CapitaLand Commercial Trust - DBS Research 2016-10-20: Moving from green to gold

CapitaLand Commercial Trust - DBS Research 2016-10-20: Moving from green to gold CAPITALAND COMMERCIAL TRUST C61U.SI

CapitaLand Commercial Trust - Moving from green to gold

  • 3Q16 DPU of 2.30 Scts (+7.5% y-o-y) in line with expectations.
  • Robust results on the back of the recent purchase of the remaining 60% interest in CapitaGreen.
  • Plans to redevelop Golden Shoe Car Park provides medium term NAV and earnings upside.

3Q16 results in line 

Boost from CapitaGreen

  • As expected, CCT delivered a robust set of results underpinned by the recent acquisition of the remaining 60% interest in CapitaGreen with 3Q16 DPU rising 7.5% y-o-y to 2.30 Scts.
  • Excluding the increased contribution from CapitaGreen, underlying net property income (NPI) would have dipped 1% y-o-y owing to lower occupancies at 6 Battery Road (97.4% versus 99.5% in 3Q15) and One George Street (96.6% versus 99.4% in 3Q15).
  • Overall portfolio occupancy remains healthy at 97.4%, outpacing overall core CBD market occupancy 95.9%.

Still achieving positive rental reversions

  • Despite headwinds in the Singapore office market, CCT reported positive rental reversions during the quarter. For Six Battery Road, CCT was able to achieve signing rents of between S$10.75-13.00 psf compared to average expiring rents of S$11.12 psf while for One George Street committed rents were S$8.00-9.00 psf compared to expiring rents of S$8.68 psf.
  • Pleasingly, CCT has further reduced occupancy risk for FY17, with 9% of office leases now up for renewal (by gross rental income) down from 11% at end 2Q16. In addition, CCT is in advanced negotiations for another 1.5% leases. For FY18, 17% of leases are due for renewal.

Gearing up post acquisition of CapitaGreen

  • Following the debt funded acquisition of CapitaGreen, CCT’s gearing rose to 37.8% from 29.8%.
  • Average cost of debt remains stable at 2.5%.
  • NAV per unit stands at S$1.72 following the payment of the recent DPU.

Redevelopment of Golden Shoe

  • In conjunction with its 3Q16 results, CCT announced its plans to redevelop its Golden Shoe Car Park property.
  • It has submitted plans to the relevant government authorities to create a property with approximately 1m sqft of commercial GFA which comprises an office tower of up to 280 metres high. A new food centre owned by the government is expected to replace the existing food centre and adjoin the new office tower.
  • Subject to government approvals, the redevelopment will commence in 2H17 with completion in 2021.
  • Funding for the redevelopment may include a JV structure and sale of an existing asset.
  • Given a lack of financial details and exact split between retail and office space for the redevelopment, it is unclear what will be the exact financial impact on CCT at this point in time.

Rejuvenation of Raffles City Shopping Centre

  • To maintain Raffles City Shopping Centre’s positioning, a S$54m asset enhancement initiative (AEI) will be undertaken from 3Q16 to 1Q18. The AEI will involve the refreshing of the main entrance, refurbishing the mall’s interiors and upgrading of the lift lobbies as well as the revamping of the Central Atrium at Level 3.

Positive news flow supportive of CCT’s share price

  • While we expect negative rental reversion next year given the average expiring rents of S$10.73 psf which are currently above spot Grade A rents of S$9.30 psf and potential loss of income from Golden Shoe, we expect CCT will still be able to grind out an uplift in DPU in FY17 largely from the full year contribution from the acquisition of the remaining 60% interest in CapitaGreen as well as end of the majority of the rent free periods at CapitaGreen. We believe this should drive CCT’s share price higher, in the midst of a slowing DPU outlook for the overall SREIT market.
  • In addition, we believe investors will react positively to the redevelopment of Golden Shoe which will complete in 2021 when there is no expected new supply of office space in Raffles Place, as well as any capital gain from the potential sale of an asset to fund the redevelopment.

Maintain BUY with TP of S$1.70

  • With CCT continuing to trade below its NAV per share of S$1.72, its delivery of a strong DPU in 3Q16 and upside to long term NAV per unit from the redevelopment of Golden Shoe, we maintain our BUY c Timely acquisition of CapitaGreen. 
  • Despite the expected decline in the office market, we believe the timely acquisition of the remaining 60% in CapitaGreen not only helps to offset potential negative rental reversions and lower occupancies for the rest of CapitaLand Commercial Trust (CCT)’s portfolio but will allow CCT to deliver a 2-year DPU CAGR of 4% (2015-2017 excluding impact from redevelopment of Golden Shoe), which is among the highest in the office sector (average of 2%) and above the S-REIT DPU CAGR of 1%.

Trading at a discount to physical office transactions. 

  • Investors have been concerned over the value of CCT’s portfolio given falling office rents. We believe this is unwarranted given the resiliency of office property values in Singapore. 
  • CCT’s Singapore Grade A office portfolio trades at an implied value of c.S$1,900 per square foot (psf) compared to recent sales of between c.S$2,700 (adjusted for 99-year leasehold for CapitaGreen) and $3,500 psf. 
  • While CCT’s Grade A portfolio is unlikely to trade up to c.S$2,700 given the older profile of some of its properties, we believe the current strength of the physical market and 999-year leasehold status of some of its buildings, warrants CCT to trade close to its book value per unit of S$1.72 or an implied valuation of S$2,000 psf.

Medium term upside from redevelopment of Golden Shoe Car Park. 

  • CCT announced the redevelopment of its Golden Shoe Car Park property. Subject to obtaining the necessary government approvals, the property will be developed into one with c.1m square feet (sqft) of commercial space in terms of gross floor area (GFA) and comprise an office tower of up to 280 metres high. 
  • Upon completion in 2021, the property will provide a medium term uplift to CCT’s current NAV per unit of S$1.72.


  • Our DCF-based TP of S$1.70 implies a price of c.S$2,000 psf for CCT’s Singapore portfolio.

Key Risks to Our View

  • A key risk to our view is new office supply causing spot rents to fall below S$7 psf, which is likely to lead to lower-than- expected asking rents and rental income.

Melvin SONG CFA DBS Vickers | Derek TAN DBS Vickers | http://www.dbsvickers.com/ 2016-10-20
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.70 Same 1.700