CapitaLand Commercial Trust - UOB Kay Hian 2018-10-29: 3Q18 In Line


CapitaLand Commercial Trust - 3Q18: In Line

  • CCT has started to see positive reversions at some of its properties, including CapitaGreen and One George Street. Singapore office rental outlook remains positive.
  • During the quarter, CCT also secured a one year-lease extension with HSBC at S$27.7m.
  • Maintain BUY with raised target price of S$2.00. 

CapitaLand Commericial Trust’s 3Q18 results.

Results in line with expectations.

  • CapitaLand Commerical Trust (CCT) reported 3Q18 DPU of 2.20 S cents (+8.9% y-o-y), bringing 9M18 DPU to 6.48 S cents (-1.5% y-o-y).

  • 3Q18 gross revenue and net income grew by 35.6% and 37.3% y-o-y respectively, due to contributions from Asia Square Tower 2 (AST2) and Gallileo, partially offset by the divestments of Wilkie Edge and Twenty Anson.
  • The results are in line with expectations, with 9M18 DPU representing 72.8% of our full-year forecast.

Portfolio occupancy helped by AST2.

  • The group’s portfolio occupancy enjoyed an uptick to 99.2% (+1.4ppt q-o-q), due to an improvement in occupancies at AST2 which increased to 98.1% (vs 91.9% in 2Q18).
  • The occupancy of its Singapore portfolio was 99.1%, which is above the market’s CBD occupancy of 94.6%.

Committed rents are above market, but reversions are mixed.

  • CapitaGreen (2.8% to 3.6%) and One George Street (1.1%-31.1%) saw positive reversions (committed rents vs average expired rentals), while Capital Tower (-23.4% to -5.3%) and AST2 (-16% to - 0.8%) were negative.
  • CapitaLand Commerical Trust also has a well-spread portfolio lease expiry profile, with a weighted average lease term to expiry of 6.0 years.

Aggregate leverage declined to 35.3% (-2.6ppt qoq).

  • During the quarter, CapitaLand Commerical Trust prepaid S$500m of higher interest debt from net proceeds raised from the divestment of Twenty Anson. Resultantly, their weighted average cost of debt declined to 2.6% (-0.2ppt q-o-q).
  • On our estimates, CapitaLand Commerical Trust has a debt headroom of about S$1.7b.

Singapore office rents on growth trajectory.

  • Singapore's core CBD and Grade A occupancy rates improved to 94.6% as at Sep 18. Grade-A office rents rose by 14.8% y-o-y to S$10.45 psfpm in 3Q18, according to CBRE. Market rents are expected to improve further, on the back of limited new supply in next few years and high pre-commitment levels of completed and upcoming office CBD buildings.

Frankfurt prime office rents to stay resilient.

  • Management noted the relatively low new supply completing in 2018 and 2019, as well as the good pre-letting levels, which will support prime office rents in Frankfurt.

HSBC extended Singapore lease for a year at S$27.7m.

  • The lease extension is for the whole of 21 Collyer Quay with HSBC, and will commence from 30 Apr 19. The property comprises of c.200,467 sf in NLA of office space, built on a leasehold tenure (ie expiring on 18 Dec 2849). At S$27.7m extension for a year, the renewal rent works to S$11.51 psfpm (vs S$8.50 psfpm passing rent on the current lease).
  • The renewed rents are also in line with asking rents of S$10-13 psfpm in the vicinity at 20 Collyer Quay (according to Corporate Locations). The renewals are also signed on a triple net basis, meaning that the tenant HSBC will bear the building's operating expenses including property tax (similar to the current lease).
  • CapitaLand Commerical Trust is also evaluating their options for 21 Collyer Quay post-Apr 20, which include refurbishment, re-letting, redevelopment and divestment, given that HSBC is renewing the lease for only a short one-year period.

Earnings revision.

  • We raise our 2019 and 2020 DPU by 1.3% and 0.3% respectively, factoring in the higher rents achieved for the one-year lease extension by HSBC.

BUY with a raised target price of S$2.00 (previously S$1.99).

  • Our valuation is based on DDM (required rate of return: 6.9%, terminal growth: 2.5%).

Peihao LOKE UOB Kay Hian Research | Andrew CHOW CFA UOB Kay Hian | https://research.uobkayhian.com/ 2018-10-29
SGX Stock Analyst Report BUY MAINTAIN BUY 2.00 UP 1.990