In Search of a REIT: CapitaLand Commercial Trust (C61U) - Is It Worth It?

So I've been satisfied with how my chosen REITS (Keppel DC & Keppel) have been performing, and I've been looking to add a little diversification to my portfolio. I'm in the mood for something steady, sustainable, and resilient, so I thought I would focus on a couple of other REITs. As per usual, I will be conducting a quick analysis to determine if a particular REIT is a decent investment opportunity for me. Naturally, I thought I would work my way down the list, and the name right at the top was CapitaLand Commercial Trust (C61U), touted as the "first and largest REIT to be listed on the SGX."

So what is this REIT?

The CapitaLand Commercial Trust Group (CCT Group) manages a portfolio of office and commercial properties mainly situated in Singapore, except for one commercial building located in Frankfurt, Germany. These properties produce income mainly through the letting of property space. Now, I already have a REIT in my portfolio (namely, Keppel REIT) that focuses on properties, which will also be affected by similar headwinds and tailwinds as CapitaLand Commercial Trust in the future (e.g. appreciating or depressed office rentals). However, I am also aware that Keppel REIT has properties in both Singapore and Australia - if CapitaLand Commercial Trust is able to offer a diversified selection of properties which are showing healthy rentals along with a decent balance sheet, I will consider it for an addition to my portfolio. CapitaLand Commercial Trust's long-term corporate credit has been given a BBB+ rating by Standard & Poor's, indicating "adequate protection parameters" but also that the Trust is vulnerable to adverse economic conditions that may affect its ability to pay its obligations.

CapitaLand Commercial Trust currently has the following properties in its portfolio:


1) Capital Tower
- Gross Revenue 2018: $71.4 million
- 10% of leases expiring in 2019 and 2020
- Roughly 90% of leases expiring in 2021 and beyond
- Net Property Income increased by $0.5 million from 2017 to 2018

2) Asia Square Tower 2
- Gross Revenue 2018: $105 million
- 40% of leases expiring in 2019 and 2020
- Net Property Income increased by $2.6 million from 2017 to 2018
(estimated, due to $12.9 million being Net Property Income for 2 months in 2017, so $77.4 million for 12 months)

3) CapitaGreen
- Gross Revenue 2018: $91.1 million
- 48% of existing leases expiring in 2019 and 2020
- Net Property Income increased by $3.2 million from 2017 to 2018
- Committed Occupancy dropped (0.3% from 2017 to 2018)

4) Six Battery Road
- Gross Revenue 2018: $68.9 million
- 52% of leases expiring in 2019 and 2020
- Net Property Income increased by $1.4 million from 2017 to 2018

5) One George Street (50% interest)
- Gross Revenue 2018: $25.1 million
- 42% of leases expiring in 2019 and 2020
- Net Property Income decreased by $0.25 million from 2017 to 2018
(since CLCT owns a 50% interest, Net Property Income has been adjusted accordingly)
- Committed Occupancy dropped (0.2% from 2017 to 2018)

6) Raffles City (60% interest)
- Gross Revenue 2018: $138.3 million
- 41.3% of leases expiring in 2019 and 2020
- Net Property Income decreased by $0.24 million from 2017 to 2018
(since CLCT owns a 60% interest, Net Property Income has been adjusted accordingly)

7) 21 Collyer Quay (HSBC Building) 
- Gross Revenue 2018: $20.4 million
- Lease to HSBC expires in 2020
- Net Property Income constant from 2017 to 2018

8) Bugis Village
- Gross Revenue 2018: $11.8 million
- ALL leases expiring in 2019 and 2020
- Net Property Income decreased by $0.1 million from 2017 to 2018

9) CapitaSpring (45% interest, to be completed in 2021)
- On track to be completed in 1H 2021
- JP Morgan has signed on as anchor tenant, occupying 24% of the building


1) Gallileo 
- Gross Revenue 2018: $12.8 million
- Less than 1% of leases expiring in 2019 and 2020
- Majority of leases expiring in 2024 and beyond
- 100% Committed Occupancy

Source: CCT Annual Report for Period Ended 31/12/2018


Total gross revenue for CCT in FY 2018 was $557.4 million - this indicates that the Group's major earners are Raffles City, Asia Square Tower 2, and CapitaGreen. These three holdings make up almost 60% of the Group's gross revenue. Normally, I would cite (as a potential point of concern) that each of these holdings has >40% of their respective leases expiring in 2019 and 2020, but my concern is mitigated by redevelopment plans which will be discussed later in the article. At the close of 2018, total committed occupancy for Singapore was 99.3%. The sole holding in Germany - Gallileo - is a freehold property that is currently 100% occupied, with Commerzbank AG as the anchor tenant. Commerzbank's rent is currently adjusted based on inflation every two years, and has an option to terminate their existing lease in 2024 with 24-months' notice. Gallileo was acquired with a partial mix of debt and equity - the amount borrowed for the acquisition itself was $339.5 million at an assumed interest rate of 1.4% per annum. 

The CCT Group has set a hard cap of 20% of total portfolio property value on overseas exposure, thus limiting their exposure to foreign investment risk. Currently, the CCT Group's overseas exposure is limited to their sole holding in Germany, and currently accounts for 5% of total portfolio value. CCT is currently on the lookout for potential acquisitions in Germany and other regions.

I am always interested in examining a REIT's debt portfolio to see how resilient it would be against potential interest rate changes. More S-REITs have been shifting to fixed-rate loans in anticipation of rising interest rates in 2019, and CCT Group has done the same - CCT has issued multiple medium-term-notes and bonds, with rates ranging from 2.7% - 3.33% per annum. As such, the Trust should be relatively shielded against any potential interest rate hikes. At the moment, CCT has been refinancing borrowings ahead of maturity. Most recently, Raffles City Singapore (RCS) Trust, through which CCT and CapitaMall Trust (CMT) jointly manage the Raffles City property, issued two medium-term notes: $275 million 7-year fixed rate @ 3.2% due 2025, and $150 million 6-year fixed rate @ 3.05% due 2024. The proceeds from these notes were used to refinance bank loans due in 2018, 2019, and 2022. Ultimately, CCT Group has $148.3 million due at the end of 2019, and I foresee no difficulty in CCT's ability to handle this. CCT Group's debt portfolio has a term-to-maturity of 3.9 years as at end of 2018, while average cost of debt remains stable at 2.6% per annum.

Source: CCT Annual Report for Period Ended 31/12/2018

Looking to the future...

The Urban Redevelopment Authority (URA) plans to rejuvenate "mature towns and major recreational corridors" according to the URA's Draft Master Plan 2019, which is currently on exhibition. The URA plans to introduce "more homes in the CBD and Marina Bay to increase the vibrancy of the office-dominated Downtown," by offering incentives to encourage the conversion of existing office developments into mixed-use properties, which will include hotel and residential developments. This would be a boon for CCT, as their holdings are located either in or near the CBD area. As a side note, this would also benefit my other holding - Keppel Reit, since Marina Bay Financial Centre is in their portfolio. In time, these redevelopment plans would serve two purposes: (1) encourage tenants to lengthen their leases AND attract new tenants to fill existing slots due to increased activity and greater accessibility in the area, and (2) increase foot traffic for CCT's mixed-use developments.

Source: "URA Draft Master Plan to boost mixed-use properties in CBD", Singapore Business Review, 28 MAR 2019

Additionally, Grade-A office rents increased by 14.9% to $10.80 psf/month in 2018, and property consultants are optimistic on office rental growth in 2019, while office vacancy is expected to trend downwards during the same period. According to the CBRE Group, rents on Grade-A properties in the CBD area are expected to increase by about 2% in 2019 (to $11.01 psf/month), and another 2% in 2020 (to $11.27 psf/month). Demand looks to be stable, and leasing interest for new developments appears decent - CCT's latest development CapitaSpring already has JP Morgan occupying 24% of space as anchor tenant.

Source: CBRE Research

Using a simple Net Asset Value (NAV) model to value this REIT, we arrive at an NAV of $1.83. The Trust is therefore trading at a 6% premium to NAV. However, I expect to see more upside for CCT's earnings over the next couple of years due to (1) expected rise in office rents over the next few years, and (2) limited office supply. Therefore, should spare cash be available, I would feel comfortable parking some cash here for yield over the next two to three years. I expect to see CCT's price move to the $2.00 - $2.10 region.

Until next time.


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