CapitaLand Commercial Trust - Phillip Securities 2018-10-26: Asia Square Tower 2 Saves The Day

CAPITALAND COMMERCIAL TRUST (SGX:C61U)

CapitaLand Commercial Trust - Asia Square Tower 2 Saves The Day

CapitaLand Commercial Trust (CCT)'s 3Q and 9M NPI/DPU in line with our estimates.
Full quarter contribution from Galileo, which comprises 5% of CCT’s NPI in 3Q18.
Reduced gearing of 35.3% with higher proportion of debt on fixed rates.
Near-full portfolio occupancy boosted by Asia Square Tower 2 (AST2).
Negative rental reversions still plague key properties.
Maintain ACCUMULATE with Target Price of S$1.90 (prev S$1.88).

Gearing currently stands at 35.3% (2Q18: 37.9%) following repayment of bank borrowings from proceeds from divestment of Twenty Anson on Aug 29.
Debt on fixed rate now comprises 92% of total borrowings (2Q18: 85%) with lower all-in cost of debt of 2.6%.

Portfolio occupancy increased q-o-q to 99.2% from 97.8%, boosted by ramp-up in occupancy at AST2 (98.1% vs 91.9% in 2Q18).

Average expiring rents for Asia Square Tower 2, Capital Tower and Six Battery Road were above rents committed in 3Q18.
We expect reversions to turn positive as expiring rents continue to decline, against the backdrop of healthy office leasing activity and tapering office supply in the CBD Core area.

Outlook is positive now that Asia Square Tower 2, CapitaLand Commercial Trust (CCT)’s biggest contributor by GRI (office portfolio), had ramped up occupancy within the quarter. In addition, CCT will record a 36% increase in rental from HSBC’s one-year lease extension at HSBC Building from April 2019, which will push NPI yield from 4% to 6%. Plans for the building thereafter include refurbishment/leasing, divestment and redevelopment.
Additional recurring income would also come from a new one-year lease with the State for Bugis Village from Apr 2019 for c.S$1mn.
CapitaLand (SGX:C31) had in October invested S$27 million in co-working operator The Work Project Kingdom, which will lease space at Capital Tower and Asia Square Tower 2, in pursuit of the core-flex model at these buildings. The Manager had expressed confidence that the core-flex space combinations will help tenant retention in the long-run.

This translates to a FY18e yield of 5.1% and P/NAV of 0.99x. We adjust our DPU estimates - and correspondingly, our target price - upwards to factor in better occupancy showing at Asia Square Tower 2 (18% of CCT’s 9M18 NPI).
In addition, there have been adjustments on our rental and cost assumptions, following a change in analyst.

Tara WONG Phillip Securities Research | https://www.stocksbnb.com/ 2018-10-26

SGX Stock Analyst Report ACCUMULATE MAINTAIN ACCUMULATE 1.90 UP 1.880