Letter to Unitholders
CCT's strong performance is a result of the Manager's proactive leasing strategy as well as timely acquisition of the remaining 60.0% interest in CapitaGreen not already owned by CCT.
We are pleased that CCT delivered distribution per Unit (DPU) of 9.08 cents for FY 2016, an increase of 5.3% year-on-year (YoY). The exceptional growth was achieved despite headwinds in the macroeconomic environment and the above-average supply in Singapore's Grade A office market. CCT's strong performance is a result of the Manager's proactive leasing strategy as well as timely acquisition of the remaining 60.0% interest in CapitaGreen not already owned by CCT. CCT purchased 60.0% of CapitaGreen at a property value of S$960.2 million or S$2,276 psf. The acquisition is a testament to the successful execution of our portfolio reconstitution strategy resulting in an enhancement of asset quality and improvement in financial performance of CCT's portfolio. Unitholders of CCT would have enjoyed a total return of 16.4%1 in FY 2016, including the FY 2016 DPU of 9.08 cents.
- Based on closing price of S$1.35 on 31 December 2015 and S$1.48 on 31 December 2016.
Generating Robust Performance
Amidst a challenging environment, CCT generated gross revenue of S$298.6 million in FY 2016, representing a 9.3% increase YoY. The Trust's net property income also rose 8.7% YoY to S$231.3 million. Distributable income grew 5.7% YoY to S$269.0 million, largely due to increased distributable income received from MSO Trust and RCS Trust that hold CapitaGreen and Raffles City Singapore respectively. DPU increased 5.3% YoY to 9.08 cents, which translated to a DPU yield of 6.1% based on CCT's closing price per unit of S$1.48 as at 31 December 2016.
The Trust's investment properties, including its 60.0% interest in Raffles City Singapore, were assessed by independent valuers to be worth S$8.5 billion as at 31 December 2016. This represented a 13.6% YoY rise in portfolio value mainly due to the increased stake in MSO Trust. Net asset value per unit remained stable at S$1.73 as at end December 2016.
Proactive Capital Management
After the acquisition of 60.0% interest in MSO Trust, CCT's aggregate leverage rose to 37.8%, but remains comfortably below the regulatory limit of 45.0%. CCT maintained a strong balance sheet with our proactive capital management and ability to tap on diversified sources of funding to extend the debt maturity profile. The Trust's average cost of debt for FY 2016 was 2.6% per annum. Approximately 80% of CCT's gross borrowings were on fixed interest rates as at 31 December 2016, offering certainty of interest expense. CCT has a credit rating of A- with stable outlook by Standard & Poor's.
During the year, CCT issued medium term notes (MTN) of HK$585.0 million and S$75.0 million under its S$2 billion multi-currency MTN programme. The HK$ MTN due in 2021, was fully hedged to S$102.5 million at a coupon rate of 2.70% per annum. The S$ MTN due in 2022 was issued at a coupon rate of 2.77% per annum. For FY 2017, CCT has S$175.0 million convertible bonds due 12 September 2017 and the conversion price will be S$1.4265 per unit after DPU payment on 27 February 2017. CCT has sufficient bank facilities to refinance the convertible bonds in the event they are not converted.
RCS Trust's borrowings of S$1.1 billion were refinanced in June 2016 with unsecured bank facilities of varying maturities at a lower weighted-average interest rate. This contributed to the higher distributable income as abovementioned by RCS Trust in FY 2016.
Enhancing Portfolio Quality
Our portfolio reconstitution strategy focuses on the proactive management of the Trust's assets with a view to rejuvenating the portfolio as well as creating and enhancing its value. The redevelopment of Market Street Car Park (MSCP) into CapitaGreen is an example of the successful execution of the strategy; not only does this additional Grade A office asset raise the quality of CCT's portfolio to meet the modern demands of tenants, it strengthens CCT's position as Singapore's largest office landlord in the Central Business District (CBD) and underpins positive returns for Unitholders for the long term.
With a foresight to possess a 100.0% ownership of CapitaGreen, we had negotiated a call option – that is, right to buy – for the 60.0% stake owned by our partners as part of the redevelopment joint venture. We exercised the call option in August 2016 which resulted in CCT owning 100.0% of CapitaGreen and fully benefiting from the asset's continued value contribution.
At approximately S$1.6 billion today, CapitaGreen's transformed value is substantially greater than the S$53.3 million2 value of MSCP in 2011 prior to the redevelopment. While MSCP contributed about 1% to CCT's net property income in 2011, CapitaGreen contributed about 11% in FY 2016. CCT's Grade A office footprint based on net lettable area (NLA) also increased from 2.0 million square feet as at 31 December 2015 to 2.4 million square feet as at 31 December 2016. These truly exemplify our focus on driving value creation.
To enhance the competitiveness of our assets, CCT together with CapitaLand Mall Trust embarked on S$54.0-million rejuvenation works at Raffles City Shopping Centre. Scheduled for completion in the first quarter of 2018, the works are designed to improve shoppers' experience and reinforce the mall as one of Singapore's foremost shopping destinations.
- Average valuation of Market Street Car Park as at May 2011 by CB Richard Ellis (Pte) Ltd and Jones Lang LaSalle Property Consultants Pte Ltd based on residual value of the land for the commercial development excluding a differential premium.
Delivering Resilience Despite Uncertainty
Despite the 20.2% decline in Grade A office market rent since 1Q 2015, CCT's monthly average office portfolio rent had risen for 17 consecutive quarters from 2Q 2012 due to our proactive asset management and leasing efforts. While CCT signed above-market rents for office leases committed in 4Q 2016, the signed rents were lower than the respective properties' expiring rents. As a result, CCT's 4Q 2016 average monthly office portfolio rent eased by 0.2% quarter-on-quarter to S$9.20 psf. Nevertheless, since inception, CCT has consistently maintained occupancy rate above 90%. The Trust's portfolio committed occupancy rate was 97.1% as at 31 December 2016, exceeding the market occupancy rate of 95.8%.
Our proactive leasing strategy enabled us to deliver a high portfolio committed occupancy rate of 97.1% despite a lower tenant retention rate of 62.0% in 2016. We have effected a well-spread lease expiry profile and minimised leasing risks in 2017. Out of 13.0% of the Trust's total office portfolio by monthly gross rental income expiring in 2017, about half of the leases have been renewed or committed through active engagement and forward renewals.
Singapore Office Market
The Singapore office market is expected to remain challenging in 2017. Monthly office market rent declined 12.5% YoY to S$9.10 psf as at 31 December 2016. In 2017, the market may experience continuation of office tenants' flight to quality, putting pressure on rents. While negative rent reversions are expected in CCT's portfolio, its DPU for FY 2017 is expected to be stable barring unforeseen circumstances, and supported by the income contribution from CCT's 100.0% ownership in CapitaGreen. Despite the challenging near-term market conditions, Singapore will remain an attractive office location for the long term especially among multinational corporations.
Potential Growth Catalyst
With a view to replicating the success of CapitaGreen to spark a new growth catalyst for the Trust, we have started plans for the proposed redevelopment of Golden Shoe Car Park which will potentially further reinforce CCT's foothold and position as the largest office landlord in Singapore's CBD. In October 2016, we announced the proposed redevelopment that could create approximately one million square feet of commercial gross floor area in a 280-metre tall office tower that would rival the tallest buildings in the CBD. We are evaluating the financial feasibility of the redevelopment while seeking approvals from the government authorities. If the decision for the redevelopment were to proceed, we will determine an appropriate funding structure which would include a joint venture and sale of an existing asset.
The new project targets to catch the next wave of the office market upcycle as well as incorporate elements to embrace "the future of work" – that is, the evolution of work trends arising from globalisation, mobility, technology and demographic changes.
Ongoing Engagement with Tenant Community
Aimed at creating a vibrant office community, we engaged our tenants through delightful experiential programmes. The initiatives vary from hosting breakfast talks and networking sessions for the C-suites of our tenants, to distributing biannual complimentary treats for our tenant-community. Our signature events – CCT Eco Race and Gifts of Joy – witnessed increased tenant participation; CCT Eco Race attracted over 370 participants and Gifts of Joy fulfilled 673 wishes for the beneficiaries of various charities.
This year, we also incorporated a philanthropic approach in the tenant community engagements, in partnership with CapitaLand Hope Foundation (CHF), to raise funds for The Straits Times School Pocket Money Fund (STSPMF). Participation and contributions from CHF, tenants and CapitaLand staff garnered a total of about S$48,300 for STSPMF in 2016.
To deliver service excellence and build a dynamic work community among our tenants, we rode on the rise of the sharing economy and technology by implementing a pilot, online multi-service offering that provides our tenants with convenient access to goods and services specially curated for their needs. By aggregating the demand of our office community, we are able to offer the goods and services at special price discounts.
As a progressive landlord, we keep abreast of workspace trends. One emerging trend is coworking which has been evolving and gaining popularity in Singapore. CapitaLand has formed a joint venture with Collective Works to establish a coworking space at Capital Tower. We are monitoring how coworking contributes to CCT's office tenant-ecosystem through the addition of diversity and variety to the tenant mix, being complementary to our typical office space and provision of a pipeline of potential tenants should the companies in the coworking space grow in size.
Awards and Acknowledgements
CCT achieved the following recognitions in 2016:
- Inclusion in the FTSE Straits Times Index since 21 March 2016;
- Inclusion in the FTSE4Good ASEAN 5 Index launched on 12 April 2016;
- Inclusion in the SGX Sustainability Leaders Index launched on 30 May 2016. This is a free-float market capitalisation-weighted index that measures the performance of 24 best-inclass sustainability leaders listed in Singapore and the flagship index of the SGX Sustainability Indices;
- Recognised for Most Committed to Corporate Governance in FinanceAsia 16th annual poll on "Asia's Best Managed Companies" by 129 global portfolio managers and buy-side analysts; and
- Runner-up for the Most Transparent Company 2016 category under REITs and Business Trusts at the 17th Investors' Choice Awards 2016 by Singapore Investment Association of Singapore (SIAS).
On behalf of the Board, we convey our deepest appreciation to our directors Mr Chong Lit Cheong and Mr Arthur Lang, who have stepped down from the Board, for their invaluable contributions to the Trust. At the same time, we wish to thank our valued tenants, business partners and Unitholders for their continual support, as well as to extend our appreciation to our Directors and employees for their strong commitment to creating sustainable growth for CCT.
Soo Kok Leng
Lynette Leong Chin Yee
Chief Executive Officer
27 February 2017