Commercial Offices Trusts are REITs that I seldom covered, but they have been beaten down pretty badly in this market. Checkout K-REIT, Suntec REIT, CapitaCommercial Trust and their prevailing yields.
Why is it the industrial REITs, retail and healthcare REITs were able to held up much better than them?
I believe the primarily reason are
- Capital Intensive Purchases that we do not know whether makes sense. Read MBFC purchase by Suntec and Asset Enhancement by CapitaCommerical Trust.
- Weakening of rent revisions for office buildings
CapitaCommercial Trust (CCT) looks a good proxy if you think the market will improve in the long term. Yesterday CCT announced their Q3 earnings. At Investment Moats we recently got vested with 2 tiny lots.
I thought it’s a good idea to do a snapshot at how CapitaCommercial Trust look.
- Quarter revenue was 8.9% lower, NPI 9.2% lower and distributable income 7.8% lower compare to Q3 2010. This is due to the reduction in rental income due to the sale of Starhub Centre and Market Street Car Park will be undergoing redevelopment. This together with negative rent reversions cause the reduction on all fronts.
- Higher contribution from Raffles City and that is important as it makes up a big contributor of CCT’s revenue. Capital Tower and Six Battery Road, big contributors as well, was revised down or face lower occupancy. The worry is Six Battery Road which saw a 30% fall in profit.
- Adjusted Net Asset Value per unit is $1.52 versus $1.47 in 2010. Against Current Share price of $1.10 this looks very attractive.
- Gearing Ratio at 27.4%. This is a very comfortable level with a strong sponsor.
- Net Debt/EBITDA at 5.2 times and Interest Coverage at 4.1 times. That is rather conservative but the risk is a big refinancing coming in 2012 February.
- Average Term to Maturity is 2.7 years. This is very short and could work or against CCT depending on whether rent revision is upwards or downwards.
- Current Average Prevailing Rent is $11.06 which is 41% below Peak Rent at $16-18. Lowest Rate deep in Q3 2009 was at $6. In 2011, 9% of office portfolio will need to be renew lease from $15-16 to $10. In 2012, renewal should be around the current average or if not higher. In 2013, renewal should be renewing 24% of office portfolio from $7.62 to possibly $6-10. In 2014 it will renew 30% at the current $10 rate.
- DPU this quarter was $0.0183. That is annualized to $0.0732. At current price the yield is 6.6%
I think there is a lot is made of the negative rental revision. It is especially worrying in 2014 since 30% may be refinance at a lower rate compare to $10. That said, purchasing at $1.20 and below would provide a yield of at least 5.8%, a good yield in my opinion.
We think that we will see lower rental revision coming so I would be conservative and only buy near $1 or below.
Disclosure: Writer is at the time invested in CapitaCommercial Trust.
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