CapitaLand Commercial Trust - RHB Invest 2020-04-30: Preparing For Uncertainties Ahead


CapitaLand Commercial Trust - Preparing For Uncertainties Ahead

  • Keep NEUTRAL and SGD1.70 Target Price, 8% upside with 5% yield. 1Q performance, excluding retentions, was in line. Occupancy decline was seen in some buildings – with tenants rightsizing – but we see limited downside from here, as there are minimal lease expiries.
  • The proposed merger with CapitaLand Malls Trust (CT SP, NEUTRAL, Target Price: SGD2.38) is on track.
  • Upside risk: Relatively short-term impact from COVID-19. Downside risk: A prolonged economic recession.

Flattish 1Q distributable income excluding retentions.

  • CapitaLand Commercial Trust (SGX:C61U)’s 1Q distributable income of SGD63m was 23% y-o-y lower. The drop was mainly due to a SGD6.6m retention of taxable income, SGD5.4m in income from the Raffles City Singapore (RCS) Trust, an estimated SGD7.5m in tax exempt income, and cash-paid asset management fees. Excluding this, DI should have been flattish based on our estimates.
  • NPI rose 0.7% y-o-y, mainly on contributions from Main Airport Centre – acquired in 3Q19.

Committed rent rebates of SGD25.8m, including property tax rebates.

  • Much of the rebates will be set aside for the retail and hospitality segments, which are badly impacted by the COVID-19 and circuit breaker measures.
  • ~25% of tenants are in travel & hospitality, flex spaces, retail products & services, and food & beverage. Very few of CapitaLand Commercial Trust’s office tenants have asked for rental deferments, and there are no rental arrears so far.

Lower Six Battery Rd (SBR) tenancies with Standard Chartered’s lease expiry.

  • Overall portfolio occupancy fell 2.8ppts to 95.2%, mainly dragged by SBR, where occupancy declined to 78.5% (4Q19: 98.7%) as Standard Chartered vacated some of its spaces. Asset enhancement initiative works there are being done in phases, and CapitaLand Commercial Trust expects some completion delays (initial estimate: 3Q21) due to COVID-19.
  • Leasing activities have also have taken a hit for the revamped space. Tenant space downsizing was seen at CapitaGreen, Raffles City Singapore, and Asia Square Tower 2 too.
  • CapitaSpring’s construction remains on track for 1H21. Pre-leasing currently stands at 35%, with plans to step up leasing activities post lifting of the circuit breaker

~303,000 sq ft of leases (22% new leases) were signed in 1Q

  • ~303,000 sq ft of leases (22% new leases) were signed in 1Q, with demand coming from financial services, legal firms, and energy tenants. 1Q rent reversions continued to remain positive, with expiring rent much lower than market rent. ~10% of office leases are due for renewals in 2020.
  • With average rent expiry at SGD9.37psf, c.20% below the market average, we still expect positive rent reversions for the full year.

WeWork lease still intact.

Vijay Natarajan RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-04-30
SGX Stock Analyst Report NEUTRAL MAINTAIN NEUTRAL 1.700 SAME 1.700