producing commercial properties in Singapore. CCT was listed on the Singapore market in 2004. It is currently the largest commercial REIT in Singapore by market capitalisation, which stands at S$4.89 billion. The Trust is managed by CapitaLand Commercial Trust Management Limited (CCTML), an indirect wholly-owned subsidiary of CapitaLand Limited (SGX:C31) ([stock_quote symbol=”SGX:C31″ show=”name” nolink=”1″ class=”1″]).
With that, here are 7 things you need to know about CapitaLand Commercial Trust.
Stock Information
TICKER SYMBOL: SGX: C61U
MARKET CAP: S$4.9 billion (June 2017)
INDUSTRY: REIT
The Business
CapitaLand Commercial Trust has a portfolio of good-quality (mostly Grade A and Prime office buildings). These properties are well-located and income producing. The income generated by the REIT comes mostly in the form of rental income collected from tenants. Due to its well-located properties, CCT sees high demand for the space its owns, this helps CCT secure stable earnings while allowing it to pay stable and increase distributions to its shareholders.
CapitaLand Commercial Trust’s Portfolio
CapitaLand Commercial Trust’s portfolio consists of quality office and commercial buildings that are in Singapore’s Central Area. Most of them are also located conveniently as they are next to or close to a Mass Rapid Transit (MRT) station. This, in my opinion, allows CCT to charge a small premium for its space, which is a double win for them and the tenants.
CapitaLand Commercial Trust’s portfolio comprises of 10 properties, namely:
- Capital Tower, a Grade A office tower
- Six Battery Road, a Grade A office tower
- One George Street, a Grade A office tower
- Raffles City (60% interest via the RCS Trust), an integrated development with an office tower, a shopping mall and two hotels and a convention center
- CapitaGreen, a Grade A office tower
- Twenty Anson, a prime office building
- HSBC Building, a prime office building leased to HSBC
- Wilkie Edge, an integrated development with office and ancillary retail units
- Bugis Village, shop houses for office and retail use
- Golden Shoe Car Park, a car park with over 1,000 lots and retail shops on the ground floor
Source: 2016 Full year earnings presentation
The schematic above also shows the percentage contribution of each property in its portfolio.
Portfolio’s Size
CCT’s portfolio value stands at S$8.5 billion at the end of 2016. It has been growing over the last five years. This can be seen from the diagram below.
Source: 2016 Full year earnings presentation
Moving to its financials, CCT’s revenue for the fiscal year 2016 came in at S$298.6 million with net property income clocking in at S$231.3 million. Over the past 10 years, CapitaLand Commercial Trust has seen its revenue increase at a decent 8.07% compound annual growth rate (CAGR). Unfortunately, its net income came in at a negative 4.81% (CAGR) over the same period.
However, the book value might be a more representative proxy for the value of a REIT.
On this front, CapitaLand Commercial Trust’s book value at 2016 stood at S$1.73 per unit. This has steadily increased over the last five years from S$1.62 per unit, as seen from the diagram below.
Source: 2016 Full year earnings presentation
This means that the REIT has been slowly growing its value for its unitholders.
Key Opportunities
Diverse earnings base
CapitaLand Commercial Trust has a diverse portfolio and tenant base that ensures it is not reliant on any one property or tenant (sector) for the majority of its earnings.
Source: Full year 2016 earnings presentation
The property diversity can be seen by the diagram in the business section above. The biggest contributor to its Gross Rental Income is Raffles City, which is a mixed development of Commercial, Retail and Hotel. Having exposure to the three sectors ensure that’s CCT’s revenues are stable even if some sector is facing a downturn. Other than Raffles City, no other property makes up more than 15% of the net income.
Moving to tenant diversity, from the diagram attached above it can be seen that the banking, insurance and financial services sector are the biggest contributor. However, this sector can further breaks down into 3 sub-sectors; banking, financial services and insurance. Considering the 3 sub-sectors, no one sector makes up more than 15% of revenue for CapitaLand Commercial Trust. This means that CapitaLand Commercial Trust should be less affected by sector-specific downturns.
In my opinion, having both property and tenant diversity is a big plus for CCT and this diversification is a good method for CCT to control its risks.
Commercial is more resilient than retail
The next key opportunity for CCT, in my opinion, that commercial spaces tend to be more resilient compared to retail spaces.
Retail spaces have increasing been facing pressure from the e-commerce sector. However, commercial spaces don’t seem to face these pressures. I do remember that a couple of years back, there was a huge push for work at home schemes, but it seems that it has not gained much traction till now. In my view, it is because work at home is still not acceptable by a lot of employers. Many companies still see the value of having a location where its staff can interact and work as a team. Thus, companies still need to have an office and physical presence in the countries that it does business in, and for that reason, I think commercial spaces will continue to remain important for many years to come.
Key Risks
Excess supply of space
Source: Full year 2016 earnings presentation
The diagram above showed that office supply over the next few years might face an excess supply. This means that when tenants renew their leases with CCT they will have more bargaining power. This could mean that over the next few years it is possible that CCT’s revenue might decreases on a per property basis because it could lease spaces at a lower rental price to ensure it can maintain its high occupancy rate.
Economic Slowdown
Source: Full year 2016 earnings presentation
The diagram above sums up another key risk for CapitaLand Commercial Trust; a drop in rental rates. Since 2015, office rental rates have declined about 20%. The trend has been a steady one with rental’s decreases between 2-5% every quarter. There are 2 possible reasons for this decline, one is the excess supply of commercial space which I mentioned above as a risk factor.
The other is a slowly economy of Singapore. When the economy slows, companies could not grow revenue and earnings as quickly, this, in turn, puts pressure on companies to pay its rent in time. In such situations, if CapitaLand Commercial Trust doesn’t reduce its rental rate, it could potentially lose tenants as they shift their operations in search of cheaper alternatives.
Valuation
CapitaLand Commercial Trust is currently trading at a Price to book (P/B) ratio of 0.95 and spots a 5.5% distribution yield for its investors. Both metrics are comparable to its five-year average of 0.9 P/B ratio and 5.4% distribution yield.
Investor Relations
Investor Relation Material:
CapitaLand Commercial Trust Management Limited
As manager of CapitaLand Commercial Trust
168 Robinson Road
#30-01 Capital Tower
Singapore 068912
T +65 6713 2888
F +65 6713 2999
E ask-us@cct.com.sg
Top Shareholders (2nd August 2016)
- Temasek Holdings (Private) Limited 32.6%
- SBR Private Limited (SBR) 6%
- E-Pavilion Pte. Ltd. (E-Pavilion) 6.2%
Financials
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The information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in Ketz’s personal capacity and do not in any way represent those of his employer and other related entities. Ketz does not own any companies mentioned.
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