Capitaland Commercial Trust’s distribution per unit was up 6.1% for 4Q2017 to 2.08 SG cents from 1.96 SG cents.
In 2017 on a full year basis, distribution per unit was up 5.0% to 8.66 SG cents compared to 8.25 SG cents in 2016.
The increase in distribution per unit is despite a fall of 3.8% and 4.0% in gross revenue and net property income respectively between 4Q2017 and 4Q2016.
Revenue and net property income
The decrease in gross revenue was due to divestments of One George Street (50% interest) in June 2017, Golden Shoe Car Park in July 2017 and Wilkie Edge in Sept 2017.
The decline was mitigated by higher gross revenue from CapitaGreen and contribution of newly acquired Asia Square Tower 2 (AST2).
Because of the decrease in gross revenue, net property income also declined by 4.0% in 4Q2017 compared to the same period last year.
Capitaland Commercial Trust’s portfolio remains diversified among 9 properties, by 4Q2017’s net property income, namely
- Raffles City Singapore (60% interest) – 27%
- CapitaGreen – 18%
- Capital Tower – 14%
- Six Battery Road – 13%
- Asia Square Tower 2 – 13%
- HSBC Building – 5%
- One George Street (50% interest) – 5%
- Twenty Anson – 3%
- Bugis Village – 2%
Raffles City Singapore is the biggest contributor to Capitaland Commercial Trust’s net property income in 4Q2017, followed by CapitaGreen.
The contribution is not largely different to that of 1Q2017’s net property income, in that Raffles City Singapore and CapitaGreen are the 2 largest contributors.
The difference is the addition of Asia Square Tower 2 and the removal of Wilkie Edge and Golden Shoe Car Park, each of which contributed 3% and 2% to 1Q2017’s net property income respectively.
All of Capitaland Commercial Trust’s property saw a valuation uplift with the exception of Bugis Village.
Valuations as at 31 Dec 2017 compared to 31 Dec 2016 are as follows
- Capital Tower – Increase of 2.9% from S$1,325m to S$1,363m
- Six Battery Toad – Increase of 2.3% from S$1,371m to S$1,402m
- CapitaGreen – Increase of 0.8% from S$1,603m to S$1,616m
- HSBC Building – Increase of 0.2% from S$455m to S$456m
- Twenty Anson – Increase of 0.2% from S$432m to S$433m
- Bugis Village – Decrease of 9.3% from S$48.5m to S$44m. The reason provided by Capitaland Commercial Trust for the decrease is “The valuation of Bugis Village takes into account the right of the President of the Republic of Singapore, as Lessor under the State Lease, to terminate the said Lease on 1 April 2019 upon payment of S$6,610,208.53 plus accrued interest”. In 4Q2016’s financial presentation, the same description can be found in the footnote. Between 31 Dec 2015 and 31 Dec 2016, valuation for Bugis Village fell from S$53.7m to S$48.5m. Between 31 Dec 2014 and 31 Dec 2015, valuation fell from S$55.4m to S$53.7m.
- Asia Square Tower 2 is a new addition to the portfolio and is valued at S$2,094m
- Raffles City’s valuation on a 100% basis rose 2.9% from S$3,169m to S$3,260m
- One George Street’s valuation on a 100% basis rose 10.1% from S$1,014m to S$1,116m. The main driver for One George Street’s increase in valuation is a lower capitalization (3.85% in Dec 2016 to 3.7% in Dec 2017) and discount rate (7.25% in Dec 2016 to 7.0% in Dec 2017) used.
Capitaland Commercial Trust’s financial position remains healthy, with credit rating at BBB+ by S&P, outlook stable as of 31 Dec 2017.
This is one notch lower than 31 Dec 2016’s and 31 Dec 2015’s rating of A- by S&P.
Net asset value per unit is up very slightly to S$1.78 from S$1.77 (for 31 Dec 2016 and 31 Dec 2015).
Total gross debt has been up on a yearly basis, reaching S$4,009m in 4Q2017 compared to S$3,312m in 4Q2016 and S$2,280m in 4Q2015.
The increase is due mainly to an increase in CapitaGreen’s stake in May 2016 and acquisition of Asia Square Tower 2 in Sep 2017.
Aggregate leverage of 37.3% in 4Q2017 is largely unchanged from 37.8% a year ago.
Average cost of debt at 2.6% as of 4Q2017 has been stable over the last 2 years. It was 2.6% as of 4Q2016 and 2.5% as of 4Q2015.
Rental reversion pressure
Capitaland Commercial Trust still faces pressure to achieve positive rental reversion but is finding it difficult to do so because expiring rents are substantially higher than market rents.
For example, Six Battery Road’s average expired rents were S$12.77 psf pm compared to committed rents of between S$10.69 to S$13.50 psf pm for leases signed in 4Q2017.
For One George Street, average expired rents are S$9.62 psf pm compared to committed rents of between S$9.0 to S$10.6 psf pm for leases signed in 4Q2017.
The estimation of market rents by various consultants are as follows.
For Six Battery Road’s submarket:
- Cushman & Wakefield – S$9.37 psf pm
- Knight Frank – S$9.1 to S$9.6 psf pm
For One George Street’s submarket:
- Cushman & Wakefield – S$9.37 psf pm
- Knight Frank – S$8.0 to S$8.5 psf pm
Despite the negative rental reversions, monthly average office rents for Capitaland Commercial Trust’s portfolio is up 5.9% year on year.
The main reason is the inclusion of Asia Square Tower 2 into the portfolio.
Increase in market rents
Various property consultants are noting that Grade A office market rents are on a mend, with rents up 3.3% on both a quarterly and yearly basis.
Market rents in 4Q2017 as estimated by CBRE is S$9.4 psf pm, compared to S$9.1 both in 3Q2017 and 4Q2016.
Capitaland Commercial Trust says that the rise in market rents will reduce pressure on reversions for leases expiring in 2018.
Ultimately, the higher signing rate for leases will be beneficial to the portfolio’s income and to the distribution to shareholders.
Well run REIT
On the whole, Capitaland Commercial REIT remains well run, with sound management, strong sponsor and a diverse portfolio of assets.
At a share price of S$1.82, Capitaland Commerical REIT is marginally above net asset value but not overtly overvalued.