CapitaLand Commercial Trust - DBS Research 2017-04-20: Powering Ahead

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CAPITALAND COMMERCIAL TRUST C61U.SI

CapitaLand Commercial Trust - Powering ahead

• Solid 1Q17 results boosted by CapitaGreen.
• Still achieving above-market rents.
• Gearing remains stable; firepower for acquisitions.
• Obtained provisional permission for redevelopment of Golden Shoe Car Park.

Uplift from CapitaGreen again. 

• CCT delivered a healthy set of results as expected, with 1Q17 up 9.6% y-o-y to 2.40 Scts.
• This was on the back of the timely acquisition of the remaining 60% interest in CapitaGreen in 3Q16. 
• The 2.40 Scts 1Q17 DPU assumes that none of the S$175m convertible notes due on 12 September 2017 with a conversion price of S$1.4265 is converted into CCT units.
• Assuming all the outstanding convertible notes were converted, 1Q17 DPU would have come in at 2.31 Scts (+5.3% y-o-y).
• The acquisition of CapitaGreen resulted in NPI jumping 34.3% y-o-y to S$69.9m. 
• Excluding the increased contribution from CapitaGreen, underlying group NPI (assuming 60% proportionate contribution from Raffles City Singapore) would have dipped 1.5% y-o-y. This was largely due to declines in contribution from: 
  1. 6 Battery Road (0.8% drop in NPI) - slight dip in occupancy to 99.0% from 99.4% in 1Q16 
  2. Golden Shoe (27.3% drop in NPI) – occupancy fell to 73.7% from 97.7% in 1Q16 as tenants moved out ahead of the closure of the carpark in the middle of this year 
  3. Raffles City Singapore (5.4% drop in proportionate NPI) – impact from lower hotel turnover rent.
• Offsetting the weaker performance in the above properties was a 8.2% uplift in contribution in CapitaGreen owing to an increase in occupancy from 98.1% in 1Q16 to 98.8%.
• Meanwhile, underlying CapitaGreen NPI (100% basis) rose 39.7% y-o-y, as the property benefitted from the absence of rent-free periods and higher occupancies (98.2% versus 92.8% in 1Q16). 
• Overall portfolio occupancy remains healthy at 97.8% outpacing overall core CBD market occupancy of 95.6%, albeit down from the prior year (98.1%) due to the falls recorded in the properties described above.

Achieving above-market rents but negative rental reversions 

• As expected, the weak office rental market (1Q17 Grade A CBD rents fell 1.6% q-o-q or 9.6% y-o-y to S$8.95 per sqft per month) reported negative rental reversions. However, CCT was able to maintain its record of signing rents that are above market.
• As a consequence of the soft rents achieved this quarter and in the last couple of quarters, average office portfolio rents are now at S$9.18 per sqft per month, down from S$9.20 in 4Q16. However, this remains higher than the average portfolio rents at end-1Q16 of S$8.96 per sqft per month.
• Moving ahead, CCT should continue to report negative rental reversions, as the weighted average expiring rents for the remainder of 1H17 and 2H17 stand at S$14.00 and S$10.69 per sqft per month respectively, above spot office rents of S$8.95 per sqft per month.
• CCT continues to make progress on the leasing front, with 5% of FY17 office leases now up for renewal (by GRI), down from 5% at end-4Q16. Out of the 5% leases, 1.8% are under advanced negotiations. For FY18, 17% of leases are due for renewal, unchanged from three months ago.

Stable gearing. 

• Gearing remains relatively stable at 38.1% (37.8% at end-4Q16). Average cost of debt and percentage of fixed rate debt were steady at 2.6% and 80% respectively.
• NAV per unit (excluding distributable income) stands at S$1.72.

Obtained provisional permission for redevelopment of Golden Shoe but no further news on Wilkie Edge. 

• CCT announced that it has obtained provisional permission from the Urban Redevelopment Authority for the proposed redevelopment of Golden Shoe. CCT plans to redevelop Golden Shoe into a property with approximately 1m sqft of commercial GFA which comprises an office tower of up to 280 metres high.
• The next step before CCT completes its feasibility study is the Singapore Land Authority’s assessment of the differential premium for the enhancement in land use.
• Meanwhile, there is no further news on the potential sale of Wilkie Edge, proceeds of which will be used for the redevelopment of Golden Shoe.

Maintain BUY with TP of S$1.69. 

• While we expect CCT to continue to report negative rental reversions over the coming quarters, we continue to like the stock for its resilient DPU, largely on the back of the acquisition of CapitaGreen, as well as exposure to the potential recovery in the office market from end-2017/early 2018. 
• Moreover, we believe the potential sale of Wilkie Edge above book value and final approval for the redevelopment of Golden Shoe, will be additional re-rating catalysts. Thus, we maintain our BUY recommendation with TP of S$1.69.

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/ 2017-04-20

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.690 Same 1.690