CapitaLand Commercial Trust - RHB Invest 2018-04-25: Bugis Village To Be Returned To The State

CAPITALAND COMMERCIAL TRUST C61U.SI

CapitaLand Commercial Trust - Bugis Village To Be Returned To The State

CapitaLand Commercial Trust (CCT)’s portfolio occupancy and rents remained steady in 1Q.
Bugis Village (2.2% of 1Q18 NPI) is to be returned to the State in Apr 2019, as authorities have exercised the right to take back the property. CCT would instead be paid compensation of SGD6.6m plus accrued interest, which is well below its latest book value of SGD44m.
While the office market outlook remains rosy, we expect the positive effects to flow into CCT’s DPU only after 2020. This is mainly due to the relatively high average expiring rents (10-15% higher than market average), which minimises upside potential.
Key re-rating catalysts would be the repositioning of AST2 and redevelopment of GSCP.
Maintain SELL and Target Price of SGD1.63 (10% downside).

CapitaLand Commercial Trust’s (CCT) 1Q18 gross revenue and NPI rose 7.7% and 10.5%YoY respectively, mainly driven by contributions from Asia Square Tower 2 (AST 2) and higher income from CapitaGreen.
Finance costs rose 7.7% y-o-y, on the back of higher borrowings to fund acquisitions.
In 1Q, CCT retained SGD1.6m of income available for distribution, which it plans to release later in FY18.
The results were in line, with 1Q18 DPU accounting for 24.5% of our full-year estimate.

This comes after the authorities chose to exercise the right to take back the property under the terms of the lease.
The property had a leasehold title expiring Mar 2088, with the Government having the right to terminate the lease on 1 Apr 2019 upon payment of a pre-agreed compensation amount. Post exercise of these rights, CCT is expected to receive compensation of SGD6.6m and accrued interest compounded from 1989. However, we note that the sum is well below the asset’s latest valuation of SGD44m, thus we expect some write-downs in coming quarters. The property also accounted for 2.2% of 1Q18 NPI.
We believe CCT would use some of the divestment proceeds to top up the loss of income in 2019 and 2020.

Occupancy declined slightly for CapitaGreen, to 99.1% (2017: 100%), and for Six Battery Road, to 99.8% (2017: 99.9%). This was offset by occupancy improvements at Twenty Anson, One George Street and AST 2.

Leasing activity slowed down slightly in 1Q18, with 96,000 sqf of leases signed (37% new leases) across its properties in 1Q18 (4Q17: 182,000 sqf). Key sectors driving demand were financial services, consultancy, IT, media, telecommunications, and energy services.
On the positive side, CCT’s properties secured rents that were largely higher than market and expiring rents.
About 5% of its leases are pending renewal in 2018, for which we expect flat to slightly negative rent reversions. This is as the average expiring rental rate of SGD10.82 psf is still 12% higher than 1Q18’s average Grade-A office (CBRE) rent of SGD9.70 psf.

The redevelopment of Golden Shoe Car Park (GSCP), which has been named “CapitaSpring”, has secured its anchor tenant well ahead of completion in 1H21. JP Morgan, currently a tenant in its Capital Tower, would be extending its existing lease and relocating to CapitaSpring upon completion. It has committed to take up 155,000 sqf of space, or ~25% of total office NLA.
CCT currently has a 45% stake in the development and has a call option to acquire the balance 55% interest within five years from building completion.

We forecast a flattish DPU for FY19F/20F.
Our DDM-derived Target Price is based on CoE of 6.9% and TG of 1.5%. The stock currently offers FY18F/19F dividend yields of 4.8%.
The key risk would be a stronger-than-expected surge in office demand.

Vijay Natarajan RHB Invest | http://www.rhbinvest.com.sg/ 2018-04-25

SGX Stock Analyst Report SELL Maintain SELL 1.630 Same 1.630