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CapitaLand Commercial Trust’s Latest Earnings: Distribution Growth Seen, But Will Good Times Last?

This morning, CapitaLand Commercial Trust  (SGX: C61U), which is now part of the Straits Times Index (SGX: ^STI), announced its fiscal first-quarter earnings covering the three months ended 31 March 2016.

CapitaLand Commercial Trust is the first and largest listed commercial real estate investment trust in Singapore’s stock market. It currently has a portfolio of 10 prime commercial properties in our country, as well as some small investments in Malaysia. In our shores, it owns properties (either fully or partially) such as Capital TowerSix Battery Road, HSBC Building, and Raffles City, just to name a few.

With that as a background, let’s dive in into the REIT’s latest results.

For the reporting quarter (first-quarter of 2016), gross revenue slipped slightly by 1.9% year-on-year to S$66.9 million. This was on the back of lower occupancies at the REIT’s properties, Capital Tower and Golden Shoe Car Park. With lower revenue, CapitaLand Commercial Trust’s net property income also declined 3.6% to S$52 million as higher property taxes took its toll.

But, the REIT’s distributable income to unitholders managed to climb 3.3% higher to S$64.9 million compared to a year ago. Increased distributions from RCS Trust and a maiden distribution from MSO Trust – two trusts that CapitaLand Commercial Trust has an interest in – contributed to the better showing. Consequently, the REIT’s distribution per unit (PDU) also stepped up by 3.3% from 2.12 cents a year ago to 2.19 cents in the reporting quarter.

CapitaLand Commercial Trust ended the reporting quarter with an adjusted net asset value per unit of S$1.72, a slight 1.2% increase from the first-quarter of 2015.

Looking at the REIT’s balance sheet, here are some important details:

CapitaLand Commercial Trust balance sheet
Source: CapitaLand Commercial Trust’s earnings presentations

The trust’s gearing had increased a little compared to a year ago, but that’s still a lot lower than the 45% gearing limit that the Monetary Authority of Singapore has set for Singapore-listed REITs. Meanwhile, the REIT’s cost of debt – the effective interest rate – had also increased a little (from 2.4% to 2.5%) and its interest coverage had fallen.

The REIT has 28% of its total borrowings coming due in 2016 and the terms of any refinancing may be worth watching, given the aforementioned higher cost of debt and lower interest cover that it has experienced.

Changing gears to CapitiaLand Commercial Trust’s operational performance, the REIT ended the reporting quarter with an occupancy rate of 98.1%, an increase from the 97% seen a year ago. That’s a better performance than CBRE’s 95.1% estimate of the occupancy rate for Singapore’s central business district core in the first-quarter of 2016.

Average rental rates for the REIT’s office portfolio in the reporting quarter had also increased to S$8.96 per square feet per month from S$8.78 in the same period last year and S$8.90 in the previous quarter.

In the earnings release, CapitaLand Commercial Trust had shared some insights on the near-term outlook for the office market in Singapore’s central business district. It said that “new above-normal office supply” that’s going to be completed in the second-half of 2016 “is expected to result in higher market vacancy levels.” An estimated 4.1 million square feet of new office space will be released into the market in 2016. To put things into perspective, “just” 600,000 square feet of office space is expected to be completed in 2017.

CapitaLand Commercial Trust’s units closed at S$1.43 each today. This translates to a historical price-to-book ratio of 0.83 and an annualised distribution yield of around 6%.

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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 Sudhan P owns units in CapitaLand Commercial Trust.