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

CAPITALAND COMMERCIAL TRUST (SGX:C61U)

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.

CAPITALAND COMMERCIAL TRUST (CCT, SGX:C61U) reported a 2Q19 DPU of 2.20 S cents (+1.9% y-o-y), bringing 1H19 DPU to 4.40 S cents (+2.8% y-o-y). The results were in line with expectations.

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.

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.

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.

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%.

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.

Jonathan KOH CFA UOB Kay Hian Research | Peihao LOKE UOB Kay Hian | https://research.uobkayhian.com/ 2019-07-18

SGX Stock Analyst Report HOLD DOWNGRADE BUY 2.17 UP 2.160