CapitaLand Commercial Trust - CIMB Research 2016-07-21: Boosted by JV contributions

CAPITALAND COMMERCIAL TRUST C61U.SI

CapitaLand Commercial Trust - Boosted by JV contributions

2Q DPU grew 0.5% yoy to 2.2 Scts, making up 25% of our FY16 forecast.
Marginal uplift from renewals, demand came largely from financial services, energy and commodities tenants.
Additional contributions from CapitaGreen likely to offset any income vacuum from negative rental reversions.
Balance sheet healthy with gearing rising to 38% post acquisition.

Maintain Add with a higher TP of S$1.69; our top pick among the office REITs.

CCT saw a 2.2% dip in 2Q16 gross revenue to S$67.6m on lower portfolio occupancy of 97.2% dragged by Capital Tower and One George St, while NPI fell a larger 4.5% to S$51.5 m due to higher property taxes and leasing commissions.
Distribution income grew 1% yoy to S$65.1m with higher Raffles City and CapitaGreen (40%) contributions.
2Q/1H DPU of 2.2/4.39 Scts make up 25%/51% of our full-year forecast. There was a 0.4% revaluation uplift in portfolio value, with cap rates remaining largely unchanged.

CCT signed or renewed 277k sf of office and retail space in in 2Q16, of which 27% were new leases. These included names from banking and financial services, energy, commodities, TMT and consultancy services, such as Korea Development Bank, and Sea Hub Energy. These were done at a slight positive reversion and boosted average portfolio rent to S$8.98psf (vs S$8.96psf in 1Q).

CCT has 4% of income to be re-contracted in 2H16 and 11%/17% in FY17/18. Average expiring rents at S$9.40psf to 10.77psf are above current spot at S$9.50psf. The bulk of renewals are in 6 Battery Rd, and One George St.
We expect negative rental reversion to kick in over the next 2 years. But this income vacuum could be offset by contributions from the extra 60% stake in CapitaGreen (purchase completion expected 3Q16). The property is 94.6% committed and could to add 0.05 Scts to CCT’s 4Q16 DPU estimates.

The acquisition of the stake in CapitaGreen was fully funded by debt and is likely to boost CCT’s gearing to a still healthy 37-38%. With the inclusion of loans from this purchase, we expect average funding cost to tick up slightly from the present 2.5%.

We adjust our FY16F DPU estimates marginally but lower our FY17-18F DPU by 5.2- 5.5% as we tweak our office rent assumptions.
Nonetheless, we believe CCT could achieve a positive DPU CAGR of 3.7% over the next 3 years with the inclusion of CapitaGreen’s contributions.
Our DDM-based target price is raised to S$1.69 as we reduce our cost of equity assumption to 7.4%. CCT is our top pick among the office REITs.
The risk to our call is if office rents decline more sharply than expected.

LOCK Mun Yee CIMB Securities | YEO Zhi Bin CIMB Securities | http://research.itradecimb.com/ 2016-07-20

CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 1.69 Up 1.58