CapitaLand Commercial Trust’s Latest Earnings: What Investors Should Know

This morning, CapitaLand Commercial Trust (SGX: C61U), or CCT, announced its financial results for the second quarter ended 30 June 2017. The reporting period was from 1 April 2017 to 30 June 2017.

As a background, CCT is the first and largest listed commercial real estate investment trust (REIT) in Singapore. It has a portfolio of 10 prime commercial properties located in the Central region here, as well as an investment in a commercial REIT in Malaysia. In Singapore, it owns Capital Tower, Six Battery Road, CapitaGreen, Bugis Village, HSBC Building, and Raffles City (60% interest), among others. The REIT is 32% owned by property giant, CapitaLand Limited (SGX: C31).

With that, let’s take a look at the earnings results.

Source: CCT Second Quarter Earnings Presentation

For the second quarter ended 30 June 2017, gross revenue surged 29.5% year-on-year to S$87.5 million. This was largely due to contribution from CapitaGreen, which was fully acquired on 31 August 2016. Completed in December 2014, the building is a Grade A premium office tower that sits on the site of the former Market Street Car Park, which was owned by CCT.

After netting off the property operating expenses, net property income rose 34.3% to S$69.1 million.  The distributable income went up 6.7% to S$69.5 million, mainly due to increased distribution received from MSO Trust, which holds CapitaGreen.

Estimated adjusted distribution per unit (DPU) for the quarter was at 2.27 cents, up from 2.20 cents a year ago. The DPU is estimated due to potential conversion of convertible bonds into units of CCT after results announcement. The actual amount of DPU will be announced on books closure date, being Thursday, 27 July 2017.

Moving on to the key financial ratios, the gearing ratio, as at 30 June 2017, was at 36%, down from 38.1%, as at end of March 2017. This is well below the regulatory limit of 45%. Average cost of debt was unchanged at 2.6% and around 85% of CCT’s borrowings are pegged at fixed rates. This offers greater certainty of interest expense in a rising interest rate situation.

Ms Lynette Leong, Chief Executive Officer of the REIT’s manager, was upbeat about the latest performance of the REIT. She said:

“CCT delivered a strong set of results this quarter, underpinned by the continued strong performance of CapitaGreen. The Trust’s portfolio committed occupancy rate of 97.6% as at end June 2017 maintained its lead over the market occupancy rate of 94.1% despite oversupply conditions in the office market. During the quarter, we announced the sales of One George Street and Wilkie Edge and are pleased to have achieved sale prices of 16.7% and 39.3% above the respective 31 December 2016 book values and at exit yields of 3.2% and 3.4% per annum respectively. Net proceeds from these two asset sales are expected to total approximately S$833 million, greatly enhancing CCT’s financial flexibility. In line with our portfolio reconstitution strategy for CCT, we will reinvest most of the proceeds into value enhancement opportunities so as to generate attractive, sustainable returns for CCT’s unitholders.”

She added:

“On 13 July 2017, we announced our decision to redevelop Golden Shoe Car Park (GSCP) into a 280-metre tall, 51-storey landmark integrated development through a joint venture (JV). By taking a 45% stake in the JV, we are mitigating CCT’s development risk exposure, whilst creating an acquisition pipeline for the remaining 55% stake of the commercial component through the call option that is exercisable after the development is completed. This is a similar model as CapitaGreen which has proven to be successful for CCT.”

The redevelopment is expected to be completed in the first half of 2021, when there is no projected new office supply in the area.

The commercial REIT is now going at S$1.71 per unit. This translates to a historical price-to-book ratio of close to 0.9, considering a net value per unit of S$1.85. Meanwhile, its trailing distribution yield is at around 5.5%.

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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.