Letter to Unitholders
We are pleased to generate a positive set of results for CCT in 2015 notwithstanding the year of economic challenges. Driven by our proactive management of CCT's resilient portfolio and prudent management of capital, the Trust's FY 2015 distribution per unit (DPU) of 8.62 cents rose 1.9% year-on-year. Unitholders can be assured that we remain proactive and yet disciplined in our approach towards acquisition and development while we optimise the potential of CCT's assets and create value for the Trust.
The year in review was one of resilience for CapitaLand Commercial Trust (CCT, or the Trust). Anchored on solid fundamentals, CCT is well positioned to weather challenges in the Singapore office market. We have achieved stable growth buoyed by well-located quality assets, effective portfolio and asset management, robust balance sheet as well as diversified funding streams.
By adopting a forward-looking and disciplined approach with our portfolio reconstitution strategy, we have refreshed the portfolio so that all the properties stay relevant to meet the demands of tenants. Asset enhancement initiatives to upgrade our older Grade A office buildings have been completed over the years. We have successfully redeveloped Market Street Car Park into CapitaGreen, and CCT will progressively reap income contribution from its 40.0% interest in this new and superior Grade A office building from 2016 onwards.
Meanwhile, our track record of prudent capital management has translated into low aggregate leverage of 29.5% for CCT – well below the new regulatory limit of 45.0% across Singapore REITs – which not only protects the Trust's balance sheet but also provides the financial flexibility to capture opportunities for further growth.
Delivering Better Performance
Notwithstanding the challenging economic environment, we continued to grow the Trust's distributable income by 2.1% in FY 2015 compared to a year ago to reach S$254.5 million on the back of improved net property income from our wholly owned properties and 60.0% stake in Raffles City Singapore.
Buoyed by the stronger performance, FY 2015 DPU of 8.62 cents grew in tandem by 1.9% year-on-year. The resulting DPU yield was 6.4% based on CCT's closing price per Unit of S$1.35 as at 31 December 2015. Unitholders who invested in CCT since our listing on 11 May 2004, in particular, would have benefitted from distributions and capital appreciation that generated a total return of 203.6%1.
At the close of the financial year, our investment properties were assessed by independent valuers at an aggregate of S$7.5 billion, which represents a yearon- year increase of 1.6%. Meanwhile, the Trust's total deposited properties, which included the proportionate interests in its joint venture properties, recorded S$7,721.5 million as at end 2015. After accounting for distributable income payable to Unitholders, net asset value per Unit rose 1.2% to S$1.73 from S$1.71 the year before.
Enhancing a Quality Portfolio
CCT recognises the importance of engaging in proactive portfolio management. Driven by our portfolio reconstitution strategy, we strive to enhance and unlock property value with the aim of maximising the full potential of our assets. Our first development project, CapitaGreen secured a committed occupancy rate of 91.3% as at 31 December 2015. CapitaGreen started generating positive net property income in the second half of 2015. However, after the payment of interest expenses for CapitaGreen's borrowings, there was no contribution to distributable income in FY 2015. In FY 2016, CCT expects to progressively receive distributable income contribution from its 40.0% interest in CapitaGreen.
Capital Tower's AEI which started in 4Q 2013 with a target return on investment (ROI) of 7.8% was completed in December 2015. Costing S$35.0 million instead of the budgeted S$40.0 million, the AEI realised a ROI of 8.2%. With the replacement of chillers at Capital Tower as part of the AEI, the reduction in energy consumption translates to average savings of approximately S$676,000 per year.
Proactive Leasing Strategy and Strong Tenant Retention
Our property portfolio maintained an occupancy rate that is consistently above market levels. As at 31 December 2015, the Trust's portfolio occupancy rate of 97.1% was higher than the CBD Core market occupancy level of 95.1% and also above its 2014's portfolio occupancy of 96.8%.
In order to mitigate leasing challenges in 2016 and 2017 when an above-normal new office supply is expected to be completed, we have been reducing the percentage of leases due for renewal in these years. This resulted from earlier years of planning and lease negotiations to have lease expiries not occur on these years. Furthermore, we stepped up our efforts to retain tenants by engaging them ahead of their lease expiries and the achievement was evident from our tenant retention rate of 83% in 2015. Consequently, only 15% of CCT's total occupied office portfolio net lettable area is expiring in 2016, of which one-third has been renewed and we will continue to advance our proactive approach for the remaining 10%.
The Trust generated positive rent reversions for the year, fuelled by our success in securing higher rents than the expiring rents for leases due in 2015. Year-on-year, CCT reported a 3.4% rise in the office portfolio average monthly gross rent per square foot to S$8.90 from S$8.61. While we expect to continue to face headwinds in the Singapore office market, we believe that CCT is well positioned to weather the storm and we will persist to maintain its high and above-market occupancy rate.
Prudent Capital Management
The Trust continued to keep a robust balance sheet with a low aggregate leverage level of 29.5%. Assuming an aggregate leverage level of 40%, CCT has debt headroom of S$1.3 billion and the financial flexibility to execute potential growth opportunities.
We actively diversified CCT's sources of funding and extended debt maturities while growing the proportion of unsecured debt over time. About 84% of CCT's gross borrowings are on fixed interest rates which limit exposure to interest rate fluctuations and provide certainty of the quantum of interest expense. Average cost of debt was 2.5% per annum as at 31 December 2015, a slight increase from 2.3% at end 2014.
In FY 2015, we tapped on opportunities to issue two medium term notes (MTNs) at attractive low interest rates on long-dated maturity. The first MTN issue was an eight-year Japanese yen-denominated floating rate notes due February 2023, which was hedged to S$100.0 million with a fixed interest rate of 3.05% per annum. On 13 August 2015, we issued a six-year S$100.0 million medium term notes due August 2021 at a fixed interest rate of 2.96% per annum. In addition, bank borrowings of CapitaGreen were refinanced with a new five-year bank credit facility of S$900.0 million due in 2020.
Opportunities for Growth
As a proactive REIT Manager, we constantly seek appropriate accretive opportunities to grow the Trust. We also continue to adopt a disciplined and sustainable approach towards acquisition of properties which have strategic fit with our existing portfolio.
Within the existing portfolio, we have the call option to acquire the remaining 60.0% interest of CapitaGreen from our joint venture partners, CapitaLand and Mitsubishi Estate Asia at any time from now until December 2017.
With the completion of CapitaGreen, the regulatory development capacity has been reset. This allows CCT to undertake new development projects up to 10% of its deposited properties which totalled S$772.1 million as at 31 December 2015.
Engagement and Commitment to Excellence
During the year, we successfully engaged our tenants through various activities such as the distribution of bi-annual treats, including a special SG50 "kachang puteh", which means "roasted nuts and beans" as well as our signature charity event, Gifts of Joy, which brought joy to 578 beneficiaries as we fulfilled their wishes. The Gifts of Joy was supported by The Boys' Brigade and the CapitaLand Hope Foundation. In addition, we awarded our tenants with specially commissioned, artistic bowls to commemorate each year of their respective lease anniversaries.
The official opening of CapitaGreen on 9 September 2015 was a milestone in our sustainability journey. It is a vote of confidence for CapitaLand's and CCT's efforts to continually improve and challenge new frontiers in sustainability and value creation. The Council on Tall Buildings and Urban Habitats (CTBUH) named CapitaGreen the "Best Tall Building in Asia and Australasia" in June, while MIPIM Asia endorsed CapitaGreen with a Bronze award for Best Office and Business Development in December 2015.
In our drive for excellence, we sought to propel innovation through technology. Building Information Modelling, which was used during the construction of CapitaGreen, ensured a timely delivery of a quality product. This also enabled CapitaGreen to clinch the 2015 Building & Construction Authority Building Information Modelling (BIM) Platinum Award – Project Category in October 2015.
For a delightful customer experience during office unit handover, we introduced a hassle-free and paperless, proprietary process known as Digital Online Tenancy System or DOTS in 2015. It ensures clear communication with new tenants and improves the efficiency and productivity of our team. We will continue to enhance customer experience and engagement as part of our overall plan to attract and retain tenants within our portfolio.
Accolades and Appreciation
Moody's Investors Service upgraded CCT's issuer rating to "A3" from "Baa1" with stable outlook on 12 February 2015. CCT's strong market position and operating performance as well as management track record, among other positive factors, contributed to the upgrade in credit rating.
CCT was ranked among the top five Singapore largecap companies for both Best Corporate Governance and Best Investor Relations in FinanceAsia's 15th annual "Asia's Best Managed Companies" poll of 250 global portfolio managers and buy-side analysts on 20 March 2015.
We wish to extend our sincerest thanks to our valued tenants, business partners and Unitholders for their unwavering confidence and support. We would also like to express our deepest appreciation to our Directors and employees for their dedicated service and tireless efforts towards the goal of maximising the value of CCT.
Soo Kok Leng
Lynette Leong Chin Yee
Chief Executive Officer
23 February 2016
- Sum of distribution and capital appreciation from CCT's opening unit price on 11 May 2004 to closing unit price on 31 December 2015, taking into account reinvested distribution and the effects of the renounceable rights issue in 2009.