8 Quick Things I Learned from CapitaLand Commercial Trust’s AGM 2015

Photo: CapitaLand

One gentleman in his early fifties who identified himself as Mr Wong bought CapitaLand Commercial Trust (CCT) in 2009 when CCT was in distress due to the 08/09financial crisis. He held on. Today, his dividend yield is easily in the double digits every single year.

As we all know, investing in real estate investment trusts (REITs) boasts predictable and stable returns, and Mr Wong doesn’t the idea of uncertainty. He asked:

“Is there a succession plan for the board of directors? Otherwise, I do not know what my future will be. On succession, we must also consider female board members.”

Lynette Leong, CEO of CCT, a vibrant and energetic figure who’s always well-organized with her presentations replied:

“I want to assure you I have been in this position for more than seven years [since 2007] and I’m fairly young! I hope I can continue with the trust. So hopefully you will remain as our unitholder for as long as I am here.”

Chairman Soo Kok Leng also pointed out:

“Boards members are constantly renewed and eligible members are evaluated based on experience and skillsets, not because of gender. Besides, it is hard to look for new female board members. But if you do know any female directors, please approach us!”

With that, here are…

8 Quick Things I Learned from CapitaLand Commercial Trust’s AGM 2015:

  1. There will be an increase in rent whenever the average occupancy rate of the core CBD hits above 95% according to CEO Lynette Leong. Grade A office rental rates in 4Q2015 rose by close to 15% to $11.20 psf. As a result, CCT holders received a higher distribution per unit (+3.9%) and property valuation (+2.4%) due to positive rent reversion.
  2. Lynette Leong also pointed out that strata office sales in the market fetch less than 3.5% in property yield. Investors are better off owning a REIT that nets an average yield of 6%.
  3. Since Jan 2014, CCT adopted a new way of reporting its joint ventures. The old way of reporting used to record joint venture income as revenue (top line), but now CCT captures the distribution income of joint ventures under distributable income (bottom line).
  4. CCT owns 40% of the newly completed office building CapitaGreen and accounted for 8.2% of property valuation in 2014. The building has a registered occupancy rate of 70% and will start to contribute positively to CCT’s overall performance in 2016 as the manager expects tenants to move in the second half of 2015. Assuming the office rental rate is similar to last year’s, unitholders can expect higher distribution income from this property next year onwards.
  5. There is concern about a large supply of office space (about 3.7 million square foot) coming online in 2016 that may depress office rents. Thankfully, CCT is well-prepared and planning to execute these few strategies:
    • Secure their largest tenants early this year whose leases are expiring next year
    • Maintain or improve their existing tenant retention rate of 86% (up from 67% in 2013) via asset enhancement initiatives to anticipate the needs of their tenants and stay relevant in the market
    • Extend leases with their tenants beyond 2016; CapitaGreen’s committed occupancy has leases expiring beyond 2018
  6. Gearing is at 29.3% (click here to check the latest REIT data). With potentially higher interest rates coming, this can be detrimental to a REIT’s performance. Knowing this, CCT has set 83% of their borrowings on fixed rates to mitigate this risk and stretched their loan maturity to 2021.
  7. Assuming a 40% gearing, CCT has debt headroom up to $1.3 billion which would be sufficient to acquire the remaining 60% stake in CapitaGreen building. Lynnette Leong said that the acquisition must be yield accretive before they consider it.
  8. One unitholder sharply pointed out that Raffles City, located directly above City Hall MRT, was under-rented with expiring leases of only $7.88 psf. In response, Lynette Leong mentioned that rents always depend on the market rate at any given point in time and the duration of the lease. In the case of Raffles City, it has a long master lease that was signed long ago.

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Rusmin Ang is an equity investor and co-founder of The Fifth Person. His investment articles have been published on The Business Times BTInvest section and Business Insider. He has also been featured multiple times on national radio on 938LIVE for his views and opinions on how to invest successfully in the stock market. Rusmin is on the speaking circuit for CIMB Securities (Malaysia) and has spoken at events in Penang, Sibu and Kuala Lumpur and is the co-author of Value Investing in Growth Companies published by Wiley, Inc. The book can be found in all major book stores worldwide and on Amazon.com, Barnes & Noble and Apple’s iBooks. Rusmin was actually a former SIAEC scholar who gave up his scholarship and a cushy career to follow his itch of learning how to be a better investor and ultimately lead a life of financial independence. He believes that anyone, even with a regular job, can achieve more financial peace-of-mind by investing intelligently and safely for the long term.

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  1. Pingback: 5 Important Factors You Need to Consider Before You Invest in Any REIT | The Fifth Person

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