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.