Tuesday, August 18, 2015

Recent Action - CapitaCommercial Trust

I recently added 8,000 shares of CapitaCommercial Trust (CCT) at a price of $1.33 into the portfolio.

This is on the back of a great recent fall from the high of $1.94 in recent times to the current low at $1.33. I was looking through closely and waiting for a comfortable price to get in and I thought the current share price offered reasonably good long term returns with a price to book value at 0.77 and a dividend yield at probably around 6.5%.

The office sector is undergoing some corrections right now with massive supply glut going to come in 2016. They are also more cyclical to the economy than any other reits we can find out there. This is probably the reason why buying an office reits require investors to consider margin of safety. Investors who bought near the peak would be waiting to lick their wounds for a prolong period of time.

The company has convertible bonds due in Sep 2017 at a price of $1.54 for it to be in-the-money. If converted, the existing gearing will go even lower than the current. Judging by the looks of it, it appears that the company is able to obtain the cheap financing loan from this one at 2.5%.

I also like the fact that the company is retaining a portion of its distributable income in their retained earnings, which could be distributed if they are suffering any setback to their distributional income in the future.

Investors though should also take note that most net capitalization for office property reits in Singapore stands at the lower of 4%, while the dividends offered are in the north of 6%. This means that there are some form of income support stabilization with regards to the property that are pushing its yield higher than what it looks like. For example, the income support for Twenty Anson will expire in Sep 2015, currently yielding a net capitalization of 5.5%, and when it expires, it will go back to the 4% net yield. If you don't like this type of thing, go instead for FCOT, where most of the capitalization rate is much higher for overseas properties.

There's something about the Grade A premium office properties that Capcom owns that makes them special. Because of that, investors usually have to pay a little bit of premium when considering these Reits. With the rest of the stake in CapitaGreen looking to be acquired sooner or later, we can ensure that the company's assets and WALE remains intact with longer lease.


  1. Hi B,

    I'm also keeping a close watch on CCT, but I didn't notice that we are around the Aug 13 lows! I think it's valuations are very attractive, mmm sexy. I'm just concerned about the fallout effect from the broader market. Are you? I plan to continue nibbling this counter.

    I just have to remind myself not to "show hand" so quickly. The GFC smashed SREITs down to average P/Bs of 0.40 and yields of almost 12%!

    1. Hi GMGH

      Valuations are indeed starting to appear attractive at last, but I'll doubt this will be the final straw. I'm planning to add more into the counter should it drop further and if I like it at this price, I must have loved it at a lower price, everything else equal.

  2. Can see u just added a small position relative to ur portfolio size.

    For me, i have resisted the itchy urge to add this counter for so long. I dont mind waiting for the last drop, support level of 1.3 is critiical, if effectively break down, price can look directly to 1.1. Or if supported, it can go rangebound.

    1. Hi Richard

      LP from Bully The Bear said the same thing to me about the support at 1.3 and 1.1. It does look like it will break now so the next support should be where we should be looking at.

      Thanks for sharing.

    2. Thank you for sharing with us.
      Last night Fed miniutes was interpreted as less likely to raise int rate in sep. if so, market may have some relief, or not, as Fed may do it in Dec. China make it more complicated by devaluing yuan. So much uncertainty now. I rather see fed raise the rate in sep, and market can have a clearer patch.

  3. I have this counter in my portfolio for several years and this is one of those I like. The dividend has been on up-trend for past few years.

    I am watching it closely too.

    1. Hi Sanye

      I used to own other Reits in the past such as FCT and FCOT and held them for very long until divested recently. More value seems to appear in the reits sector now, so am watching it closely too.

    2. Hi B,

      Mind to share what are the other REITs you are currently focusing on? :-)

    3. This comment has been removed by the author.

  4. B,

    I need to check with u something. Actually I have some problem understanding their statements.

    Net gain in investment in fair value of property is non-cash item, right?

    If so, they are distributing almost everything, how did u get the info about them retaining earnings?

    Asking in Ernest, I not accounting trained

    1. Hi SI

      Sorry for my delay.

      Yes, the net gain in fair value are non-cash items, so they would not affect the distribution income, but only the nav if any.

      In their financial statements, I saw on point note 14 that they are retaining a piece of their earnings. I'm not entirely sure what is that for, though I am assuming it is for distribution later in the stage.

      Please let me know if my understanding is incorrect.

      You wrote a very beautiful article on CCT.

  5. B, would you mind doing a post on what net capitalization means? Having trouble understanding why distribution yield > capitalization rate indicates that there is income support being provided.

    1. Hi J

      It simply means that since the property is only able to yield a capitalization rental rate of 4%, to be able to dish out 7% to investors mean that the difference of the 3% would need to come from somewhere, usually the case for income support from parents to stabilize the assets and provide attractive returns to investors.

    2. Hi,

      Correct me if I'm wrong..

      NPi yield ( capitalisation rate) is based on property income / NAV .

      Dividend yield is based on dividends/ market price.

      Dividend yield > npi Yield may just mean market price has dropped like in gfc days, doesn't indicate income support.

      unless the financial statement says there is income support, I don't think we can infer through dividend yield > npi yield.

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  7. Hi

    Noticed you have sold away CCT at 1.53. Not keeping to collect dividend. I just nibble some at 1.490. Hope its not high price to go in. What is your view of keeping these reits. Thanks