CapitaLand Commercial Trust (CCT SP) - Stable performance
Maintain BUY; preferred office exposure
- There was little surprise in FY16 results, with DPU at 103% of our forecast. Underlying performance was stable in a difficult market.
- No updates were provided on Golden Shoe’s redevelopment.
- We keep our DPU, expecting management to mitigate loss of income from Golden Shoe by distributing tax-exempt income on its books. This should provide stable DPU in the next three years, with catalysts expected from a 2018 rebound in office rents.
- Maintain BUY and SGD1.81 TP, at an unchanged yield target of 5.0%.
- CCT remains our preferred office REIT.
- Risks to our view include sharper-than-expected decline in office rents and Cost overrun for redevelopment projects.
Stable, defying market headwinds
- 4Q16 DPU rose 10% YoY to 2.39 SGD cts.
- FY16 DPU of 9.08 cts was marginally better than our 8.81 due to faster-than-expected rental contributions from CapitaGreen.
- Portfolio occupancy was stable. A slight increase in vacancy at Golden Shoe arose from its impending redevelopment. Higher vacancy at Twenty Anson was the result of tenant exits to a new office building.
- Portfolio passing rent was also stable at SGD9.20 psf, down only 0.2% QoQ.
- Although management flags more negative than positive rental reversions, we reckon this is already well known.
No updates on Golden Shoe
- With debt headroom of just SGD0.3b to a gearing of 40%, CCT may need to raise funds by selling fringe assets or rope in related companies to fund this project. We doubt management will push its leverage near the regulatory limit of 45%.
- Golden Shoe accounts for 2% of NPI and we expect management to cushion its income loss by distributing part of the SGD20.4m (0.68 cts/unit) tax-exempt income on its books.
Cheap vs private market
- There remains a large mismatch between the value of CCT’s office assets implied by its current share price and valuations in the private market.
- Current stock price implies SGD1,860 psf and a cap rate of 4.8% for its office assets in Singapore. These are cheap against the replacement cost of a new office building and recent transactions in the physical market.
- Appreciation in capital value of its properties.
- Successful redevelopment of assets such as Golden Shoe Carpark.
- Earlier-than-expected rebound in office rents.
- Sharper-than-expected declines in office rents or occupancy.
- Overpaying for acquisitions.
- Cost overruns in any redevelopment projects.