12 things I learned from CapitaLand Commercial Trust’s 2017 AGM

With tears welling up in her eyes, she choked on her words slightly as she finished her speech. When she sat down, the audience gave a big round of applause, while the board smiled and nodded their heads in approval.

The CEO of CapitaLand Commercial Trust had decided to end her presentation with a show of appreciation for her tenants and business partners who’ve helped make the REIT the success it is today. When she came to thanking her employees for their tireless effort and dedication, the emotions swelled and you could see that it meant a lot to the CEO.

It is not every day that you get to hear CEOs express their gratitude to their staff and it was heartening to see Ms Lynette Leong voice hers with such genuine sincerity.

CapitaLand Commercial Trust (CCT) is Singapore’s first and largest commercial REIT and comprises 10 centrally-located office and commercial properties including Capital Tower, Raffles City, and CapitaGreen. CCT’s portfolio of properties is worth $8.8 billion as at 31 Dec 2016.

We attended CCT’s 2016 AGM the previous year when the management expressed their concern that surplus office supply could further depress office rents in the CBD for the year ahead. Back then, the management also shared their strategies to retain existing partners and attract new tenants in light of the looming oversupply.

Did their plan work? And did CCT manage to deliver a decent set of results for their latest financial year? We went to their 2017 AGM to find out. Here’s what we learned:

  1. Gross revenue increased 9.3% year-on-year to $298.6 million driven mainly by higher contributions from CapitaGreen. CMT had a 40% stake in the property and held an option to purchase the remaining 60% stake — which they have since exercised. As such, CMT now owns CapitaGreen entirely and recorded 100% contributions from the property from 1 Sep 2016 onward.
  2. Net property income increased 5.7% year-on-year to $231.2 million. Likewise, distributions per unit (DPU) increased 5.3% to 9.08 cents. This was mainly due to the 100% contribution from CapitaGreen and a higher distribution from CCT’s 40% stake in Raffles City.
  3. Gearing ratio is at 37.8% and average cost of debt is 2.6%. CEO Lynette Leong mentioned that 80% of borrowings are at fixed interest rates to shield against rising interest rates and lend certainty to CCT’s interest expenses. She also shared that CCT immediately swaps any foreign currency bond borrowings to Singapore dollars to mitigate any foreign exchange risk.
  4. Singapore Grade A office rents fell 12.5% year-on-year, so CCT was happy to achieve DPU growth for 2016. But the CEO cautioned that the market will be tougher in 2017 due to an exceedingly large supply of office space (3.1 million square feet) coming up this year. The supply will ease and fall to 1.7 million square feet in 2018 and 1.1 million in 2019.
  5. Portfolio occupancy rates are at 97.1%, however, tenant retention for 2016 was only at 62% (compared to 83% the previous year). Still, CCT managed to obtain positive reversions for Grade A office renewals and new leases in 2016, but the CEO cautioned that negative reversions may set in this year due to the large office supply.
  6. To mitigate the office supply situation, CCT has done its best to limit the number of leases expiring in years when there is a lot of supply. For example, CCT only has 12% of leases expiring in 2017 – half of which have already been renewed. In comparison, CCT has 33% of leases expiring in 2019 just when office supply eases off. The CEO explained that rents would have recovered and the renewals would be able to command higher prices then.
  7. CapitaLand formed a joint venture with Collective Works to establish a co-working space at Capital Tower as the trend is growing in popularity in Singapore. CCT is observing the contributions from the co-working segment and views that co-working spaces can provide a pipeline of potential tenants as the companies in the co-working space grow in size.
  8. CCT wants to redevelop Golden Shoe Car Park into a 280-metre office skyscraper. The new building will be the tallest building in the CBD (alongside One Raffles Place and Republic Plaza) and have one million square feet in gross floor area. Golden Shoe Car Park currently sits in a great location and the management plans to replicate the success of CapitaGreen – a 40-storey office tower that was redeveloped from the Market Street Car Park. At this point, the management is waiting for the authorities to access the amount of differential premium CCT needs to pay to the government. The premium is based on the enhancement in land value after Golden Shoe Car Park is rezoned from transport to commercial use. CCT will then decide if the project is financially feasible based on the size of the differential premium. If so, redevelopment will start in 2H 2017. CCT will not be able to undertake the entire project by itself and is looking at a joint venture and the sale of assets to fund the redevelopment.
  9. A unitholder asked if CCT has plans to purchase land for future development as space in the CBD is limited. The CEO replied that, firstly, the amount of land CCT can buy depends on whether the government is selling any. Secondly, development requires intensive capital which means the REIT has to raise money via loans or rights issues. Instead, the CEO believes that redevelopment is a better strategy — as in the case of CapitaGreen and the proposed redevelopment of Golden Shoe Car Park which is a property they already own that sits in a good location.
  10. A unitholder questioned the $1.8 million CCT paid in marketing commissions for the year. The CEO explained that the commissions are a one-off payment and that they had to pay higher commissions at times in order to secure tenants due to the tough market conditions and fierce competition from other landlords.
  11. A unitholder noted that CCT retained $20.4 million in tax-exempt income mainly from its investment in MRCB-Quill REIT and asked what the management planned to do with the money. The CEO replied that they plan to save the distributions from MRCB-Quill REIT for “a rainy day” and use the money only in an event they need to do so (e.g. CAPEX).
  12. Another unitholder followed up on MRCB-Quill REIT and asked what CCT’s plans were for its stake in the Malaysian REIT. The CEO replied that they plan to hold onto their stake for now since MRCB-Quill REIT is a growing REIT and has been a good investment for CCT.

Liked our analysis of this AGM? Click here to view a complete list of AGMs we’ve attended »

Adam Wong

Adam Wong is the editor-in-chief of The Fifth Person and author of the national bestseller Lucky Bastard! which made the Sunday Times Top 10 Bestseller's List in 2009 and Value Investing Made Easy which made the Kinokuniya Business Bestseller's List in 2013. In 2010, he appeared on U.S. national television on the morning show The Balancing Act. An avid investor himself, Adam shares his personal thoughts and opinions as he journals his investing journey online.


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