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Brief Introduction
Interested in investing in Singapore Office Properties? If you are, you would have come across a close cousin of Capitaland Mall Trust, Capitaland Commercial Trust, CCT for short. CCT was first listed on 11 May 2004. Like all reits, CCT’s aim is to own and invest in income producing real estate. The main differences lies in the type of real estate that CCT focuses on.
CapitaLand Commerical Trust (CCT) is a REIT that focuses on Grade A commercial properties in Singapore. These office buildings are mostly situated in the Central Business District and include the likes of Capital Tower, Asia Square Tower 2, CapitaGreen and 21 Collyer Quay. As of 2018, Capital Commercial Trust has total deposited properties of SGD 11.2 B and a strong occupancy of 99.4%.
It has been given a BBB+ rating by Standard and Poor.
In terms of distributions, CCT’s DPU per unit is at 8.7 cents which is slightly higher than the 8.66 cents in 2017. This comes on the back of higher distributable income for the fiscal year.
Below is a graph with the current and historic stock price of Capitaland Mall Trust.
History of CCT
Yet, unlike most Reits, CCT was not created via an Initial Public Offering. Instead, it was created out of a capital reduction exercise. 7 commercial properties were first transferred from Capitaland to CCT.
The seven properties were:
- Capital Tower, 6 Battery Road, Starhub Centre, Robinson Point, Bugis Village, Golden Shoe Car Park and Market Street Car Park.
During the capital reduction exercise, Capitaland distributed 60% of the units in CCT to the existing shareholders of Capitaland. Back in 2004, investors received 200 CCT units for every 1000 units of Capitaland Shares.
The acquisition was a win-win during a time when REITs were not as popular an investment instrument as it is today. Through the capital reduction process, Capitaland was able to release capital that was locked in these stable recurring income office properties and channel them into projects with higher return. Capitaland stock owners on the other hand benefit from having a higher guaranteed amount of dividends in the form of real estate investment trust (reit) dividends.
Difference between CCT and capitaland
Many Singaporeans when looking at a REIT like Capitaland Commercial Trust will ask this question. “What is the difference between Capitaland Commercial Trust and Capitaland?” After all, Both companies have the word Capitaland in their name. While we covered the same topic in Capitaland Mall Trust Dividend Share Price Company Analysis, it is a good idea to recap and also cover something new about the trust structure of Capitaland Commercial Trust.
If you look at the trust structure of Capitaland Commercial Trust, you will realise that Capitaland is not there. The reason is because, Capitaland is one of CCT’s unitholders. Capitaland owns an approximate 30% of CCT’s units, with the majority of the remaining units being left as public float. This means that it is the public who is the majority owner of CMT.
Despite not owning the majority of CCT’s units, Capitaland continues to have management control of Capitaland Commercial Trust. This is because Capitaland Commercial Management Limited, the manager of CMT, is the wholly owned subsidiary of Capitaland.
Valuation First, Business profile second
There are many valuation techniques that we can use to judge the attractiveness of a potential investment. These can range from
- Stock Price V.S NAV Per Unit
- Dividend Yield V.S Net Property Yield
- Dividend Yield V.S comparable opportunities
- Management’s own Investment Hurdle
- Potential for Strong Rental Reversion
- Potential for Further Cap Rate Compression
Stock Price V.S NAV Per Unit
Given that a REIT is in some sense its portfolio of properties, some will argue that a fair value to pay for a single shareholding is the NAV per unit. The NAV is calculated by first taking total assets and deducting by total liabilities. This will include the subtraction of both long term and short term debt. There after, the NAV is deducted by the total number of units outstanding to arrive the NAV per unit. For CCT, as of 2018, the NAV per unit is 1.80.
The NAV of 1.80 means that the market has priced in its expectations that the investment properties under CCT will continue to grow in value. Hence buyers have bid the share price above 1.80 and have kept it there ever since.
Dividend Yield V.S Net Property Yield
Apart from looking at NAV per unit, one can also compare the dividend yield with the net property yield. How do you derive both numbers and what is the difference between the two? The dividend yield is what the management has announced it is going to distribute for the quarter or year, divided by the price of the security. This number is therefore:
- Subject to a certain degree of management discretion (do note that management has to pay 90% of distributable income)
- Includes the effect of the firm using leverage
It is derived as follow:
Capitaland Commercial Trust is currently trading at SGD 2.05 (as of 4th Oct 2019). Given the distribution table as shown below, the distribution yield should be around 4.24%. This means that if you were to buy a unit of CCT now and the distribution remains constant at 8.70 cents, your return from annual distributions will be 4.24%.
| Period | Distribution per Unit (cents) | Payment Date |
| 01 July 2018 to 31 December 2018 | 4.42 | 28-Feb-19 |
| 28 May 2018 to 30 June 2018 | 0.79 | 29-Aug-18 |
| 1 January 2018 to 27 May 2018 | 3.49 | 18-Jul-18 |
| 8.70 |
Meanwhile, the Net Property Yield is the total income that is derived from the Property minus any related expenses.
As of FY 2018, the property yield for CCT will be around 4.13%. Given that the current dividend yield is at 4.22%, the share is considered attractive as it is yielding more than it would have if you bought the entire portfolio at 7.6 Billion and produced a 4.13% Net Income Yield.
Dividend Yield V.S comparable opportunities
Some may argue that this level of dividend yield is attractive relative to other assets. As of this writing, this is still higher than the 2.5% you get on your CPF Ordinary Account and also higher than the 10Y SIGB bond yields 2% and lower.
However, 4.07% seems low relative to Mapletree Industrial Trust’s dividend yield of 4.9% (as of Sept 2019). Given thats the case, should you then maximise your gains by solely buying into Mapletree Industrial Trust? The answer to that lies in whether there is any merits in diversifying your holdings in Reits.
Management’s own Investment Hurdle
One good measuring yardstick is to look at the valuation assumptions that the company made in valuing the investment properties. The valuation assumption includes the capitalisation rate that the reit uses. It will also include the discount and terminal rates that are used in valuing the property.
| Valuation tool | 2018 | 2017 |
| Capitalisation Rate | 3.50 to 4.00 | 3.60 to 4.10 |
| Discount Rate | 6.75 | 7.00 |
| Terminal Yield | 3.50 to 4.25 | 3.60 to 4.35 |
Capitalisation Rate, also know as cap rate is the ratio of Net Operating Income and Market Value. So if net operating income stays the same, we should be expecting a slight appreciation in market value of the commercial properties that CCT holds.
Why should cap rate mean anything to the Reit Investor
With your dividend yield from holding the REIT being slightly higher than cap rate, it seems to suggest that at the very least, the current stock price is fair. Noting that since dividend yield is the total annual distribution divided by stock price and cap rate is the total net operating income divided by the current market value of the properties, dividend yield for the portfolio will only be higher than the cap rate for individual constituent properties if either
- The REIT has been paying out too much dividend (i.e. more than its distributable income)
- The stock is valued at less than the investment property portfolio
- The cap rate has compressed to a point where management may consider locking in the capital gains by recycling the asset and buying into higher yielding asset.
To verify which scenario it is, one has to track the company and know both the quality of the management and the properties that the Reit owns.
Further Cap Rate Compression
Is it possible to get further cap rate compression in the Grade A Office space?
While we believe there will be little upside, things are never quite certain in finance and hence it is important to run though a series of thought scenarios and probable events that can bring CCT above current prices
- Further compression in market cap rate (Macro)
- Rent reversion => NOI increase => Share Price increases while Div Yield stays constant.
- Accretive Acquisitions
Properties under Capitaland Commercial Trust
Capitaland Commercial Trust has an interesting portfolio of properties that no other company has in Singapore. It is predominantly focused in Grade A Office Properties in Singapore. If you think about it, this means that most of its properties are within the Central Business District in Singapore. For illustration purposes, I have attached the following diagram from one of CCT’s presentations.
Many of these properties will be familiar to those who work in the CBD. However, do note that even though CCT manages these properties though its property management arm, it may not fully own them. For example, CCT does not have the full ownership to Raffles City Singapore, CapitaSpring and One George Street.
In recent years, CCT has also moved out of Singapore to look at overseas opportunities in Germany.
Thoughts on the properties
There is no doubt that the properties that CCT holds are high quality Grade A Offices. Beginners learning how to invest their money in Singapore has the benefit of knowing first hand the investment property portfolio that CCT has. This benefit tends to get diluted somewhat as the Reit ventures into Frankfurt with the Galileo Tower and the MAC Center.
That said, it the strong revenue growth and the solid occupancy numbers show that CCT has been generating good net operating income out of these properties.
CCT’s ability to generate strong rental reversion for its properties stem in part from the cyclical upturn in Grade A office rents as seen from the time series chart above.
Property lease management
What constitutes good property management from the point of view of a real estate investor? A few things come to mind.
- Diversify rental streams
- Top 10 tenants contribute 38% of gross revenues.
- Keep a comfortable leverage ratio
- With an aggregate leverage of 35.5% as of 3Q 2019, CCT is still well within the 45% limit that MAS has set for publicly listed reits.
- Actively manage maturing leases
- Of the 27% of leases that are to expire in 2019, CCT has renewed 23% and has also secured extensions for 8% of the leases ude in year 2020.
HEADWINDS
While CCT has benefited from the sharp recovery in office rents, it is clear that the office rental in Singapore is cyclical. Hence, when we see rental yields roll off the cyclical highs, it will be more difficult to maintain strong revenue growth while keeping occupancy high. While CCT has the added benefit of strong parental support from Capitaland and its strong base of lessors to mitigate that potential downside, this is still a potential scenario that investors have to keep in mind.