REITs − Singapore - 1Q17: Results Of CCT (In line) and KREIT (In line)
- CCT’s results were in line with expectations.
- Evident pressure on rental reversions will likely be mitigated by full contributions from CapitaGreen and a well-spread out lease expiry profile.
- Maintain BUY on CCT with a target price of S$1.75.
- CapitaLand Commercial Trust (CCT) has reported quarterly results.
Results within expectations.
- Maintain BUY with a target price of S$1.75, based on the dividend discount model (required rate of return: 6.7%, terminal growth rate: 1.4%).
- 1Q17 DPU of 2.40 S cents, up 9.6% yoy.
- 1Q17 gross revenue and NPI were up 33.9% yoy and 34.3% yoy respectively primarily due to higher contribution from CapitaGreen (remaining 60% stake acquired in Aug 16) and higher revenue occupancy at Capital Tower.
- The results were in line with expectations, with 1Q17 DPU representing 26% of our full year forecast.
Clear pressure on rentals in 1Q17
- Clear pressure on rentals in 1Q17, with reversions at Six Battery Road ranging from - 24% to -15% (committed rents vs average expired rentals) and One George Street's reversions ranging from -17% to +3%. 1Q17 average portfolio rent declined 0.2% qoq to S$9.18 psf pm.
Pro-active renewal of office leases to mitigate leasing risk.
- More than half of expiring rents for 2017 have been renewed, with about 4% (by portfolio NLA) left. 2018 will see about 13% of office leases by portfolio NLA up for renewal.
Provisional permission for 1m sf Golden Shoe Carpark redevelopment obtained from URA.
- The REIT manager is awaiting the Singapore Land Authority's assessment for differential premium paid before deciding to proceed with the redevelopment. CCT is also evaluating its funding structure (JV and divestment proceeds).
S$175m in convertible bonds expiring 12 Sep 17.
- Using the current conversion price of S$1.4265 and 1Q17 DPU, full conversion would result in a nearly 4% dilution.
- While management expects negative rental reversions to continue, underscored by supply-side rental pressure, they nevertheless expect DPU to remain stable, bolstered by the recent acquisition of the remaining 60% stake in CapitaGreen, along with about S$22.5m (0.75 S cents) in retained income from MQREIT (11.0% stake).
Grade A office space outlook less gloomy.
- Two of 2017’s largest office developments, 1.9m sf Marina One and 0.3m sf UIC Building now have pre-commitments at 60% and 50% respectively, according to industry consultant CBRE.
- We also note that Grade A office absorption of 93.6k sf has outperformed the broader office market, as island-wide office space registered negative net absorption of 47.4k sf.
Nascent signs of Grade A office rental stabilisation.
- According to CBRE, Grade-A office rentals declined 1.6% qoq in 1Q17 to hit S$8.95 psf pm (21.5% decline from 1Q15’s peak of S$11.40 psf pm).
- We opine that Grade A rental decline could fast be approaching a bottom, especially as qoq declines have been slowing since 3Q16 (-2.1% qoq), vs qoq declines during 3Q15-2Q16 (-3.5% to -4.8%).
Office yield compression towards up-cycle could yield significant upside.
- The office sector currently trades at a yield spread of 3.62%, close to its long term spread of 3.9% post the recent rally. Notwithstanding the harsher operating landscape currently, the prospects of a resurgent economy could further compress office yield spread towards its up-cycle average spread of 2.27%, presenting a 31% upside potential.