Some people buy a stock based on its price vs past 1 year, vs what they previously paid for, vs what the IPO price was, vs dividend yield, vs price-to-book ratio, etc. I have a preference for stocks that have sustainable income, and this can mean monopoly in industry, selling of goods or services that are daily necessities, companies the country cannot do without.
I had (long, long ago) divested stocks in Capital Mall Asia (2009) and Mapletree Commercial Trust (2013) shares that I got in the Initial Public Offering (IPO) after locking in capital gains of 25%, mainly because I feel that online shopping puts a strain on retail shops and it's impossible to continuously increase rents by 10%.
Commercial trust broadly includes office space, retail space and convention/exhibition space. Today my focus is on office space.
If I have only $5,000 to spend on commercial trust shares, and all the yields are attractive -- 6 to 7% -- which will you choose?
- CapitaLand Commercial Trust (CCT)
- Keppel REIT (K-REIT)
- Fraser Commercial Trust (FCT)
- OUE Commercial REIT (OUE C-REIT)
- Mapletree Commercial Trust (MCT)
- Suntec REIT
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| Comparison of key attributes among commercial trusts |
CapitaLand Commercial Trust (CCT) has the least debt, which means they have more room to grow or higher profit margins, depending on how you look at it. K-REIT's debt is too high for comfort and that is possibly a reason for its suppressed stock prices, given the uncertainty of an interest rate hike.
Profit Margin
Interestingly, Suntec REIT has the lowest profit margin based on my interpretation. I re-read the financial statements a few times just to make sure that I didn't read it wrongly, and I think I lifted the correct figures. As these massive landlords also invest in different properties, I must also commend K-REIT earns a profit that is 127% its revenue. i.e. it is able to generate sizable passive income, i.e. income from its investments from subsidiaries or joint ventures whose buildings are not directly managed by the company. CCT's overall profit margin is 91%, which I like a lot.
Price-to-book ratio and yield
All look attractive. MCT is the only exception trading above book value, which reflects investor confidence, but its portfolio is 70% retail and Vivocity is doing very well.
Occupancy
CCT is particularly attractive because of high occupancy and longer average leases, which means its income stream will likely be more stable than its competitors. While at a portfolio level, FCT's lease look healthy (3+ years), when you drill into the specifics, the Singapore leases are about 1.5 years, and the Australian leases are 10 years. Income from their Australia properties form a smaller percentage, hence FCT will probably have higher operating costs trying to renew and add tenancy contracts.
Overall
CCT looks the most attractive, but there is a risk of dilution of units. The dividend of 8.5 cents assumes that none of the convertible bonds (they call it CB 2017 in their financial report) will be converted to units. The total value is $175 M at a conversion price of $1.54, representing 3.9% of total units, which will mature on 12 Sep 2017. For as long as the market price remains below $1.54, it is unlikely the investor will convert to units. The dilution effect is about -10 cents in annual dividend per share.
The writer owns some units of Keppel REIT.
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