Letter to Unitholders
Distributable income grew 7.4% year-onyear to S$288.9 million, riding on CCT's successful portfolio reconstitution, prudent capital management, premium Grade A assets and strong fundamentals.
Summary of Message
- Rejuvenation of portfolio with the acquisition of Asia Square Tower 21 and redevelopment of Golden Shoe Car Park positions CCT for long-term growth.
- Value creation from astute deployment of divestment proceeds into newer and higher yielding assets.
- CCT reported a DPU of 8.66 cents and a total return of 37.4%2 in FY 2017.
- Well positioned to ride on the recovery of the office rental market. Proactive business partner focused on the provision of innovative, future-ready office space.
2017 marked a new and exciting inflexion point for CCT. We divested One George Street (50.0% interest) and Wilkie Edge, and astutely redeployed the capital into higher yielding assets. We acquired Asia Square Tower 2 in the thriving Marina Bay financial district, expanding CCT's footprint in the Singapore Central Business District (CBD). We also embarked on the redevelopment of Golden Shoe Car Park which, when completed, will be an integrated landmark that will change the Singapore CBD skyline. These activities have greatly enhanced the resilience and quality of our portfolio and positioned CCT for long-term growth.
Growing from Strength to Strength
The Trust reported a higher distributable income of S$288.9 million. This was due to higher contributions from CapitaGreen and Raffles City Singapore, a top-up of S$4.4 million for the loss of distributable income arising from the divestments of One George Street (50.0% interest) and Wilkie Edge, as well as a tax-exempt income distribution of S$8.0 million. Year-on-year, gross revenue rose by 13.0% to S$337.5 million while net property income grew by 14.8% to S$265.5 million.
Due to the enlarged total units base following the rights issue to raise proceeds to partly fund the acquisition of Asia Square Tower 2, conversion of convertible bonds and issuance of Units for management fees in FY 2017, FY 2017 DPU of 8.66 cents was 4.6% lower than the actual FY 2016 DPU of 9.08 cents. However, when compared to the adjusted FY 2016 DPU of 8.25 cents3, FY 2017 DPU would be 5.0% higher. A CCT unitholder who had invested since end-December 2016 and subscribed to the rights units in 2017 would have seen a total return of 37.4%2 in FY 2017.
The acquisition of Asia Square Tower 2 and growth in asset valuations increased CCT's portfolio value by 25.4% yearon- year to S$10.4 billion as at 31 December 2017. This translates to an adjusted net asset value (NAV) per Unit of S$1.74. CCT is trading close to NAV based on Unit price of S$1.75 as at 26 February 2018.
CCT's consistently strong performance has been the culmination of years of hard work and prudent capital management by the CCT team. Our asset management strategies, prudent capital management, as well as timely divestments and acquisitions have created virtuous cycles of success in the portfolio. A case in point would be the redevelopment of Market Street Car Park into CapitaGreen through a joint venture and the subsequent acquisition of the remaining interest that CCT did not own in 2016. These actions have contributed significantly to the delivery of positive results in 2017 despite 10 successive quarters of rental decline in the Singapore office market, which bottomed out in 2Q 2017. We intend to build on these robust fundamentals to strengthen CCT for the next cycle of growth.
Balancing a Resilient Portfolio
The portfolio reconstitution strategy has always focused on growing the REIT organically and through acquisitions, divestments and developments. Asia Square Tower 2 is a quintessential example of the successful execution of this strategy. We acquired the premium Grade A property for S$2,094 million at an entry yield of 3.6% as compared with the lower exit yields of 3.2% and 3.4% achieved for One George Street (50.0% interest) and Wilkie Edge respectively.
Another example is Golden Shoe Car Park. It was sold for S$161.1 million to a joint venture between CCT (45.0% interest), CapitaLand (45.0% interest) and Mitsubishi Estate Co., Ltd. (10.0% interest) and is being redeveloped into a 51-storey, integrated premium Grade A property in Raffles Place scheduled for completion in 1H 2021. The estimated project development expenditure of S$1.8 billion is expected to generate a target yield-on-cost of about 5.0% p.a.
With an address at Market Street, the landmark integrated development will feature premium Grade A offices, 299 units of serviced residences, ancillary retail component, a food centre, landscaped spaces as well as technology-enabled private and public areas. Tenants can enjoy unique shared spaces for collaboration, meetings, wellness programmes and other activities. “Future of work” innovations and concepts will be incorporated to enable personalisation of workspace, seamless connectivity and other cuttingedge smart building features.
With no new supply of commercial space completing in Raffles Place until 2021, the integrated development at Market Street is expected to become a location of choice for companies seeking a prestigious address, modern facilities and dynamic environment that actively promotes connectivity and collaboration within its vertical community.
These concerted efforts to reconstitute the portfolio have enlarged the proportion of CCT's Grade A NLA from 62.7% in 2016 to 79.2% in 2017, and reinforced CCT's market leadership as the largest owner of commercial buildings with more than 20% of Singapore's CBD Grade A stock. Contribution from the top 10 tenants has correspondingly reduced from 36% to 35% in our already-diversified tenant mix, thereby further mitigating the risk of reliance on a small group of tenants or industry sector.
Proactive Capital Management
CCT maintains an aggregate leverage of between 30% and 40%, well below the regulatory limit of 45%. As at 31 December 2017, CCT's aggregate leverage was 37.3% with an average cost of debt at 2.6% p.a.
In March 2017, a US$2.0 billion Euro Medium-Term Note (EMTN) Programme for Raffles City Singapore (RCS) Trust was established. Pursuant to this, S$300.0 million 6-Year fixed rate notes were issued at an interest rate of 2.6% p.a. S$175.0 million of convertible bonds, which were due in 2017, were fully converted by the holders and cancelled entirely.
The acquisition of Asia Square Tower 2 was funded by a combination of S$1.1 billion in bank borrowings, S$340.1 million in divestment proceeds from One George Street (50.0% interest) and Wilkie Edge, and a fully underwritten and renounceable rights issue of approximately S$700 million. The rights issue received overwhelming support from investors. It was 1.8 times subscribed and demonstrated the market's confidence in Singapore as a commercial gateway city as well as investors' continued belief in CCT's capability to deliver long-term value.
Proceeds from the divestment of One George Street (50.0% interest), Golden Shoe Car Park and Wilkie Edge were also deployed to repay total borrowings of S$886.2 million, maturing between 2018 to 2020.
CCT also obtained S$600.0 million of term loan facilities, that was used to refinance part of the S$1.1 billion of bank borrowings drawn down for the acquisition of Asia Square Tower 2, extending the proforma weighted average maturities as at 31 December 2017 of the Trust's debt portfolio from 2.4 years to 2.9 years.
Maximising Portfolio Occupancy
As at end 2017, CCT had a committed portfolio occupancy rate of 97.3%. This is well above CBRE's CBD Core market average of 93.8% and a testament of our proactive leasing and tenant engagement initiatives.
During periods of challenging market conditions, CCT had initiated forward renewals which boosted tenant retention in 2017 to 78% compared to 62% in 2016. Out of the 15% of office leases due in 2018, about half of the leases have been renewed or committed. With market rents rising, we expect to narrow the gap between expiring and committed rents for leases due in 2018. However, there will be a flow through of negative rent reversions into 2018 from leases signed in 2017.
Preparing for Growth in the Next Lap
Externally, the geopolitical environment remains volatile. Evolving issues, such as the recent corporate tax-cut in the US, rise of terrorism and the rapid growth of emerging markets in ASEAN, will no doubt have an impact on Singapore's economy. We are closely monitoring these situations and are taking steps to mitigate operational and financial risks.
One of our fundamental strategies is to progressively upgrade our properties. The ongoing S$54.0 million rejuvenation of Raffles City Singapore will give a refreshed shopping experience for consumers and strengthen the mall as a favourite destination among tourists and locals.
On 9 February 2018, we held the groundbreaking of the redevelopment of Golden Shoe Car Park that was graced by guest of honour, Mr Lawrence Wong, Minister for National Development and Second Minister for Finance. The milestone event unveiled the work, live, play concepts of the redevelopment.
CCT has a call option to acquire the commercial component of the Golden Shoe Car Park redevelopment from its joint venture partners within five years upon receipt of Temporary Occupation Permit. This will provide CCT with another growth pipeline after 2021.
We are also evaluating opportunities to maximise organic growth in occupancy and rentals. Grade A Core CBD monthly rent rose by 3.3% quarter-on-quarter in 4Q 2017 and year-on-year to S$9.40 psf. According to CBRE, market confidence has returned, evidenced by higher rental expectations of landlords of other prime-grade buildings.
While we can still expect some negative reversions for the limited number of leases due in 2018, expectations of rising rents will lift some pressure off upcoming renewals in CCT's portfolio that have expiring rents that are above market.
As a progressive partner for commercial space, CCT will monitor office and technology trends closely and testbed promising innovations in our properties with the aim to modernise assets, create conducive spaces and foster community collaboration. We launched a pilot project at Twenty Anson offering fully furnished, plug-and-work office suites, meeting facilities and collaborative spaces.
Engaging Communities and Sustaining Operations
We have organised a series of events throughout the year to engage stakeholders as well as to create a vibrant tenant community.
CCT Eco Race 2017 is a workplace community initiative with partners Building and Construction Authority, Health Promotion Board, National Environment Agency and Fitness First that attracted some 380 participants.
We also organised an inaugural mini Sports Day to engage in meaningful interaction with students from the Rainbow Centre as part of Gifts of Joy 2017. More than 150 volunteers from CapitaLand and its tenants came together to distribute 466 gifts. At the biannual Tenant Treats, we distributed Gula Melaka cakes purchased from our tenant, Joe & Dough, as well as cookies made by social enterprises.
In partnership with CapitaLand Hope Foundation, a total of S$46,000 was contributed to Rainbow Centre Singapore, resulting from participation and pledges from tenants, partners and CapitaLand employees.
Awards and Accolades
Industry awards have always been a welcomed affirmation of our efforts as well as a source of motivation to strive further. In 2017, CCT was recognised for the following achievements:
- Gold for Best Investor Relations and Bronze for Best Annual Report under the REITS and Business Trusts category by Singapore Corporate Awards 2017;
- Second in Singapore for the Most Honoured Companies under Developed Markets (Small and Mid cap) by the Institutional Investor 2017;
- Runner-up at Singapore Corporate Governance Award 2017 under REITs and Business Trusts category at the 18th Investors' Choice Awards 2017 by Securities Investors Association (Singapore);
- Second in the new REIT and Business Trust category of the annual Singapore Governance and Transparency Index 2017.
CCT's success is the result of the hard work and commitment of a dedicated team, foremost of which is Lynette Leong Chin Yee. Her tenacity and leadership over the last 10 years as CEO of the Manager has built a strong foundation on which we will build on to take CCT into the next lap.
During the year, Dato' Mohammed Hussein and Mr Goh Kian Hwee, Non-Executive Independent Directors, Mr Wen Khai Meng and Mr Ronald Tay Boon Hwee, Non-Executive Non-Independent Directors, and Ms Lynette Leong Chin Yee, Executive Non-Independent Director and CEO, relinquished their respective roles on the board of the Manager. We would like to thank them for their invaluable contributions over the years. We would also like to welcome on board Ms Jessica Tan Soon Neo, Mrs Quek Bin Hwee and Mr Ng Wai King as Non-Executive Independent Directors, and Mr Andrew Geoffrey Lim Cho Pin and Mr Lee Chee Koon as Non-Executive Non-Independent Directors.
Special thanks also to the CCT team whose dedication has allowed the Trust to stay the course and deliver a strong performance for CCT in 2017. Most of all, our deepest gratitude goes to you, our Unitholders for your unwavering support and trust. Your confidence in us encourages us to constantly strive to deliver long term growth and build a stronger CCT.
Soo Kok Leng
Kevin Chee Tien Jin
Chief Executive Officer
26 February 2018
- Excludes the hotel premises which is owned by an unrelated third party.
- Total Return assuming subscription to rights issue: calculated based on capital appreciation of rights units and existing Units held from 31 December 2016 to 31 December 2017 plus FY 2017 DPU over the weighted average of closing price as of 31 December 2016 and rights issue price.
- Adjusted DPU for FY 2016 of 8.25 cents comprised actual 1H 2016 DPU of 4.39 cents announced on 26 July 2016 and adjusted 2H 2016 DPU of 3.86 cents, adjusted for the enlarged 3,608.1 million Units including those issued for equity raised, conversion of convertible bonds and management fees in FY 2017.