CapitaLand Commercial Trust - UOB Kay Hian 2019-07-18: 2Q19 Steady Growth; Deepens Presence In Germany; Downgrade To HOLD


CapitaLand Commercial Trust - 2Q19: Steady Growth; Deepens Presence In Germany; Downgrade To HOLD

  • 2Q19 results were in line with expectations. CapitaLand Commercial Trust benefitted from the up-cycle in the office market with average office rent increasing 3.5% q-o-q to S$10.05psf pm, although committed office occupancy dipped slight by 0.7ppt q-o-q to 98.3%.
  • CapitaLand Commercial Trust will embark on AEIs for 21 Collyer Quay and Six Battery Road in 2020.
  • The acquisition of MAC in Frankfurt, Germany is accretive to 1H19 DPU by 1.0% (40% debt) to 2.5% (100% debt).
  • CapitaLand Commercial Trust's share price has already outperformed. Downgrade to HOLD. Target price: S$2.17. Entry price: S$1.98.


Steady growth from diversified base of Grade A office buildings.

  • The improved performance was due to the acquisition of Gallileo and higher revenue from 21 Collyer Quay (lease with HSBC extended by one year with step-up of 35%), Asia Square Tower 2 (AST2) and Capital Tower, offset by the divestment of Twenty Anson and lower revenue from Bugis Village (returned leasehold interest to the State) and Six Battery Road.
  • Portfolio occupancy remained high at 98.6% as at Jun 19. Occupancy at AST2 dipped slightly by 2.3ppt q-o-q to 95.8%. The results included tax-exempt income distribution of S$3.9m.

Positive rental reversions.

  • CapitaLand Commercial Trust signed 214,000sf of new leases and renewals with average gross rent at S$10.05psf pm in 2Q19, an increase of 4.2% y-o-y and 3.5% q-o-q. Committed rents were S$11.87-13.50psf for AST2 (expired rent: S$10.58psf), S$12.90- 13.20psf for Six Battery Road (expired rent: S$11.70psf) and S$12.00-13.30psf for CapitaGreen (expired rent: S$11.62psf).
  • Property values increased S$70m or 0.6% hoh to S$10.7b (Singapore up S$79.7m, ny down S$9.7m due to weaker Euro). NAV/share edges up slightly by 1.1% q-o-q to S$1..81.


  • Management will create value by enhancing the value by acquiring potential.

Scheduled to commence AEIs for 21 Collyer Quay and Six Battery Road in 2020.

  • 21 Collyer Quay (previously called HSBC Building) will be closed for a cost of S$45m. Management estimated the ROI for the AEI at 9%. The entire WeWork for years starting 2Q21. Inclusive of management estimates CapitaLand Commercial Trust’s exposure 7%.
  • Six Battery Road will get a new facade (said to “shine like a diamond during the day and glow like a lantern at night”). CapitaLand Commercial Trust will add a new alley lined with F&B outlets, which links Raffles Place to the Singapore River, and a new rooftop restaurant. The AEI will cost S$35m with ROI estimated at 8% and will be carried out in phases from 1Q20 to 3Q21 (affects NLA of 129,000sf). Management will stagger the upgrading works to minimise the short-term impact.

Embarks on second Germany.

  • CapitaLand Commercial Trust has proposed to acquire a 94.9% stake in Main Airport Frankfurt, Germany, for €251.5m (S$387.1m) at an initial NPI yield of 4.0%. MAC is a freehold airport in Europe.
  • Committed occupancy is 90% and key tenants include IQVIA (health information and clinical research), Dell (computer hardware and software) and Miles & More (frequent flyer and awards programme).
  • Depending on the funding structure and on a pro forma basis, the acquisition is expected to be accretive to 1H19 DPU by 1.0% (40% debt) to 2.5% (100% debt). Pro-forma aggregate leverage would increase from current 34.8% to 35-37%. Overseas exposure will increase from 5% to 8%.


  • We trimmed our AEI for 21 Collyer Quay.


  • Downgrade to HOLD with target price at S$2.17. Our valuation is based on DDM (required rate of return: 6.25%, terminal growth: 2.0%). Entry price: S$1.98.
  • CapitaLand Commercial Trust is the bellwether for office REITs. However, the stock has already outperformed. Upside is limited and share price could consolidate in the near term.


  • Higher office rentals and positive newsflow on leasing activities.
  • More accretive acquisitions in Germany or Singapore.

Jonathan KOH CFA UOB Kay Hian Research | Peihao LOKE UOB Kay Hian | 2019-07-18
SGX Stock Analyst Report HOLD DOWNGRADE BUY 2.17 UP 2.160