CapitaLand Commercial Trust (CCT SP) - UOB Kay Hian 2016-10-20: 3Q16 CapitaGreen Bears Fruit

CapitaLand Commercial Trust (CCT SP) - UOB Kay Hian 2016-10-20: 3Q16 CapitaGreen Bears Fruit CAPITALAND COMMERCIAL TRUST C61U.SI

CapitaLand Commercial Trust (CCT SP) - 3Q16 CapitaGreen Bears Fruit

  • CCT posted a healthy set of results bolstered by full contribution from CapitaGreen.
  • Against this backdrop, plans to redevelop Golden Shoe were also announced (intended commencement in 2H17 and completion in 2021). 
  • Overall positive rental reversions were observed in 3Q16, with a higher average portfolio rent of S$9.22 psf. Proactive forward renewals and CapitaGreen’s contributions should ease rental pressure on leases due in 2017-18. 
  • Maintain BUY with a lower target price of S$1.88.


RESULTS


Results in line with expectation. 

  • CapitaLand Commercial Trust (CCT) posted a 3Q16 DPU of 2.30 S cents +7.5% yoy. 3Q16 gross revenue and NPI were up 8.9% and 8.3% yoy respectively, on the back of full contribution from CapitaGreen (completion of remaining 60% stake acquisition in Aug). The results came in within our expectation, with 9M16 DPU representing 73.3% of our full-year forecast.

Golden Shoe Carpark redevelopment. 

  • CCT announced the submission of plans to redevelop Golden Shoe Car Park into an office building with potential GFA of 1m sf.
  • Should things go according to plan, CCT will commence redevelopment in 2H17 with target completion in 2021. The REIT manager has informed tenants that they have until 31 Jul 17 to vacate the premises.
  • S$54m asset enhancement of Raffles City Shopping Centre. The refurbishment is expected to take place from 3Q16-1Q18.


STOCK IMPACT


Overall positive rental reversions registered

  • Overall positive rental reversions registered, with committed rents at Six Battery Road up to 16.9% above average expired rentals. One George Street saw up to 14.1% upside from average expired rents. 
  • One George Street and Six Battery Road achieved monthly rents in the range of S$8.00-S$9.90 psf and S$10.75-S$13.00 psf respectively.

Average portfolio rent grew 2.6% qoq to S$9.22 psf in 3Q16.

  • Bulk of office leases expiring in 2016 forward-renewed, with about 1% by NLA due. This leaves a respective 6% and 13% of office leases by NLA due in 2017 and 2018 respectively with average passing rents of S$10.73 psf and S$11.10 psf. 
  • While expiring rents are above that of CBRE spot Grade-A office rents of S$9.30 psf, we believe that the acquisition of CapitaGreen, along with about S$17m (0.6 S cents) in retained income from MQREIT (17.7% stake) could tide CCT through the likelihood of negative reversions next year. We thus factor in a 5% drop in rent for 2017.

Positive leasing newsflow, coupled with positive office absorption. 

  • Singapore’s largest office projects Marina One (1.9m sf) and Guoco Tower (0.89m sf) have been gaining momentum on the leasing front. Pre-leasing at Marina One stands at about 35.3% (including Julius Baer’s reported take-up of 100,000 sf), while Guoco Tower is now 80% committed (tenants: Agoda, Danone and Straits Trading). 
  • According to industry consultant CBRE, the healthy take-up led to positive island wide take-up of 0.82m sf in office space for 3Q16, reversing four consecutive quarter of negative space absorption (average 0.23m sf).

Nascent signs of rental stabilisation. 

  • According to CBRE, Grade-A office rentals declined 2.1% qoq in 3Q16 to hit S$9.30 psf pm (18.4% decline from 1Q15’s peak of S$11.40 psf pm). However, we note that the Grade-A rental decline on a qoq basis had slowed in 3Q16. In 3Q15-2Q16, Grade-A rents witnessed qoq declines ranging from 3.5- 4.8%.

Expect pick-up after short-term pressure. 

  • We expect a potential recovery in 2018, post supply digestion next year, after about a 20% correction in office rents from 1Q15’s peak.
  • Beyond 2018, new core CBD office supply is expected to remain meagre (excluding redevelopment projects), at below 0.65m sf (Frasers Tower) 


EARNINGS REVISION

  • We maintain our 2016 DPU forecast, although we lower our FY17 and FY18 DPU estimates by 2.2% and 2.7% respectively by factoring in a 5% additional drop in forward rent renewals to adjust for the widened gap between expiring rents in 2017 and 2018 and spot rents (down 11% ytd).


VALUATION/RECOMMENDATION

  • Maintain BUY with a reduced target price of S$1.88 (down from S$1.93) as we factor in a 5% drop in 2017 and 2018 rents. Our valuation is based on DDM (required rate of return: 6.7%, terminal growth: 1.7%).


SHARE PRICE CATALYST

  • Higher-than-expected signing rentals and occupancies at CapitaGreen.
  • Higher office rentals, positive newsflow on leasing activity as well as employment and economic growth.
  • Slower rise in interest rates.




Vikrant Pandey UOB Kay Hian | Derek Chang UOB Kay Hian | http://research.uobkayhian.com/ 2016-10-20
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.88 Down 1.930



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