CapitaLand Commercial Trust - UOB Kay Hian 2020-10-22: Goodbye CCT, Welcome Capitaland Integrated Commercial Trust (CICT)

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CAPITALAND COMMERCIAL TRUST (SGX:C61U)

CapitaLand Commercial Trust - Goodbye CCT, Welcome Capitaland Integrated Commercial Trust (CICT)

• CapitaLand Commercial Trust benefitted from the full-quarter contribution at the newly-acquired MAC and the sequential rebound of 12.2% q-o-q at RCS. However, the asset enhancements at Six Battery Road and 21 Collyer Quay remain a drag.
• WeWork, the sole tenant at 21 Collyer Quay, is now financially more stable, but the pre-commitment at CapitaSpring remains low at 34.9%.
• CapitaLand Commercial Trust's unitholders will be paid a cash consideration and allocated new CapitaLand Mall Trust (SGX:C38U) shares on 28 Oct 20. CapitaLand Commercial Trust is scheduled to be delisted from the SGX Main Board on 30 Nov 20.
• Maintain HOLD with target price of S$1.63.

CapitaLand Commercial Trust's 3Q20 Results

• CapitaLand Commercial Trust (SGX:C61U) reported a DPU of 2.0 S cents, down 9.1% y-o-y. It has released S$3.75m or half of the taxable income of S$7.5m from its 60% stake in Raffles City Singapore (RCS) retained during 1H20.

Affected by asset enhancements at Six Battery Road and 21 Collyer Quay.

• Gross revenue and net property income (NPI) dropped 8.7% and 9.9% y-o-y respectively.
• CapitaLand Commercial Trust benefitted from full-quarter contribution from Main Airport Centre (MAC), which was acquired in Sep 19, and higher contribution from Gallileo, both located in Frankfurt, Germany. It was affected by asset enhancement works at Six Battery Road and 21 Collyer Quay (HSBC’s lease expired on 30 Apr 20).
• Revenue from RCS rebounded 12.2% q-o-q. Rental waiver amounted to S$0.9m in 3Q20 (1H20: S$11.9m).

Maintained positive rental reversion in 3Q20.

• CapitaLand Commercial Trust signed 267,000sf of new (24%) and renewal (76%) office leases in 3Q20. Committed rents at Six Battery Road and Raffles City Tower for new and renewed leases were S$10.32-12.40psf pm (+11% to +32%) and S$9.00-10.30psf pm (+9% to +25%) respectively.
• New demand came mainly from real estate & property services (44%) and financial services (35%). Retail space at RCS suffered negative rental reversion of 15.9% during 9M20.

Committed occupancy remained stable at 95.2% (flat q-o-q).

• Occupancy for the Singapore office portfolio inched marginally higher by 0.3ppt q-o-q to 95.5%, above market core CBD occupancy of 93.9%. However, occupancy at Six Battery Road remains low at 79.4% due to ongoing asset enhancement works. In Germany, occupancy for Gallileo was unchanged at 100% (flat q-o-q), but occupancy for MAC dropped 2ppt q-o-q to 90.2%.

Conservative capital management.

• In light of uncertainties due to the COVID-19 pandemic, CapitaLand Commercial Trust has been disciplined in practising prudent capital management. CapitaLand Commercial Trust has completed the refinancing of borrowings due in 2020. Refinancing for S$290m of secured bank loan for One George Street due in 2021 is in progress. It has sufficient bank facilities to refinance another S$260m of borrowings due in 2021. The average cost of debt remains stable and low at 2.2%.

Creation of CICT through CMT and CCT merger.

• The merger between CapitaLand Mall Trust (SGX:C38U) and CapitaLand Commercial Trust has obtained approvals at the EGM and trust scheme meeting. The effective date for the merger is 21 Oct 20. CapitaLand Commercial Trust ceased to trade on the SGX Main Board since 19 Oct 20.
• CapitaLand Commercial Trust unitholders will be paid a cash consideration and allocated new CapitaLand Mall Trust (SGX:C38U) shares on 28 Oct 20. Clean-up distribution for the period of 1 Jul 20 to 20 Oct 20, which includes a 3Q20 DPU of 2.0 S cents, will be paid on 30 Nov 20. CapitaLand Commercial Trust is scheduled to be delisted and CapitaLand Mall Trust (SGX:C38U) will be renamed as CapitaLand Integrated Commercial Trust (CICT) on 30 Nov 20.

Mixed outlook.

• Since 28 Sep 20, up to half of all employees are allowed to be back working from their offices, although they must work from home for at least half their working hours. 35% of CapitaLand Commercial Trust’s office tenants have returned to their offices as of Oct 20. CapitaLand Commercial Trust benefits from expansion at technology companies. However, it estimated that some tenants may return about 20% of their office space due to:
  1. cost reduction initiatives; and
  2. adoption of long-term office space + flexible (Core + Flex) model.
• Areas of weakness include energy & commodities and financial institutions & insurance.
• 37 tenants representing 6.2% of the total number of tenants are on the rental deferment scheme, including a hotel operator, a co-working operator and retail & F&B tenants.

WeWork executing five-year turnaround plan.

• WeWork has aggressively reduced cash burn and shed costs since aborting the planned IPO in October last year. It has slashed its workforce from 14,000 last year to 5,600 currently. It has drastically slowed its expansion and closed some locations. Thus, its membership count has dropped 12% q-o-q to 612,000 in 2Q20. It has sold non-core assets, such as coding academy Flatiron School, software company Teem, co-working start-up The Wing and its China co-working operations. WeWork is on track to achieve positive cash flow in 2021.

The COVID-19 pandemic turned out to be a blessing in disguise.

• Corporate customers are using WeWork’s flexible office space as their satellite offices - closer to where their employees’ live and to reduce concentration of employees at their main offices. Some corporate customers leverage on WeWork’s various facilities to provide employees with the flexibility to work from wherever they prefer.

Asset enhancement and redevelopment works in progress.

• Management expects asset enhancement works for Six Battery Road (costs: S$35m, targeted return on investment (ROI): 8%) to complete by end-21. 21 Collyer Quay is fully leased to WeWork on a 7-year lease, which is set to commence in 4Q21 (previous: 2Q21). The upgrading costs S$45m and is expected to provide an ROI of 9%.

Pre-commitment for CapitaSpring remains low.

• Construction for CapitaSpring has pushed ahead and structural works have reached level 50. The building is targeted for completion in 2H21. Committed occupancy remains low at 34.9%.

CapitaLand Commercial Trust - Recommendation

• We maintain our existing earnings forecasts.
• Maintain HOLD with target price of S$1.63. Each CapitaLand Commercial Trust unit is equivalent to 0.72 new CapitaLand Mall Trust (SGX:C38U) unit plus cash of S$0.259, which is worth S$1.63 based on a unit price of S$1.91 for CapitaLand Mall Trust (SGX:C38U). Our target price is based on a swap ratio of 0.72 x CapitaLand Mall Trust (SGX:C38U) unit + cash S$0.259.
• 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.

Jonathan Koh CFA UOB Kay Hian Research | Loke Peihao UOB Kay Hian | https://research.uobkayhian.com/ 2020-10-22

SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.63 DOWN 1.660