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CapitaCommercial Trust: Review for 2013

CapitaCommercial Trust (SGX: C61U) is part of the commercial property investment arm of the largest property developer in South East Asia, CapitaLand (SGX: C31).

All of the real estate investment trust’s property assets are located in Singapore. Its portfolio contains of seven wholly-owned commercial properties around Singapore in addition to a car park and a 60% stake in Raffles City, a prominent piece of real estate that’s located right in the heart of the city of Singapore.

The REIT also has a 40% stake in the upcoming CapitaGreen tower, which is under construction.  All told, CapitaCommercial Trust’s property portfolio is valued at S$6.96b (inclusive of the land valuation of the yet-to-be-completed CapitaGreen) as of 31 Dec 2013.

CapitaCommercial Trust  also has a small exposure to properties in Malaysia through its 30% associate, the Quill Capita Trust, which is listed on the Kuala Lumpur Stock Exchange in Malaysia.

Performance

CapitaCommercial Trust’s full-year earnings were announced on Thursday. For the 12 months ended 31 Dec 2013, the trust was able to grow its gross revenue by 3% year-on-year to S$387m as most of its properties brought in higher revenue. Net property income, on the other hand, only managed to increase by 0.3% to S$297m from a year ago as there were higher property taxes and operating expenses.

Moving further down the income statement, the REIT’s distributable income came in at S$234m, some 2.5% higher than the corresponding figure in the previous year on the back of an increase in net property income, higher interest income from loans, and lower interest expenses.

All told, the trust was able to raise its annual distribution per unit by 1.2% from a year ago to 8.14 Singapore cents on the asusmption that there is no dilution coming from its convertible bonds outstanding.

The REIT’s occupancy rates for its properties across its portfolio for the fourth quarter of 2013 improved to 98.7% from 97.2% in the corresponding quarter a year ago.

Balance Sheet

Compared to a year ago, the trust has managed to improve its balance by reducing its gearing ratio from 30.1% to 29.3%. CapitaCommercial Trust has also managed to lower the cost of its debt from 3.1% to 2.6% and thus improve its interest coverage (essentially measuring how well an entity is able to handle its interest payments) from 4.4 times to 5.5 times.

As mentioned previously, it is worth noting that CapitaCommercial Trust has two issues of convertible bonds outstanding: S$190m worth of convertible bonds due in 2015 with a conversion price of S$1.2324 per unit; and S$175m worth of convertible bonds due in 2017 with a conversion price of S$1.6394 per unit.

If both sets of convertible bonds are fully converted, 261.1m new units of CapitaCommercial Trust would be created, representing a potential 9.1% dilution for existing unit holders.

Growth

CapitaCommercial Trust expects the high-end office market rental rates to be increasing for 2014. The trust has roughly 10% of its gross rental waiting for renewal and there might be a possibility of positive rental reversions (the adjustment of rental rates to reflect market conditions). The REIT also has room to lever itself up to a gearing ratio of 40% for future investment opportunities and on that front, the REIT’s manager commented that they “will continue with a disciplined approach” in the search for acqusitions.

Yield

CapitaCommercial is currently selling for S$1.44 per unit and valued at 0.8 times book value with a historical dividend yield of 5.7% based on its pay-out of 8.14 cents.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.