CapitaLand Commercial Trust - DBS Research 2020-04-30: In A Cash Conservation Mode


CapitaLand Commercial Trust - In A Cash Conservation Mode

  • CapitaLand Commercial Trust's 1Q20 DPU fell 25% y-o-y mainly due to income retention in view of the COVID-19 situation.
  • 1Q20 revenue and NPI grew 3.8% and 0.6% y-o-y led by contributions from Main Airport Center.
  • COVID-19 could impact selected sectors, which contribute c.25% of gross rental income.

1Q20 DPU fell 25% y-o-y mainly due to retention of income to conserve cash:

  • CapitaLand Commercial Trust (SGX:C61U)'s 1Q20 DPU fell 25% y-o-y to 1.65 Scts mainly due to retention of taxable distributable income and no distribution of tax-exempt income for cash conservation due to the COVID-19 pandemic.
  • Aside from RCS Trust (60% held by CapitaLand Commercial Trust) retaining a higher amount of S$5.4m vs S$1.5m in 1Q19, CapitaLand Commercial Trust has retained S$6.4m of taxable distributable income and reduced its dividend payout ratio to c.91%
  • CapitaLand Commercial Trust's 1Q20 revenue and NPI grew 3.8% y-o-y and 0.6% y-o-y respectively, mainly led by contributions from Main Airport Center and higher rental income from 21 Collyer Quay and CapitaGreen, partially offset by lower rental income from Six Battery Road and Asia Square Tower 2 due to lower occupancies.

Portfolio occupancy fell to 95%; strong positive rental reversions maintained:

  • Overall portfolio occupancy inched down by 2.8ppts to 95.2% vs 98% in 4Q19 and 99.1% in 1Q19, mainly from Six Battery Road (78.5% vs 98.7% in 4Q19) following the expiry of Standard Chartered Bank’s lease in Jan 2020.
  • While market spot rents fell marginally (-0.4% q-o-q to S$11.50psf), signing rents during the quarter were 3- 23% higher (mid-point of disclosed signing rent range) than expiring rents. This should translate to higher income in the coming quarters offsetting some vacancies.
  • The highest rental reversions came from CapitaGreen with committed rents ranging from S$11.00psf to S$12.20psf vs average expiring rents of S$9.41psf.
  • In 1Q2020, CapitaLand Commercial Trust finalised leases covering some 303k sqft of space (largely renewals), representing two-thirds of the leases expiring in FY2020. This lowers the percentage of lease expiries from 17% as at 4Q19 to 9%. Most of the remaining leases will be expiring in 2H2020.
  • Pre-committed leases at CapitaSpring remains stable at 35%.

Gearing stable; borrowing cost fell marginally q-o-q

  • Gearing remained relatively stable at 35.5% vs 35.1% in 4Q19.
  • Average cost of debt fell marginally by 0.1 ppt q-o-q to 2.3% (2.4% at end 4Q19).
  • Meanwhile, c.85% on CapitaLand Commercial Trust’s borrowings remain on fixed rates.
  • NAV per unit at S$1.83 vs S$1.82 in 4Q19 and S$1.79 in 1Q19.

CapitaLand Commercial Trust - COVID-19 impact / updates

  • CapitaLand Commercial Trust has committed a total of S$25.8m (including property tax rebates) to support affected tenants. CapitaLand Commercial Trust will pass all property tax rebates granted by the government to all its tenants. While CCT will provide more targeted assistance to affected office tenants, it has committed to extend rental rebates for April and May to retail tenants and waive the turnover rent for April for a hospitality tenant.
  • CapitaLand Commercial Trust has identified business sectors that are more affected by COVID-19, and these contribute c.25% of gross rental income. These business sectors comprise travel and hospitality, retail products & services, F&B and flex space operators. Aside from the flexible space operators which contribute some 4%, the rest of the tenants are largely from the hospitality and retail segments at Raffles City Singapore.
  • Thus far, CapitaLand Commercial Trust has received only a few requests for rental deferment. Management does not expect substantial rental reliefs and rent deferments to be given to its office tenants except that it may extend some assistance (rental deferment) to co-working operators.
  • Aside from rental relief measures, ongoing AEIs could potentially be delayed with the Circuit Breaker. Out of the 3 ongoing projects, management expects AEI works on Six Battery Road AEI will likely be delayed and consequently, leasing of the upgraded space may take longer to fill. Management believes the AEI works at 21 Collyer Quay and redevelopment of CapitaSpring will remain on track to complete by 4Q2020 and 1H2021 respectively despite the Circuit Breaker.

CapitaLand Commercial Trust's Outlook

  • While there are current / upcoming vacancies (Standard Chartered’s lease ended in Jan 2020, HSBC’s lease ends in Apr 2020 at 21 Collyer Quay and Raffles City Tower) which are already known and expected by the market, COVID-19 and Circuit Breaker has slowed leasing activities and marketing of these spaces could take longer than expected.
  • During this uncertain period, management expects tenants will likely renew their leases rather than move to a new location. As such, tenant retention will be a key focus.
  • Management expects rental reversions to remain positive given the low expiring rents in FY2020 to FY2022.
  • Management expects the Circuit Breaker will have a bigger impact in the months of May and June. As such, the retention of income will be reviewed closer to the end of 2Q20.

Downgrade to HOLD; Target Price cut to S$1.55

Derek TAN DBS Group Research | Rachel TAN DBS Research | 2020-04-30
SGX Stock Analyst Report BUY MAINTAIN BUY 1.55 DOWN 2.300