CapitaCommercial Trust - UOB Kay Hian 2015-10-29: 3Q15 ~ When The Going Gets Tough, The Tough Get Going

CAPITALAND COMMERCIAL TRUST C61U.SI

CapitaCommercial Trust (CCT SP) 3Q15: When The Going Gets Tough, The Tough Get Going

CCT’s positive rental reversions portfolio-wide mitigated the lower occupancy rates seen.
Well spread out expiry profile will cushion against the incoming supply. Expect a healthy correction in the office segment in 2016 (5-10%) before a pick-up in 2017 as supply dwindles.
We maintain BUY with an unchanged target of S$1.95.
There is substantial debt headroom for the potential acquisition of the remaining stake in CapitaGreen, which is likely to increase yield accretion in 2H16.

CapitaCommercial Trust (CCT) reported 3Q15 DPU of 2.14 S cents (+2.9% yoy, -2.3% qoq). 9M15 DPU is in line with our expectations, accounting for 74.7% of our full-year DPU estimate of 6.45 S cents. Gross revenue grew 2.9% yoy, partially offset by higher taxes on valuation gains, resulting in NPI growth of 1.5% yoy respectively.
Average monthly office portfolio rent remained stable at S$8.89 psf pm (2Q15: S$8.88).

Golden Shoe Car Park came in as a sole exception of the positive rental reversions. Committed rents at One George Street were 23.0-62.6% above average expired rentals. Six Battery Road saw up to 21.6% upside from average expired rents. One George Street achieved monthly rents in the range of S$9.30 psf to S$12.30 psf, while Six Battery Road and CapitaGreen achieved monthly rents in the range of S$10.50 to S$13.50 psf and S$11.90 to S$14.00 psf respectively.

Total committed occupancy rate shed 1.6ppt qoq to reach 96.4% (2Q15: 98.0%), while the Grade-A office portfolio occupancy rate declined 2.4ppt to reach 94.7% (2Q15: 97.1%). This was mainly attributable to lower occupancy at Capital Tower, as Mizuho (65,000 sf) consolidated its operations into Asia Square as disclosed. In 10M15, CapitaGreen saw occupancy rates rise to 87.7% (2Q15: 80.4%), though we note committed rents of S$11.90-14.00 psf pm there fell 1.2-12.5% short of 2Q15’s (S$12.05-16 psf pm). Companies from the Banking, Finance, insurance and tech sectors took the bulk of space during the quarter.

About 14% and 12% of leases by NLA are due to expire in 2016 and 2017 respectively when the bulk of supply from Guoco Tower (1.3m sf in 2016), Marina One and Duo (2.4m sf in 2017) stream in. We note that CCT’s office average passing rents expiring in 2016 and 2017 are valued at S$9.69 psf and S$10.26 psf pm respectively.
Meanwhile, the bulk of this year’s expiring leases have been forward renewed. By gross rental income, only about 1% each for office and retail leases remains due for renewal respectively.

Current gearing of 30.1% gives rise to an estimated debt headroom slightly in excess of S$1.2b (40% gearing assumed), CCT can well expect to meet the acquisition cost of the remaining 60% stake in CapitaGreen, of S$1.1b-1.2b, without the need for further equity fund-raising.

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.

Office rents saw continued easing in 3Q15. According to CBRE, Grade-A office rentals declined a further 3.6% qoq in 3Q15 to hit S$10.90 psf pm (2Q15: S$11.30). Marina One (1.9m sf), which is slated to hit the market in 2016, has yet to see any pre-commitment although industry consultant DTZ posited that Marina Bay rents fell 5.5% qoq to S$13psf pm in 3Q15.
The next surge in office supply will arrive in 2H16/2017, which could result in a further 5-10% correction in rents. Beyond 2017, the supply remains meagre at below 0.65m sf (Frasers Tower) and this should lead to a pick-up in rental growth, propped up by conversions of older buildings.
We note that CCT’s office average passing rents expiring in 2016 and 2017 are at S$9.69 and S$10.26 psf pm respectively.

Maintain BUY with a target price of S$1.95.Our valuation is based on DDM (required rate of return: 7.15%, terminal growth: 1.7%).

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 UOB Kay Hian | Derek Chang UOB Kay Hian | http://research.uobkayhian.com/ 2015-10-29

BUY Maintain BUY 1.95 Same 1.95