CapitaLand Commercial Trust - RHB Invest 2016-03-16: Mixed Outlook On This One

CapitaLand Commercial Trust - RHB Invest 2016-03-17: Mixed Outlook On This One CAPITALAND COMMERCIAL TRUST C61U.SI 

CapitaLand Commercial Trust - Mixed Outlook On This One 

  • We raise our DDM-derived TP to SGD1.30 (from SGD1.15, 10% downside) and upgrade our call on CCT to NEUTRAL (from Sell), which implies a total loss of 4.1%, as we note that it would be the least affected office REIT during the segment’s rental downturn. 
  • We are not concerned over its upcoming expiring leases, as its average rental rates are still below market levels. 
  • In addition, it is the most conservatively geared office REIT. 
  • Our new call, however, is because we do not see any catalysts due to the weak supply-demand dynamics within the office leasing market. 

Not much concern over its upcoming leases. 

  • We are not overly concerned about CapitaLand Commercial Trust’s (CCT) upcoming lease expiries, as the REIT’s average rent of its remaining leases is still below the current market rate of SGD10.40 psf/month. 
  • We also note that, in the recent quarterly results, CCT announced that one-third of 2016’s expiring leases have been renewed, thereby minimising the risk of an increasing vacancy rate. 
  • Lastly, we are confident as to its management’s tenant retention strategy, as it has a good track record of retaining 83% of tenants within its portfolio. 

Arguably the most conservative office REIT. 

  • In comparison to the c.38% average of its peers, CCT is the lowest leveraged office REIT within the SREITs sector, ie c.30%. 
  • In addition, we like the fact that the REIT is the least exposed to office lease renewals this year vis-à-vis its peers. 
  • Lastly, CCT’s portfolio is able to maintain a near-full occupancy level of c.97% despite the pessimistic outlook within the overall office sector. 

However, the office supply glut is still an ongoing concern. 

  • The major concern over the office leasing environment centres around the office supply glut issue. We think that the supply-demand dynamics for the office leasing environment is unfavourable, as the market is likely to be oversupplied. 
  • The office sector had absorbed c.1.2m sq ft on average over the past 10 years, while the market is expecting to complete an average of c.2m sq ft in the next three years. 

Fairly priced now. 

  • We upgrade our recommendation on CCT to NEUTRAL (from Sell) as we raise our TP to SGD1.30 (from SGD1.15),which implies an FY15 P/BV of 0.73x. 
  • We prefer to take a cautious view on this REIT, mainly due to the abundance in office supply pipeline, as we forecast for office rental rates to decline 15% this year. This is in spite of our view that CCT is the most conservative office REIT, with minimal concerns over its expiring leases. 
  • Key upside risks includes better than expected rental reversion.

Ivan Looi RHB Invest | 2016-03-16
RHB Invest SGX Stock Analyst Report NEUTRAL Upgrade SELL 1.30 Up 1.15