What You Should Know About CapitaLand Commercial Trust (SGX: C61U) At Its Share Price of S$2.09
Sudhan P●
CapitaLand Commercial Trust‘s (SGX: C61U) share price (or technically unit price for REITs) is currently at S$2.09.
At that price, CapitaLand Commercial Trust has a price-to-book (PB) ratio of 1.1 and a distribution yield of 4.2%.
The distribution yield looks low, but could there be more to this REIT than meets the eye?
To answer that question, let’s analyse CapitaLand Commercial Trust using my 10-step guide to pick the best Singapore REITs.
As a summary, here are the 10 steps I use to pick the best Singapore REITs:
- Growth in Gross Revenue and Net Property Income
- Growth in Distribution Per Unit
- Property Yield of Between 5% and 9%
- Gearing Ratio of Below 40%
- Interest Coverage Ratio of Above 5x
- Healthy Portfolio Occupancy Rate
- Positive Rental Reversions
- Presence of Growth Prospects
- Acceptable Price-to-Book Ratio
- Distribution Yield of Above 5%
Business Background
Before we dive into analysing CapitaLand Commercial Trust, let’s take a quick look at what its business is about.
CapitaLand Commercial Trust is Singapore’s first and largest listed commercial REIT.
As of 30 September 2019, the REIT’s portfolio was valued at around S$11.6 billion, and it currently has eight prime commercial properties in Singapore and two properties in Frankfurt, Germany.
CapitaLand Commercial Trust’s Singapore properties are strategically located in the Central Business District, and that’s one feature that makes the REIT attractive.
In terms of contribution, Raffles City Singapore and Asia Square Tower 2 are the biggest contributors to CapitaLand Commercial Trust’s net property income (NPI).
1. Gross Revenue and Net Property Income (NPI) Check
Check for: Increasing gross revenue and NPI
CapitaLand Commercial Trust’s gross revenue grew from S$262.6 million in 2014 to S$394.0 million in 2018, increasing by 10.7% annually.
NPI, meanwhile, rose from S$205.2 million to S$314.6 million during the same time frame, climbing at a rate of 11.3% per annum.
| 2014 | 2015 | 2016 | 2017 | 2018 | Compound Annual Growth Rate (CAGR) | |
|---|---|---|---|---|---|---|
| Gross revenue (S$' million) | 262.6 | 273.2 | 298.6 | 337.5 | 394.0 | 10.7% |
| Net property income (S$' million) | 205.2 | 212.8 | 231.3 | 265.5 | 314.6 | 11.3% |
The faster rate of increase in NPI than gross revenue shows that CapitaLand Commercial Trust has managed to curb its property-related expenses well.
Verdict: Pass
2. Distribution Per Unit (DPU) Check
Check for: Increasing DPU
DPU in 2014 stood at 8.46 Singapore cents, and that grew to 8.70 Singapore cents in 2018. The increase translates to an annualised growth of just 0.7%.
| 2014 | 2015 | 2016 | 2017 | 2018 | CAGR | |
|---|---|---|---|---|---|---|
| Distribution per unit (Singapore cents) | 8.46 | 8.62 | 9.08 | 8.66 | 8.70 | 0.7% |
Even though DPU has increased from 2014 to 2018, the rate of growth is too low for my liking.
Also, CapitaLand Commercial Trust’s DPU in 2018 has failed to increase beyond the DPU of 9.08 Singapore cents in 2016.
For more context, distributable income grew in 2017 and 2018 as compared to 2016. However, DPU in 2017 and 2018 didn’t keep up due to a rights issue and private placement in those years, respectively.
Verdict: Fail
3. Property Yield Check
Check for: Property yield of between 5% and 9%
CapitaLand Commercial Trust’s property yield in 2018 was low at 4.1%.
| 2014 | 2015 | 2016 | 2017 | 2018 | |
|---|---|---|---|---|---|
| Net property income (S$' million) | 205.2 | 212.8 | 231.3 | 265.5 | 314.6 |
| Investment properties (S$' million) | 4,882.4 | 4,961.7 | 6,590.5 | 7,408.0 | 7,613.6 |
| Property yield | 4.2% | 4.3% | 3.5% | 3.6% | 4.1% |
Also, even though 2018’s property yield is above the yields seen in 2016 and 2017, it is still lower than that of 2015.
Verdict: Fail
4. Gearing Ratio Check
Check for: Gearing ratio below 40%
As of 30 September 2019, CapitaLand Commercial Trust had a gearing ratio of 35.5%.
Verdict: Pass
5. Interest Coverage Ratio Check
Check for: Interest coverage ratio above 5 times
CapitaLand Commercial Trust’s interest cover stood at 4.7 times, as of 30 September 2019, which is lower than my threshold.
(Note: The screenshot under point 4 above shows interest cover ratio as 5.8x as the formula used is different.)
Verdict: Fail
6. Portfolio Occupancy Rate Check
Check for: Healthy portfolio occupancy rate
As of end-September 2019, CapitaLand Commercial Trust had a committed portfolio occupancy rate of 97.6%.
For the Singapore portfolio, the occupancy rate was 98.1%, above the market occupancy level of 96%.
Verdict: Pass
7. Rental Reversion Check
Check for: Positive rental reversions
For CapitaLand Commercial Trust’s 2019 third-quarter, the majority of leases committed were signed at rents higher than the respective expiring rents.
The latest rental reversion is summarised in the table below:
With higher committed rents, unitholders can expect higher gross revenue in the coming quarters.
Verdict: Pass
8. Growth Prospects Check
CapitaLand Commercial Trust’s value creation strategy is five-pronged, with some of them squarely focusing on growth.
One of the ways to grow is to acquire quality assets.
On that front, CapitaLand Commercial Trust completed the acquisition of Main Airport Center in Frankfurt, Germany, in September 2019.
The property only contributed to income from 18 September to 30 September last year. So, there’s room for CapitaLand Commercial Trust’s income to grow due to the new acquisition.
Further down the road, there’s a possibility of higher income contribution from Six Battery Road and 21 Collyer Quay after completion of asset enhancement initiatives in 2021.
There’s also currently-under-development CapitaSpring, which is expected to contribute from 2022. CapitaLand Commercial Trust has a 45% interest in CapitaSpring.
Verdict: Pass
9. Price-to-Book Ratio Check
Check for: Acceptable price-to-book ratio
At CapitaLand Commercial Trust’s unit price of S$2.09, it is valued at a PB ratio of 1.1x.
Over the past five years, its average PB ratio was slightly below 1x.
Since CapitaLand Commercial Trust’s current valuation is above the average, it looks expensive to me right now.
Verdict: Fail
10. Distribution Yield Check
Check for: Distribution yield to be above 5%
At CapitaLand Commercial Trust’s unit price of S$2.09, it has a distribution yield of 4.2%, which is too low for my liking.
Verdict: Fail
The Final Verdict
CapitaLand Commercial Trust has a final score of 5/10.
I like CapitaLand Commercial Trust for the following attributes:
- Has prized assets in Singapore’s Central Business District;
- Strong portfolio occupancy rate; and
- Contributions from newly-acquired properties and refurbished properties in the future.
However, I’m not comfortable with CapitaLand Commercial Trust’s expensive valuations (high PB ratio and low distribution yield) to put my money into it currently.
Also, the slow growth in DPU makes me put CapitaLand Commercial Trust on my watchlist.
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Stock Discussion on CapitaLand Commercial Trust
Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. Readers should always do their own due diligence and consider their financial goals before investing in any stock.
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