CapitaLand Commercial Trust - OCBC Investment 2018-10-29: Expect Firmer Rental Reversions Ahead

CAPITALAND COMMERCIAL TRUST (SGX:C61U)

CapitaLand Commercial Trust - Expect Firmer Rental Reversions Ahead

CapitaLand Commercial Trust’s (CCT) 3Q18 results came in within our expectations.
Gross revenue and NPI jumped 35.6% and 37.3% y-o-y to S$100.5m and S$80.4m, respectively. DPU grew 8.9% y-o-y to 2.20 S cents after taking into account the adjustment to 3Q17’s DPU following the issuance of 513.5m units in Oct 2017 for a rights issue (CCT has a semi-annual distribution policy).
For 9M18, CapitaLand Commercial Trust’s NPI rose 19.2% to S$235.3m, while DPU of 6.48 S cents represented a decline of 1.5% and formed 73.3% of our FY18 forecast.

Looking at CapitaLand Commercial Trust’s disclosure on its average expired rents and committed rents in 3Q18, we believe there were negative rental reversions at Asia Square Tower 2 (AST2) and Capital Tower, while positive rental uplifts were registered at CapitaGreen and One George Street.
CapitaLand Commercial Trust’s portfolio occupancy improved from 97.8% in 2Q18 to 99.2% as AST2 saw a strong uplift in occupancy by 6.2 ppt to 98.1%. Its aggregate leverage ratio came down to a healthy 35.3%, while cost of debt was also lowered by ~20 bps to 2.6% and 92% of its gross borrowings have been fixed/hedged.
The main elephant in the room would be the potential income vacuum once HSBC’s lease extension ends in Apr 2020. We believe a large scale refurbishment or redevelopment would be the likely outcome.

Singapore’s office market continues to gain traction, as core Grade A CBD office rents rose 3.5% q-o-q to S$10.45 psf/month in 3Q18. This augurs well for CapitaLand Commercial Trust’s leasing momentum ahead, in our view.
For AST2, the average expiring rents are S$10.96 in FY19 and S$10 in FY20; for CapitaGreen, it is S$11.19 in FY19 and S$9.28 in FY20, and for Six Battery Road, the expiring rents are S$11.66 and S$10.17 in FY19 and FY20, respectively.
As there is still limited new office supply in those years, coupled with our expectations that core Grade A office rentals will continue its upward trajectory from current levels, we foresee firm rental reversions for CapitaLand Commercial Trust, especially in FY20.
After fine-tuning our assumptions, our fair value moves to S$1.68 (previously S$1.69).

Andy Wong Teck Ching CFA OCBC Investment Research | https://www.iocbc.com/ 2018-10-29

SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.68 DOWN 1.690