Signs Of Expansionary Demand
- Management views the market as being overly bearish on office rentals, citing double-digit reversions and expansionary demand seen at CapitaGreen from diverse tenants.
- There is substantial debt headroom for the potential acquisition of the remaining stake in CapitaGreen, which is likely to increase yield accretion in 2H16.
- Expect a healthy correction in the office segment in 2016 (5-10%) before a pick-up in 2017 as supply dwindles.
- Maintain BUY with a reduced target price of S$1.95 (from S$2.06), mainly factoring in lower rental growth assumptions.
RESULTS
• Results in line with expectations.
- CapitaCommercial Trust (CCT) reported 2Q15 DPU of 2.19 S cents (+4.3% yoy, +1.8% qoq).
- 1H15 DPU is in line with our expectations, accounting for 50.1% of our full-year DPU estimate of 8.6 S cents.
• CapitaGreen occupancy rose to 80.4%.
- Total committed occupancy rate crept up 1ppt to 98.0% in 2Q15, while the Grade-A office portfolio surpassed that by seeing a 1.5ppt improvement to reach 97.1% occupancy. This was mainly attributable to the CapitaGreen, which saw occupancy rise 10.5ppt to 80.4%.
- Committed rents at CapitaGreen are now at S$12.05-16psf pm, a leap from management’s previous guidance of S$9.80-16psf pm.
- Higher net property income (up 3.6% yoy) was driven by resilient portfolio performance with increase in committed rents pushing monthly average office portfolio rent up 1.1% qoq to S$8.8 psf pm.
• Bulk of leases expiring this year forward renewed.
- By gross rental income, only about 4% and 2% of office and retail leases remain for renewal respectively.
- 2016 will see about 11% and 6% of office and retail leases expiring respectively.
STOCK IMPACT
- Management views market as being overly bearish on office rentals, citing double digit reversions and expansionary demand seen at CapitaGreen.
- Management noted that half of the committed space at CapitaGreen was leased by tenants who were expanding. They took up 167,000sf of space, exceeding the 148,000sf that was vacated, which is a 113% increase in demand.
- New demand in CCT’s portfolio was supported by tenants from diverse trade sectors with the bulk 84% coming from business consultancy, IT, media and telecommunications, energy, commodities, maritime and logistics.
- Further acquisition catalyst from acquisition of remaining 60% stake of CapitaGreen (at an estimated cost of S$1.1b-1.2b) from CCT's JV partners.
- We believe management is looking to balance income accretion (minimal in 2015) and overall office valuations (higher signing rents could spur an uptick in CapitaGreen’s valuations).
- We have factored in the acquisition in 2H16.
• Sufficient debt headroom means minimal risk of dilutive equity fund raising.
- The quarter saw gearing fall 0.4ppt to hit 29.5% on revaluation of portfolio that was up 0.9%.
- With an estimated debt headroom slightly in excess of S$1.3b (40% gearing assumed), CCT can well expect to meet the acquisition cost of the remaining 60% stake in CapitaGreen, approximately S$1.1b-1.2b, without the need for further equity fund raising.
• Expect healthy correction in the office segment before pick-up.
- In 2Q15, Grade-A office rentals saw downward easing of 0.9% qoq to hit S$11.30psf pm, as Core CBD vacancy saw a dip of 8bp qoq to 3.8% This marked the end of eight quarters of consecutive growth office rents enjoyed from 2Q13 to 1Q15.
- Office rental growth moderated from 3-5% per quarter in 1Q14-3Q14 to about 2% per quarter in the past two quarters (4Q14 and 1Q15).
- We expect 2H15 rents to remain stable as the next surge of office supply will only arrive in 2H16/2017 that could result in a healthy correction (5- 10%).
- Beyond 2017, the supply remains meagre at below 0.6m sf that should lead to a pick-up in rental growth.
- Conversions of older office buildings into alternative uses would lend further support.
EARNINGS REVISION
- We reduce our 2016-17 DPU forecasts by 2-6% and cut rental growth by 5-10ppt, factoring in a slowdown in the office segment.
VALUATION/RECOMMENDATION
- Maintain BUY with a reduced target price of S$1.95 (from S$2.06), mainly factoring in lower rental growth assumptions.
- Our valuation is based on DDM (required rate of return: 7.2%, terminal growth: 2.2%).
SHARE PRICE CATALYST
- Higher-than-expected signing rentals and occupancies at CapitaGreen.
- Higher office rentals, positive newsflow on leasing activity, employment and economic growth.
- Slower rise in interest rates.
(Vikrant Pandey; Derek Chang)
Source: http://research.uobkayhian.com/
