CapitaLand Commercial Trust - Maybank Kim Eng 2016-07-21: DPU to be supported by CapitaGreen acquisition

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CAPITALAND COMMERCIAL TRUST C61U.SI 

CapitaLand Commercial Trust(CCT SP) - DPU to be supported by CapitaGreen acquisition

Maintain HOLD; TP raised for narrower yield target

• 2Q16 inline. There are some signs of weakness with occupancy declining by 0.9ppt in the quarter. 
• CCT has around 11% of its office income due for renewal in 2017 and management expects negative rental reversions to surface as market rents have declined below underlying rents. 
• We lift FY16-18 DPU by 0.4-2.0% to build in the acquisition of the balance 60% stake in CapitaGreen. We expect this acquisition to support DPU as the market weakens further. 
• Our TP is raised to SGD1.52 from SGD1.40 for a 50bps cut in target yield to 5.75%. This reflects yield compression from lower benchmark rates. Maintain HOLD.

Some signs of weakness

• 2Q16 DPU of 2.20 SGD cts is in line with 1H16 forming 50% of our full- year forecast. 
• Portfolio occupancy weakened by 0.9ppt QoQ to 97.2% due to a significant decline in occupancy at One George Street. 
• The REIT managed to fill one-third of the space vacated by RBS at the building and it’s in negotiation for the remaining space with new tenants. More vacancy could surface as the market weakness persists.

Expect negative rental reversions

• Leases due to expire in 2H16 are fairly low at just 4% of total office income. However, CCT has around 11% of office income due for renewal in 2017 and management guides that negative rental reversions could surface as market rents have declined below expiring rents. 
• In particular, expiring rents at Six Battery Road of SGD12.32/12.59 psf in 2017/18 look to be on the high side of current signing rents of SGD11-13. 
• Similarly, rising vacancy at One George Street could drive further downside to current rents of SGD8.8-10 and negative reversions are likely.

Preferred office pick

• CCT continues to be our preferred pick in the office sector. 
• Unlike its peers, CCT’s income is reflective of underlying property income and not supported by inorganic capital distributions.

Derrick Heng CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-07-21

Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 1.52 Up 1.40