CapitaLand Commercial Trust (CCT SP) - Maybank Kim Eng 2017-04-19: Negative Reversions Not A Surprise. Still Top Pick.

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CAPITALAND COMMERCIAL TRUST C61U.SI

CapitaLand Commercial Trust (CCT SP) - Negative Reversions Not A Surprise; Still Top Pick

Maintain BUY on top office REIT pick 

• 1Q17 DPU is in line, at 27% of our FY17E. 
• Although negative rental reversions at Six Battery Road bought down CCT’s portfolio passing rents, this has been well-flagged and should not jolt the market. 
• We tweak our 2017-19E DPU by less than 1%. Reiterate BUY and SGD1.81 TP, at an unchanged yield target of 5.0%. 
• CCT remains our preferred office REIT, with catalysts expected from a potential bottoming of the sector in the year ahead as the decline in office rents has slowed. 
• Risks to our view include sharp retreats in office rents and cost overruns for redevelopment projects.

Negative rental reversions in line 

• 1Q17 DPU of 2.40 SGD cts made up 26.5% of our FY17E forecast. 
• Portfolio occupancy inched up 0.7ppt to 97.8%, led by CapitaGreen. 
• Passing rents, however, marginally dipped to SGD9.18 from 4Q16’s SGD9.20 as rental reversions at Six Battery Road were negative. Signing rents at this property were SGD10.70-12.00 vs expiring rents of SGD14.17. We think the market already anticipated this. 
• We have not built in conversion of its convertible bonds due in Sep 2017. Full conversion could dilute our DPU by 2.3%, though leverage could improve 2ppts to 36.1%.

Bottoming rents; potential recovery by 2018 

• Preliminary estimates of Grade A office rents by CBRE suggest that the pace of rent decline slowed to 1.6% QoQ this quarter. We reiterate our view that office rents could bottom in early 2018 and recommend positioning ahead of this. 
• Improving pre-commitments at new office buildings may translate into less pressure on landlords to discount rents to fill up properties.

Valuations remain attractive 

• Even after a stellar 12% total return YTD, current unit price implies just SGD1,900 psf and a cap rate of 4.6% for its Singapore offices. These are lower than the replacement cost of SGD2,800 psf for a new office building and CBRE’s SGD2,700 psf estimate for the capital value of a Grade A office building.

Swing Factors

Upside

• Appreciation in capital value of its properties.
• Successful redevelopment of assets such as Golden Shoe Carpark.
• Earlier-than-expected rebound in office rents.

Downside

• Sharper-than-expected declines in office rents or occupancy.
• Overpaying for acquisitions.
• Cost overruns in any redevelopment projects.

Derrick Heng CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-04-19

Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 1.810 Same 1.810