CapitaCommercial Trust VS Keppel REIT

Prime office rents in Singapore are expected to extend gains this year as the supply of new properties coming into the market is limited. According to Knight Frank, about 1.15m sq ft of new office space will come on stream this year, rising to 1.6m sq ft in 2016 and 4.7m in 2017. As such, office REITs are expected to outperform this year and the next.

The two most prominent REITs offering Grade A properties are CapitaCommercial Trust (CCT) and Keppel REIT (KREIT) , so I thought, why not make a comparison between CCT and KREIT to see which is a better investment.

We'll compare these two REITs based on a few criteria:

1. Properties in portfolio.

CCT: Mostly in Singapore
1.      Capital Tower
2.      Six Battery Road
3.      One George Street
4.      Raffles City Singapore (60% interest)
5.      Twenty Anson
6.      HSBC Building
7.      Wilkie Edge
8.      Bugis Village
9.      Golden Shoe Carpark
10.  CapitaGreen (40% interest) – planning to acquire the remaining 60% in the next few years.
11. 30% stake in Quill Capita Trust, a commercial REIT listed on Bursa Malaysia Securities Bhd
12. 7.4% stake in Malaysia Commercial Development Fund


Total investment in Malaysia is S$65m, 0.9% of its total asset size.

KREIT:

Singapore
1. 99.9% interest in Ocean Financial Centre

2. One third interest in Marina Bay Financial Centre Phase One (Tower 1, 2 & 3)

3. One-third interest in One Raffles Quay

4. 92.8% interest in Prudential Tower

5. Bugis Junction Towers

Australia

1. 50% interest in 8 Chifley Square and 77 King Street Officer Tower in Sydney

2. 50 interest in 8 Exhibition Street in Melbourne

3. 50% interest in 275 George Street in Brisbane

4. 50% interest in new office tower to be built on Old Treasury building site in Perth

I do not like KREIT's exposure to Australian properties despite the four properties taking up only 12% of its total portfolio value. Australia's economy is not in a good shape right now due to the slump in demand of commodities, which might affect the demand for office space. However, I like KREIT's crown jewel, MBFC, which will be able to fetch a relatively higher rent compared to other properties. Meanwhile CCT's exposure to Malaysia is negligible. 

2. Debt

CCT: Gearing ratio of 29.3%, Interest cover ratio 5.5x, with average debt maturity at 3.4 years.

Average cost of debt 2.6%, 20% floating rate, 80% fixed rate.

CCT even included a sensitivity analysis in their report:

KREIT: Gearing 43.3%, Interest cover ratio 5x, with average debt maturity at 3.6 years.

Average cost of debt 2.23%, 35% floating rate, 65% fixed rate.

Looking at their debt profiles, I would definitely prefer CCT. Despite paying a higher interest rate, it has a more conservative debt profile. KREIT's gearing ratio is too high for my liking and with the imminent interest rate hike by the Fed, KREIT will likely need to spend more of its income servicing its debt, which will impact its DPU. I like CCT's low gearing ratio, higher interest coverage and the higher proportion of debt hedged at fixed rates.

3. Dividends

Share price as of 23/2/15

Looking at the dividends, KREIT is a better choice with a higher 5-year CAGR of 2.63% and a higher dividend yield. 

4. Lease Profile

CCT: 

Top ten blue chip tenants accounted for 43% of CCT’s monthly gross rental income, top three tenants: RC Hotels, GIC and JP Morgan

52% of office lease will expire in the next three years,

Overall occupancy rate = 98.7%,

Weighted average lease term (WALE) to expiry for the top ten tenants is 16.8 years, top ten tenants excluding RC Hotels is 3.1 years

KREIT: 

Total 10 tenants accounted for 42% of portfolio, top three tenants: ANZ, DBS and StanChart

40% of office lease will expire in the next three years.

Overall occupancy rate = 99.3%

WALE for ten 10 tenants is 9 years

KREIT has a higher net property income CAGR compared to CCT as it has been aggressively expanding over the past few years, acquiring interests in MBFC from Keppel Land. Meanwhile CCT hasn't been actively acquiring properties but have been upgrading and renovating their existing properties instead.

Their lease profile is relatively similar. CCT's top 10 tenants WALE is significantly higher due to the longer leasing period of RC Hotels, which manages Swissotel located at Raffles City. Hence, CCT's portfolio has a little mix of commercial and hospitality properties, other than just office properties. I think it is unlikely that RC Hotels would run into any financial difficulties given that it has been in operation for 29 years and the hospitality industry in Singapore is in relatively good shape.

5. Net Asset Value

CCT: $1.75 vs share price of $1.78, means we will be paying 1.7% premium to its NAV

KREIT: $1.41 vs share price of $1.23, means we will be buying the share at a 12.8% discount to its NAV.

In conclusion, I would think CCT is a better BUY as despite the premium to NAV.  Despite CCT having a lower dividend and net property income CAGR compared to KREIT (due to KREIT buying assets over the years), it is a conservative and well managed office REIT. I like that it has a lower gearing ratio and a larger proportion of its debt is hedged in fixed interest rates, meaning that its earnings and dividends would be resilient when the Fed decides to increase interest rates later this year. Hence, it is worth paying a slight premium of 1.7% over its NAV. Better still, buy more when on dips!