CapitaLand Commercial Trust (CCT SP) - UOB Kay Hian 2017-01-19: 4Q16 Harvesting Gains From CapitaGreen

CapitaLand Commercial Trust (CCT SP) - UOB Kay Hian 2017-01-19: 4Q16 Harvesting Gains From CapitaGreen CAPITALAND COMMERCIAL TRUST C61U.SI

CapitaLand Commercial Trust (CCT SP) - 4Q16 Harvesting Gains From CapitaGreen

  • CapitaLand Commercial Trust (CCT)’s results were bolstered by the higher contribution from full ownership of CapitaGreen
  • Overall negative rental reversions were seen in 4Q16, with average portfolio rent of S$9.20 showing a qoq dip. 
  • Proactive forward renewals and CapitaGreen’s contributions should ameliorate rental pressure on leases due in 2017-18. 
  • Maintain BUY with a reduced target price of S$1.75 (previously S$1.78) as we factor in dilution from convertible bonds. 
  • Positive newsflow on the Golden Shoe Car Park redevelopment would be a key share price catalyst.


Results in line with expectation. 

  • CapitaLand Commercial Trust’s (CCT) posted 4Q16 DPU of 2.39 S cents, +10.1% yoy. 4Q16 gross revenue and NPI were up 32.7% yoy and 35.4% yoy respectively on the back of higher contributions from and the consolidation of CapitaGreen’s earnings (remaining 60% stake acquired in Aug 16). 
  • FY16 DPU represented 99.6% of our full- year forecast.

Tenant retention hit 62% in 2016 (2015: 83%). 

  • Management attributed this to the Royal Bank of Scotland’s departure from One George Street last year, as well as the strategic rejuvenation of retail tenant offerings at Raffles City. 
  • Management also noted that new lease enquiries stemmed from the financial, manufacturing and distribution as well as technology, media, and telecom (TMT) trade sectors.

Stable overall occupancy rate at 97.1% in 4Q16 (97.4% in 3Q16). 

  • The dip in occupancy was mainly attributable to lower occupancy at Twenty Anson (-6.3ppt qoq), with tenant SAS giving up about 20,000 sf of space last year to relocate to Guocotower.
  • CapitaGreen is now 95.9% occupied (94.9% previous quarter).


Proactive renewal of leases to mitigate leasing risk, with about 5% and 13% of office leases (by NLA) left for renewal in 2017 and 2018 respectively. 

  • While expiring rents are above that of CBRE spot Grade-A office rents of S$9.10 psf pm, CapitaGreen contributions and retained income of S$20.4m could tide CCT through continued rental pressure.
  • Overall negative rental reversion, with reversions at Six Battery Road ranging from - 14% to 9% (committed rents vs average expired rentals) and One George Street's reversions ranging from -9% to 12%. 4Q16 average portfolio rent declined 0.2% qoq to S$9.20 psf pm.

Convertible bonds expiring Sep 17. 

  • Using the current conversion price of S$1.4816 and 2H16 DPU, full conversion would result in a nearly 4% dilution.

Positive leasing newsflow, coupled with positive office absorption. 

  • Pre-leasing at Marina One and Duo reportedly stood at about 35% and 30% respectively. CCT’s management opined that another 20% of space at Marina One could be in advanced negotiations. 
  • According to CBRE, leasing demand at DUO Tower and Guoco Tower led to the second consecutive quarter of positive island-wide take-up of 0.54m sf in office space for 4Q16, compared with the prior four consecutive quarters of negative space absorption (average -0.23m sf).

Nascent signs of rental stabilisation. 

  • According to CBRE, Grade-A office rentals declined 2.2% qoq in 4Q16 to hit S$9.10 psf pm (20% decline from 1Q15’s peak of S$11.40 psf pm). 
  • We opine that the Grade A rental decline could fast be approaching a bottom, especially as qoq declines have been slowing since 3Q16 (-2.1% qoq) vs qoq declines in 3Q15-2Q16 (-3.5% to -4.8%).


  • While management expects negative rental reversions to continue, underscored by supply-side rental pressure, they nevertheless expect DPU to remain stable, bolstered by the recent acquisition of CapitaGreen, along with about S$17m (0.68 S cents) in retained income from MQREIT (11.0% stake).

Golden Shoe Car Park redevelopment. 

  • Management did not disclose further details on the previously announced plans of redeveloping Golden Shoe Car Park into an office building with potential GFA of 1m sf. Should things go according to plan, CCT will commence redevelopment in 2H17 with target completion in 2021. 
  • The REIT manager has informed tenants that they have until 31 Jul 17 to vacate the premises.


  • Reduce FY17-18 DPU by 3.7% after factoring in dilution from assuming full conversion of convertible bonds (due Sep 17) at a conversion price of S$1.4816.


  • Maintain BUY with a reduced target price of S$1.75 (previously S$1.78) as we factor in dilution from convertible bonds. 
  • Our valuation is based on DDM (required rate of return: 6.7%, terminal growth: 1.4%).


  • Higher-than-expected contribution from Golden Shoe Car Park redevelopment.
  • Higher office rentals, positive newsflow on leasing activities as well as employment growth.

Vikrant Pandey UOB Kay Hian | Derek Chang UOB Kay Hian | http://research.uobkayhian.com/ 2017-01-19
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.75 Down 1.780