CapitaLand Commercial Trust - Catalysts In Place To Overcome Near-Term Headwinds
- CapitaLand Commercial Trust (CCT) has rebounded strongly by 5% since the beginning of the year.
- We believe stock has more legs with positive news flow from redevelopment of GSCP acting as a key catalyst. A potential stake sale in One George Street could also allow it to recycle capital and eliminate any funding concerns.
- Despite negative headwinds facing the office market in 2017 we believe it is relatively well positioned due to its quality assets and high portfolio occupancy.
- Maintain BUY with a SGD1.68 TP (8% upside). It remains our Top Pick among the office S-REITs.
Quality portfolio buffers impact of a challenging office market.
- While we remain bearish on the office rental market for 2017 (rental decline of 5-10%) we see muted impact on CapitaLand Commercial Trust’s (CCT) portfolio. Only 6% of its office portfolio (% of gross rental income) is up for renewals in 2017 with portfolio committed occupancy remaining high at 97.4%.
- While we expect slight negative rent reversions this year in its Six Battery Road and One George Street office properties, the impact is mitigated from full contributions from the CapitaGreen building.
- Additionally, CCT also has SGD17.3m retained tax- exempt income mainly from MRCB-Quill REIT, which can also be used to buffer some of the impact.
High fixed borrowings mitigate impact from rising interest rates.
- About 80% of CCT’s borrowings are fixed and hence shielding it from any direct impact of rising borrowing costs. Average cost of debt remains low at 2.5% with average term to maturity of 3.5 years.
- In 2017, CCT only has SGD175m of convertible bonds (coupon:2.5% pa) due for refinancing in September this year.
GSCP redevelopment the next key catalyst to watch out for.
- CCT has submitted plans to the authorities to redevelop Golden Shoe Car Park (GSCP), which is expected to commence in 2H17 and completed by 2021. GSCP is set to add ~1m sqft of commercial GFA in Singapore’s central business district (CBD) once fully redeveloped.
- Based on a similar redevelopment of Market Street Car Park, we estimate total development costs (including a differential premium) to be in the range of SGD1.5-2bn ie ~SGD1,500-2,000psf.
- With recent Grade-A office transactions still hovering above SGD2,500psf, we believe the latest redevelopment could unlock good value for its shareholders.
One George Street stake sale could eliminate funding concerns.
- Media reports have mentioned that CCT is actively looking for potential 50% stake sale in the property.
- With a flurry of capital chasing good quality office assets in 2016, we believe that there is good possibility of a sale happening. If it goes through, the sale could potentially raise SGD550-600m in proceeds, which in turn could be effectively redeployed for the redevelopment of GSCP without the need for any equity issuance.
Our Top Pick among office S-REITs with a SG1.68 TP.
- Our TP reflects a COE of 7.8% and TG of 1.5%.
- We have not factored in any potential upside from the redevelopment of GSCP, which is pending approvals.
- At current share price levels, CCT offers FY17F-18F yields at 5.8% and 5.9% respectively.