CapitaLand Commercial Trust - OCBC Investment 2016-07-20: Limited scope for positive reversion ahead

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CAPITALAND COMMERCIAL TRUST CCT C61U.SI 

CapitaLand Commercial Trust: Limited scope for positive reversion ahead

• Results within expectations
• Active management of lease expiry
• Challenging rental outlook

2Q16 performance in line

• CCT reported that its 2Q16 distributable income increased 1.0% YoY primarily because of higher contributions from the trust’s interests in CapitaGreen and Raffles City. 
• In terms of its topline for the quarter, however, gross revenues and net property income fell 2.2% and 4.5%, respectively, as the occupancy rate weakened in a few buildings and operating expenses rose from leasing commissions and property taxes. 
• For 2Q16, the trust will pay an estimated distribution per unit (DPU) of 2.20 S-cents (versus 2.19 S-cents in 1H15). This cumulates to a 1H16 DPU of 4.39 S-cents (up 1.8% YoY versus 4.31 S-cents in 1H15) and, based on the trust’s last closing price of S$1.57, represents an annualized distribution yield of 5.6%. 
• Overall, we deem this set of results to be within expectations as 1H16 distributable income and net property income constitute 52.7% and 47.9% of our full year forecast, respectively.

Scope for positive rental reversions ahead remain limited

• The trust’s overall occupancy rate dipped QoQ to 97.2% as at end 2Q16 from 98.1% in 1Q16. 
• Management continues to take an active stance on retaining and attracting new tenants, and we understand that only 4% and 10% of office leases (by occupied net lettable area as at end 2Q16) remain to be up for renewal in 2016 and 2017, respectively. 
• Monthly average office rents for the trust’s portfolio rose marginally to S$8.98 as at end 2Q16, versus S$8.96 in the previous quarter. That said, given the weak outlook for Grade A office rents, which is forecasted to dip 10% in 2016, we believe the scope for positive rental reversions ahead remain very limited. 
• As at end 2Q16, the trust’s balance sheet remains healthy with a relatively low gearing of 29.8% with a relatively low cost of debt of 2.5%. 
• Maintain HOLD with an unchanged fair value estimate of S$1.39.

Eli Lee OCBC Securities | http://www.ocbcresearch.com/ 2016-07-20

OCBC Securities Analyst Report HOLD Maintain HOLD 1.39 Same 1.39