CapitaLand Commercial Trust - DBS Research 2019-10-24: Positive Reversions Continue


CapitaLand Commercial Trust - Positive Reversions Continue

  • CapitaLand Commercial Trust's 3Q19 DPU was flat y-o-y at 2.20 Scts; 9M19 DPU grew 1.9% y-o-y to 6.60 Scts, at 74% of our FY19F estimate.
  • Recorded positive rental reversions ranging from 5-23%; highest rental reversions from AST2; above-market rents were signed at AST2 and Six Battery Road.
  • CapitaSpring’s pre-committed occupancy raised to 31% from 24% previously; two new tenants including The Work Project which signed a 7-year lease.
  • Maintain BUY; Target Price of S$2.30.

What’s New

CCT's 3Q19 DPU of 2.20 Scts flat y-o-y

  • CAPITALAND COMMERCIAL TRUST (SGX:C61U)'s 3Q19 DPU was flat y-o-y at 2.20 Scts. This takes 9M19 DPU to 6.60 Scts (+1.9% y-o-y) which represents c.74% of our FY19F estimate. See Capitaland Commercial Trust Dividend History.
  • 3Q19 revenue and NPI were also up 3.3% and 0.9% y-o-y respectively, mainly from the acquisition of Main Airport Centre, higher rentals from 21 Collyer Quay, Asia Square Tower 2 (AST2) and Capital Tower and Gallileo, and a one-off compensation sum of S$2.1m received for early surrender of lease at AST2. This was partially offset by the earlier divestment of Twenty Anson as well as lower earnings from Six Battery Road (lower occupancy of 98.4% versus 100% in 3Q18) and Bugis Village.
  • The acquisition of Main Airport Centre was completed on 17 September 2019. Hence, there was a marginal maiden contribution from Main Airport Centre in the quarter from 18 - 30 September 2019.
  • Overall portfolio occupancy remains healthy at 97.6%, marginally lower than 98.6% in 2Q19 and 99.2% in 3Q18, mainly from Asia Square Tower 2 (94% vs 95.8% in 2Q19 and 98.1% in 3Q18).
  • See Capitaland Commercial Trust Announcements.

Positive rental reversions

  • On the back of higher spot market rents (CBRE Grade A office market rents rose 8% q-o-q to S$11.45 psf in 3Q19), over the quarter signing rents were 5-23% higher (mid-point of disclosed signing rent range) than the disclosed expiring rents. This should translate into higher income over the coming quarters.
  • The highest rental reversions came from Asia Square Tower 2 with committed rents ranging from S$12.50-13.00 psf vs average expiring rents at S$10.35 psf.
  • Six Battery Road commanded strong committed rents above the market rents ranging from S$11.95-12.80 psf, though estimated rental reversions were only at single digits.

Higher gearing due to acquisition of Main Airport Centre and development of CapitaSpring; borrowing cost flat q-o-q

  • Gearing inched up to 35.5% from 34.8% as at 2Q19 and 34.9% at end-4Q18 due to acquisition of Main Airport Centre and drawdown of debt for the development of CapitaSpring.
  • Average cost of debt was flat q-o-q at 2.5% (2.6% at end-4Q18).
  • Meanwhile, c.92% of CapitaLand Commercial Trust’s borrowings remain on fixed rates.
  • NAV per unit at S$1.83 vs S$1.82 in 2Q19 and S$1.84 in 4Q18.

CapitaSpring’s pre-committed occupancy rose to 31% from 24%

  • CapitaLand Commercial Trust secured two new leases at CapitaSpring, raising the pre-committed occupancy to 31% from 24% (JP Morgan lease previously).
  • The two new leases are from the Real Estate and Property Services sector, each taking an entire floor.
  • One of the two new tenants is The Work Project (CapitaLand (SGX:C31) owns a 50% stake), which is leasing 22,000 sqft, to offer core+flex solutions to tenants. CapitaSpring has also inked a MOU with The Work Project, tapping on their ‘Work-Meet-Host’ capabilities to operate flex solutions and curate exciting new offerings including spaces with lifestyle experiences such as a lounge, bespoke office suites, conference rooms and activity-based workspaces.
  • The Work Project has committed to a 7-year lease from September 2021 to August 2028 for a total estimated rental payable of S$22.7m, implying an average rental rate of S$12.28 psf/month.
  • CapitaSpring is on track to be completed in 1H21.

Maintain BUY; Target Price of S$2.30

  • We maintain our BUY rating and Target Price of S$2.30 as CapitaLand Commercial Trust continues to be the go-to Singapore office proxy with key catalysts from
    1. healthy rental reversions sufficient to buffer potential moderation in spot rent growth;
    2. redevelopment/AEIs to improve portfolio quality driving medium-term growth,
    3. inorganic growth potential from acquisition pipeline from its sponsor (both local and overseas) and third-party acquisitions.
  • (See Capitaland Commercial Trust Share Price; Capitaland Commercial Trust Target Price)
  • Our investment thesis could be derailed if economic growth continues to weaken and eventually impacts new demand for office space.

Rachel TAN DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2019-10-24
SGX Stock Analyst Report BUY MAINTAIN BUY 2.300 SAME 2.300