CapitaLand Commercial Trust - UOB Kay Hian 2020-07-24: 2Q20 More Subdued Outlook Due To 21 Collyer Quay & CapitaSpring; Downgrade To HOLD

CAPITALAND COMMERCIAL TRUST (SGX:C61U)

CapitaLand Commercial Trust - 2Q20 More Subdued Outlook Due To 21 Collyer Quay & CapitaSpring; Downgrade To HOLD

CapitaLand Commercial Trust's 2Q20 DPU of 1.69 S cents was down 23.2% y-o-y but up 2.4% q-o-q. Distribution from 60% stake in Raffles City Singapore dropped 55% y-o-y due to rental waivers of S$4.4m, lower turnover rent from hotels, lower office occupancy and retention of taxable distributable income of S$2.1m.
WeWork, sole tenant at 21 Collyer Quay, remains in dire need of a white knight. Committed occupancy at CapitaSpring remains low at 34.9%.
Downgrade to HOLD. Target price: S$1.66.

CapitaLand Commercial Trust (SGX:C61U) reported DPU of 1.69 S cents for 2Q20, down 23.2% y-o-y but up 2.4% q-o-q. This brings 1H20 DPU to 3.34 S cents, representing 48.9% of our full-year forecast. CapitaLand Commercial Trust has released taxable income of S$6.4m retained in 1Q20 in 2Q20. The results also included tax-exempt income of S$4.7m (none in 1Q20).

CapitaLand Commercial Trust benefitted from the acquisition of Main Airport Centre (MAC) in Sep 19 and higher revenue from Gallileo, both located in Frankfurt, Germany. However, group gross revenue declined 8.1% y-o-y due to upgrading works at 6 Battery Road and 21 Collyer Quay (HSBC’s lease expired on 30 Apr 20) and rental waivers provided for tenants.
Distribution from its 60% stake in Raffles City Singapore (RCS) dropped 55% y-o-y to S$10.9m due to rental waivers of S$4.4m, lower turnover rent from hotels, lower office occupancy and retention of taxable distributable income of S$2.1m.

Most buildings saw positive reversions (committed rents vs average expired rentals) for 2Q20 -
- Asia Square Tower 2 (+16.9% to +35.3%) and
- Six Battery Road (-2.1% to +2.9%),
- CapitaGreen (+13.6% to +16.8%),
- Raffles City Tower (+7.8% to +25.7%).
CapitaLand Commercial Trust signed 176,000sf of new (13%) and renewal (87%) leases in 2Q20. New demand came mainly from the business consultancy, it, media & telecommunications, financial services and food & beverage sectors.

Occupancy for Singapore office portfolio inched higher by 0.1ppt q-o-q to 95.2%, above market core CBD occupancy of pancies for Gallileo and MAC remained stable at 100% (flat q-o-q) and 92.2% (flat q-o-q) respectively.

CapitaLand Commercial Trust recognised decline in fair value of investment properties of S$194m, or 1.7% of the aggregate appraised valuation of S$11,123m as at Dec 19. Thus, NAV/share declined 3.3% to S$1.76. As the COVID-19 situation remains fluid, the valuation of investment properties is subject to estimation uncertainties.

In light of uncertainties around the COVID-19 pandemic, management has adopted a disciplined approach in practicing prudent capital management. CapitaLand Commercial Trust has completed the refinancing of borrowings due in 2020. It has also continued to lower the average cost of debt to 2.2% in 2Q20 (1Q20: 2.3%).

About 20% of CapitaLand Commercial Trust’s office community has returned to Work From Office (WFO) during the week ended 17 Jul 20. CapitaLand Commercial Trust recognised rental waivers of S$2.6m in 1H20 (net of property tax rebates and estimated cash grants provided by the government). Raffles City Singapore and One George Street (OGS) have similarly recognised rental waivers of S$10.8m and S$0.4m respectively in 1H20.
Management did not provide guidance on the amount of rental waivers expected in 3Q20 due to lack of clarity for qualifying SMEs.

The role and use of offices will change post COVID-19. Offices will not be used merely for work but also to nurture corporate culture and identity. There will be a hybrid mix of WFO and Work From Home (WFH), resulting in fewer staff working in the office. This trend is mitigated by de-densification to provide more personal space per employee to accommodate requirements for safe distancing.

Two-thirds of the leases expiring in 2020 have been renewed. Management is proactively looking to renew existing or attracting replacement tenants for the remaining 8% of office portfolio NLA (by gross rental income). CapitaLand Commercial Trust has resumed office viewings while adhering to safe distancing guidelines since late-June. Fit-out works for new tenants have also resumed.
Although Grade A core CBD office rents declined 3% q-o-q to S$11.15psf pm, management believes positive reversion can be achieved for the remaining leases in 2H20, given the low average expiring rents at S$9.08psf pm. Management sees weaker demand for office space mitigated by limited supply of 0.8m sf per year in 2020-24 (vs 1.0m sf per year in 2015-19).

Management is looking to resume AEI works for Six Battery Rd (cost: S$35m, targeted ROI: 8%) and 21 Collyer Quay (cost: S$45m, targeted ROI: 9%) once approvals are obtained for foreign workers.
As a re-cap, 21 Collyer Quay is fully leased to WeWork on a 7-year lease, which is set to commence in 2Q21. As for Capita Spring redevelopment, construction has resumed (structural works reached level 45). However, committed occupancy remains low at 34.9%.

We lower our FY20 and FY21 DPU forecasts by 4.7% and 3% respectively due to lower contribution from Raffles City Singapore.
Our target price of S$1.66 is based on DDM (required rate of return: 5.5%, terminal growth: 1.5%).
See CapitaLand Commercial Trust Share Price; CapitaLand Commercial Trust Target Price; CapitaLand Commercial Trust Analyst Reports; CapitaLand Commercial Trust Dividend History; CapitaLand Commercial Trust Announcements; CapitaLand Commercial Trust Latest News.
CapitaLand Commercial Trust Share Price catalysts:
- Lower interest rates and wider yield spread.
- Higher-than-expected signing rentals and occupancies at CapitaSpring.
- More accretive acquisitions in Singapore or Germany.

Jonathan KOH CFA UOB Kay Hian Research | Peihao LOKE UOB Kay Hian | https://research.uobkayhian.com/ 2020-07-24

SGX Stock Analyst Report HOLD DOWNGRADE BUY 1.66 DOWN 1.680