Can CapitaCommercial Trust’s Distributions Continue Growing? Part 2

Welcome to the second part of the series looking at CapitaCommercial Trust’s  (SGX: C61U) ability to grow its distributions.

In my previous article, I covered the sources of the REIT’s revenue and its growth over the past five years from 2010 to 2014 (CapitaCommercial Trust’s financial year coincides with the calendar year).

In here, I’d like to look at the net property income (NPI) and debt profile of the commercial property owner.

As a recap: CapitaCommercial Trust has outperformed the market over the past five plus years with its share price growing around 52.5% from 1 January 2010 to last Friday.

By comparison, the capital gains of the SPDR STI ETF (SGX: ES3) – a proxy for the Straits Times Index (SGX: ^STI) – was 15.1% for the same duration.

CapitalCommercial Trust is one of the largest commercial real estate investment trusts (REIT) in Singapore by market capitalization and it is managed by CapitaCommercial Trust Management Limited, an indirect wholly-owned subsidiary of CapitaLand Limited  (SGX: C31).

At the local front, the REIT has ownership over properties such as Capital TowerSix Battery Road, and the Golden Shoe Car Park. It also has partial stakes in Raffles City SingaporeCapitaGreen, and a 30% stake in Quill Capita Trust in Malaysia.

Over the past five years between 2010 and 2014, CapitalCommercial Trust has distributed steadily increasing dividends totaling almost 40 cents per share.

Financial Year Distribution per unit (Singapore cents)
2010 7.83
2011 7.52
2012 8.04
2013 8.14
2014 8.46

Source: CapitaCommercial Trust’s Earnings Presentation

A closer look

Ideally, we would like to see the REIT’s revenue dollars drip down to the bottom line. For that, we look into the NPI of the properties. The NPI is defined as revenue minus all direct expenses.

CapitaCommercial Trust

Source: CapitaCommercial Trust’s Earnings Report

Between 2010 and 2014, NPI for the REIT has been pretty much unchanged if we exclude the share of results from associates and joint ventures.

As mentioned in Part 1, CapitaCommercial Trust’s stake in Raffles City Singapore was reclassified under share of results from joint ventures on 1 January 2014 due to an accounting change (Financial Reporting Standards – 111 Joint Arrangements). This is reflected above.

CapitaGreen, a grade A tower completed on 18 December 2014, will be included into the same joint venture bucket in the future. This may be where some income growth can be expected from in the years ahead.

Finally, the REIT’s ownership in Quill Capital Trust is reflected as well in the share of results from associates. Quill Capital Trust’s income contribution to CapitaCommercial Trust’s overall result is minimal in the grand scheme of things though.

Foolish investors might want to keep an eye on a REIT’s debt profile. The debt profile may provide clues on how a REIT is funded, and its sensitivity to the interest rate environment. We can look at CapitaCommercial Trust’s latest debt profile as of 31 December 2014:

Gearing Ratio 29.30%
Interest Cover Ratio 7.2 times
Average Term to Maturity 3.9 years
Average Cost of Debt (per annum) 2.30%
Unencumbered Assets as % of Total Assets 100%
% Borrowings on Fixed Rate 83%
Total debt $2.2 billion

Source: CapitaCommercial Trust’s Earnings Presentation

CapitaCommercial Trust has a fairly high percentage of borrowings which are on fixed rates. In the short term, this protects the REIT against a higher interest rate environment. The current average cost of debt for the REIT is 2.3% with an average term to maturity of 3.9 years.

The REIT’s gearing is also fairly low at less than 30% of the value of its total assets. The next big test in debt refinancing for CapitaCommercial Trust will come in 2016 where 42% of its debt becomes due. The progress in refinancing of borrowings is where Foolish investors should keep a watchful eye on.

Foolish summary

As lifelong students of Foolish long term investing, it pays to look under the hood to understand whether a rise in CapitaCommercial Trust’s share price is supported by the quality of growth that we are looking for.

On that note, it’s worth pointing out that the gross revenue and NPI for Six Battery Road, Capital Tower, and One George Street have not seen meaningful organic growth in the past five years. As mentioned in my previous article, the occupancy rate of commercial properties can be affected by changes in the economic conditions of the countries they belong to. The future growth of CapitaCommercial Trust might rely on its ability to add new accretive acquisitions, more so than relying on organic growth.

As always, when there’s doubt, Foolish investors may want to demand a higher margin of safety for an investment. This goes for CapitaCommercial Trust too if investors think that there’re more uncertainties involved with a REIT which has had trouble generating meaningful organic growth in some of its key properties.

CapitaCommercial Trust last traded at S$1.80 last Friday. This translates to a historical price-to-book ratio of 1.05 and a distribution yield of around 4.7%.

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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 Chin Hui Leong doesn’t own shares in any companies mentioned.