CapitaLand Commercial Trust - On The Right Track ~ 4Q16 Results in line
- We expect CapitaLand Commercial Trust (CCT) to continue its outperformance with the redevelopment of GSCP and asset divestments acting as key catalysts.
- CCT’s portfolio average rentals increased 3%YoY in 2016 despite Grade-A office rental declining 12.5%.
- We expect little impact to CCT from near-term negative headwinds facing the office sector due to high office occupancy levels and minimal leases expiring this year.
- CCT is our Top Pick among office S-REITs with a TP of SGD1.68 (7% upside).
- Maintain BUY.
Golden Shoe car park likely to funded by capital recycling.
- Management positively expects to commence redevelopment of the Golden Shoe Car Park (GSCP) by Aug 2017 subject to authority approvals.
- We expect a JV structure with CapitaLand and Mitsubishi Asia (similar to the Market Street Car Park redevelopment) to avoid high capital outlay and mitigate development risks.
- On funding, management is currently exploring capital recycling options. CapitaLand Commercial Trust (CCT) has appointed Cushman & Wakefield to conduct an Expression of Interest (EOI) exercise for sale of Wilkie Edge, which would close today.
Minimal leases expiries in 2017.
- Only 7% of leases (as % of rental income) is due for renewal this year with the bulk of it expiring in 2H17.
- Although we expect slight negative rental reversions on Six Battery Road and One George Street, the impact should be mitigated by better contributions from CapitaGreen. The bulk of its office leases (about 50%) are only up for renewal in 2019-2020, during which we expect office demand supply dynamics to have improved considerably.
Convertible bonds likely to be exercised.
- About 80% of CCT’s borrowings are fixed shielding it from the risk of rising borrowing costs. CCT only has SGD175m of convertible bonds (coupon:2.5% pa) due for refinancing in September this year. As the conversion price (SGD 1.4265 ex-dividend) for convertible bonds are below the current share price levels, we expect at least a partial conversion into CCT shares.
- Our forecasts have already factored in the impact assuming full conversion into equity.
Maintain BUY 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/FY18F yields of 5.8% .
- The stock is currently trading at an attractive 0.9x FY17F P/BV