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Better Buy: CapitaLand Commercial Trust vs. Manulife US REIT

CapitaLand Commercial Trust (SGX: C61U) and Manulife US Real Estate Investment Trust (SGX: BTOU) are two commercial REITs listed in Singapore. One has a portfolio of mainly Singapore properties, while the other comprises US office buildings. Which REIT is the better buy right now? Let’s find out.

The tale of two REITs

CapitaLand Commercial Trust is Singapore’s largest commercial REIT with a portfolio of eight office properties in Singapore and one commercial property, Gallileo, in Germany.Source: CapitaLand Commercial Trust investor presentation (includes the acquisition of MAC in Germany, which is yet to be approved by unitholders)

Meanwhile, Manulife US REIT was listed in Singapore in May 2016. The REIT currently has a portfolio of eight Class A office freehold properties located in the US. As of 30 June 2019, the REIT’s portfolio had a value of US$1.9 billion. Source: Manulife US REIT investor presentation 

Gross revenue growth

First, let’s compare the gross revenue growth of CapitaLand Commercial Trust and Manulife US REIT from 2017 to 2018. The gross revenue shows the amount of rental income that mainly flows into the REITs.

(Note: We are comparing just two years’ worth of earnings for the REITs instead of looking at a longer-term trend because Manulife US REIT doesn’t have a long listed history.)

Metric  CapitaLand Commercial Trust Manulife US REIT
Gross revenue growth 16.7% 57.1%

Source: REIT’s earnings reports

CapitaLand Commercial Trust’s gross revenue growth in 2018 was 16.7% year on year, but Manulife US REIT’s top-line growth was much higher at 57.1%.

Both REITs’ gross revenues were boosted by acquisitions. CapitaLand Commercial Trust’s newly acquired Asia Square Tower 2 and Gallileo mainly contributed to the top-line increase. As for Manulife US REIT, four office properties acquired in 2017 (Plaza and Exchange) and 2018 (Penn and Phipps) led to the increase in gross revenue.

Winner: Manulife US REIT

DPU and NAV growth

The distribution per unit (DPU) shows how much unitholders get from owning the REITs. Meanwhile, the net asset value (NAV) per unit is the difference between a REIT’s assets and its liabilities.

The table below compares the DPU and NAV growth of the two REITs from 2017 to 2018:

 Metric CapitaLand Commercial Trust Manulife US REIT
DPU growth 0.5% -3.5%
NAV growth 5.4% 1.2%

Source: Source: REIT’s earnings reports; author’s calculations

CapitaLand Commercial Trust has a better DPU and NAV per unit growth compared to Manulife US REIT. Manulife US REIT’s DPU fell in 2018 due to a higher unit base on the back of a preferential offering and rights issue.

Winner: CapitaLand Commercial Trust

Financial strength   

Next, we’ll compare the gearing ratios and interest covers of the two REITs, which reveals the strength of a REIT’s balance sheet. The gearing ratio shows how much leverage a REIT has taken on. Singapore REITs have a gearing limit of 45%, as required by the Monetary Authority of Singapore. The interest cover reveals how easily a REIT can pay interest expenses on its outstanding borrowings.

 Metric CapitaLand Commercial Trust Manulife US REIT
Gearing ratio 34.8% 37.1%
Interest cover 5.7x 3.9x

Source: REIT’s 2019 second-quarter earnings (figures as of 30 June 2019)

Here, the numbers make it clear…

Winner: CapitaLand Commercial Trust

Valuation

As investors, we should focus on the value of the REITs and not on the daily changes in their unit prices. Let’s compare the price-to-book (P/B) ratios and distribution yields of the two REITs. The values below are as of the closing prices on 19 August 2019.

 Metric CapitaLand Commercial Trust Manulife US REIT
P/B ratio 1.12 1.15
Distribution yield 4.2% 6.7%
Unit price S$2.08 US$0.905
Market capitalisation S$8.02 billion US$1.26 billion

Source: SGX Stock Screener; author’s computation

CapitaLand Commercial Trust has a lower P/B ratio than its counterpart but loses out to Manulife US REIT in terms of distribution yield.

Winner: It’s a tie

The Foolish bottom line

CapitaLand Commercial Trust is the overall winner due to better growth in its DPU and NAV per unit, as well as a stronger balance sheet. However, CapitaLand Commercial Trust’s yield is much lower than Manulife US REIT’s, and that could be because CapitaLand Commercial Trust is a well-known REIT belonging to the Straits Times Index (SGX: ^STI). Manulife US REIT could be less popular among local investors since its properties are all located in the US, which makes it hard for investors to get a feel for the properties’ quality.

Want to keep reading on how to lock in those sweet REIT dividends? Our Complete Guide To Buying The Best Singapore REITs dives into what we think you need to know about finding the best REITs that regularly hand you a fat dividend cheque. Click here to download your FREE guide.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended units of CapitaLand Commercial Trust and Manulife US REIT. Motley Fool Singapore contributor Sudhan P owns units in CapitaLand Commercial Trust.