CapitaCommercial Trust’s Latest Earnings: Healthy Office Demand Seen but Some Growth-Headwinds to Be Expected

CapitaCommercial Trust (SGX: C61U) had released its fiscal first-quarter earnings earlier today.

Before I dig into the latest figures from the trust, here’s a brief background of what it does for some context later:

CapitaCommercial Trust is “Singapore’s first and largest listed commercial” real estate investment trust. As of 31 March 2015, the REIT has interests (either full or partial) in 10 prime commercial properties in Singapore; these properties, which include Capital Tower, Raffles City, and Twenty Anson, have a collective value of S$7.6 billion.

A spotlight on the finances

In the reporting quarter (three months ended 31 March 2015), CapitaCommercial Trust’s gross revenue grew 6.5% year-on-year to S$68.16 million partly on the back of positive rent reversions. Consequently, net property income came in 6.4% higher at S$53.97 million.

The top-line growth had helped put on some meat for the REIT’s bottom-line as its distributable income climbed by 4.7% to S$62.75 million. A slightly higher number of units in issue had resulted in the REIT’s distributions per unit (DPU) growing by just 3.9% to 2.12 Singapore cents.

CapitaCommercial Trust ended 31 March 2015 with an adjusted net asset value per unit (a good proxy for the underlying economic value of the REIT) of S$1.70, up just 2.4% from a year ago.

Besides keeping an eye on the REIT’s distributions and NAV per unit, investors might also want to watch its financial strength. The table below summarises a number of important metrics and how they’ve changed from a year ago:

CapitaCommercial Trust's balance sheet figures (31 March 2015)

Source: CapitaCommercial Trust’s earnings release

Despite an increase in borrowings, CapitaCommercial Trust has managed to lower its gearing ratio slightly, lengthened the maturity of its loans, kept its average interest expense steady, and improved its interest coverage ratio. These are pluses for investors.

The REIT also ended the first quarter of 2015 with a well-distributed debt maturity profile with the maturity-date for its loans stretching from 2015 to 2023. That said, a nice chunk of loans – some S$1.16 billion – would mature by 2016 and investors might want to watch CapitaCommercial Trust’s progress in refinancing said borrowings.

A spotlight on the operations

Excluding CapitaGreen (a new office development that only just obtained its temporary occupation permit in mid-December 2014), CapitaCommercial Trust had a really strong portfolio occupancy rate of 99.7% in the first quarter of 2015; this is a slight improvement over the selfsame figure of 99.4% seen a year ago.

Demand for the REIT’s properties also seem healthy given the bump up they’ve enjoyed in rent; in the first quarter of 2015, CapitaCommercial Trust’s office portfolio saw its average rent come in at S$8.78 per square feet per month, up 6.8% from S$8.22 in the first quarter of 2014.

Meanwhile, CapitaCommercial Trust has managed to lock in place a well-staggered portfolio lease expiry profile with a weighted average lease term to expiry (WALE) of some 7.9 years as of end-March 2015. This is unchanged from a year ago.

Tenant concentration might be one area of concern for unitholders to be aware of though. To that point, in the first quarter of 2015, some 42% of CapitaCommercial Trust’s monthly gross rental income came from its top-10 tenants; this is a slight improvement over the selfsame figure of 43% in the first quarter of 2014.

Future outlook

Although the fiscal first-quarter results from CapitaCommercial Trust saw it clock some steady growth, it did warn of some growth-headwinds in the earnings release (emphasis mine):

“Based on industry data from CBRE, Singapore’s Core CBD occupancy rose slightly from 95.7% in 4Q 2014 to 96.1% in 1Q 2015. Average monthly Grade A office market rent increased by 1.8% from S$11.20 per square foot as at 4Q 2014 to S$11.40 per square foot as at 1Q 2015. While limited new office supply in 2015 may still result in rental growth this year, the growth may be moderated by the expected large future supply due to be completed from 2Q 2016 onwards.

CapitaCommercial Trust’s units are currently trading at S$1.73. At this price, the REIT has a price-to-book ratio of 1 (based on the latest NAV of S$1.70 per unit) and a trailing distribution yield of 4.9%.

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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.