CapitaLand Commercial Trust - UOB Kay Hian 2016-01-21: 4Q15 ~ Comfortable Expiry Profile To Cushion Supply Shock

CapitaLand Commercial Trust - UOB Kay Hian 2016-01-21: 4Q15 ~ Comfortable Expiry Profile To Cushion Supply Shock CAPITALAND COMMERCIAL TRUST C61U.SI 

CapitaLand Commercial Trust (CCT SP) 4Q15: Comfortable Expiry Profile To Cushion Supply Shock 

  • CCT registered overall positive rental reversions with higher occupancy rates from backfilling Capital Tower. 
  • The well-spread out expiry profile provides some cushion against the incoming supply. 
  • Expect a healthy 10-15% correction in office rents before a pick-up as supply beyond 2018 dwindles. 
  • We maintain BUY with an unchanged target price of S$1.79. 
  • Ample debt headroom exists for the potential acquisition of the remaining stake in CapitaGreen, which is likely to increase yield accretion in 2H16. 


RESULTS 


• Results in line with expectations. 

  • CapitaLand Commercial Trust (CCT) reported 4Q15 DPU of 2.17 S cents (+0.9% yoy, +1.4% qoq). 2015 DPU is in line with our expectations, accounting for 99.6% of our full-year DPU estimate of 8.59 S cents. 
  • 4Q15 gross revenue and NPI saw an uptick of 1.9% yoy and 3.2% yoy respectively. This was attributable to positive rental reversions across the portfolio barring Golden Shoe Car Park and lower property operating expenses due to lower utility expenses. 

• Positive rental reversions registered nearly portfolio-wide… 

  • Renewals and new leases at Six Battery Road saw positive reversions overall, with reversions ranging from - 3.5% to 13% above average expired rentals. 
  • One George Street’s rental reversions also varied from -3.4% to 19.2%, though reversions remained positive on average. 
  • 4Q15 saw Six Battery Road achieve monthly rents in the range of S$11.27 psf to S$13.20 psf, while One George Street and CapitaGreen achieved monthly rents in the range of S$8.75 to S$10.80 psf and S$11.47 to S$13.00 psf respectively. 
  • Golden Shoe Car Park was the sole exception of the positive rental reversions. 

• …as occupancy saw an uptick in the quarter. 

  • Total committed occupancy rate crept up 0.7ppt qoq to reach 97.1% (3Q15: 96.4%), while the Grade-A office portfolio occupancy rate also improved by 1.1 ppt to reach 95.8% (2Q15: 94.7%). This was mainly attributable to higher occupancy at Capital Tower, as CCT backfilled the space likely left behind by previous tenant Mizuho (65,000 sf) which consolidated its operations into Asia Square, with new tenants along the likes of legal firm Simmons & Simmons. 
  • Interestingly, the Technology, Media and Telecommunications (TMT) sector made up the bulk of new demand in 2015 (28% of total). CapitaGreen was 91.3% committed as at 31 Dec 15. 


STOCK IMPACT 


• Well-spread out expiry profile as incoming supply hits. 

  • About 10% and 12% of office leases by NLA are due to expire in 2016 and 2017 respectively. This should cushion some of the impact likely to be felt from the 4.3m sf of commercial space slated to come on- stream this year, along the likes of Marina One (1.9m sf), Guoco Tower (0.85m sf) and Duo (0.57m sf). 

• Ample debt headroom implies minimal risk of dilutive equity fund raising. 

  • Current gearing of 29.5% gives rise to estimated debt headroom of about S$1.3b (40% gearing assumed). Substantial debt due this year (27% of total debt) is largely attributable to the debt pertaining to Raffles City, and management has highlighted ongoing negotiations with its JV partner CMT. 
  • CCT can well expect to meet the acquisition cost of the remaining 60% stake in CapitaGreen, of about 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. Management has stated that it is currently monitoring the asset’s performance, preferring to wait for distributable income from the asset to turn positive this year. We have factored in the acquisition in 2H16. 

• Staying mum on One George Street and Wilkie Edge. 

  • Management continued to remain tight-lipped on market talks of a possible divestment of One George and Wilkie Edge. 

• Expect healthy correction in the office segment before pick-up. 

  • Office rents saw continued easing in 4Q15. According to CBRE, Grade-A office rentals declined a further 4.5% qoq in 4Q15 to hit S$10.40 psf pm (3Q15: S$10.90). 
  • Guoco Tower has been reported to have seen 10% pre-commitment of office space. 
  • The next surge in office supply will arrive in 2H16/2017. 
  • Beyond 2018, commercial supply remains meagre at below 0.65m sf (Frasers Tower). 
  • We expect a healthy 10-15% correction in office rents before the next leg up. We note that CCT’s office average passing rents expiring in 2016 and 2017 amount to S$9.57 psf and S$10.26 psf pm respectively. 


EARNINGS REVISION 

  • None. 


VALUATION/RECOMMENDATION 

  • Maintain BUY with a target price of S$1.79. 
  • Our valuation is based on DDM (required rate of return: 7.2%, terminal growth: 1.7%). 


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 UOB Kay Hian | Derek Chang UOB Kay Hian | http://research.uobkayhian.com/ 2016-01-21
BUY Maintain BUY 1.79 Same 1.79


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