• 3Q18 DPU +8.9% YoY
• Occupancy ramped up
• Strong proxy to recovering rents

3Q18 Results Within Our Expectations

CapitaLand Commercial Trust’s (CCT) 3Q18 results came in within our expectations. Gross revenue and NPI jumped 35.6% and 37.3% YoY to S$100.5m and S$80.4m, respectively. DPU grew 8.9% YoY to 2.20 S cents after taking into account the adjustment to 3Q17’s DPU following the issuance of 513.5m units in Oct 2017 for a rights issue (CCT has a semi-annual distribution policy).

For 9M18, CCT’s NPI rose 19.2% to S$235.3m, while DPU of 6.48 S cents represented a decline of 1.5% and formed 73.3% of our FY18 forecast.

Positives Outweigh Negative

Looking at CCT’s disclosure on its average expired rents and committed rents in 3Q18, we believe there were negative rental reversions at Asia Square Tower 2 (AST2) and Capital Tower, while positive rental uplifts were registered at CapitaGreen and One George Street. CCT’s portfolio occupancy improved from 97.8% in 2Q18 to 99.2% as AST2 saw a strong uplift in occupancy by 6.2 ppt to 98.1%.

Its aggregate leverage ratio came down to a healthy 35.3%, while cost of debt was also lowered by ~20 bps to 2.6% and 92% of its gross borrowings have been fixed/hedged. The main elephant in the room would be the potential income vacuum once HSBC’s lease extension ends in Apr 2020. We believe a large scale refurbishment or redevelopment would be the likely outcome.

Look Forward to Firmer Rental Reversions in FY19 and FY20

Singapore’s office market continues to gain traction, as core Grade A CBD office rents rose 3.5% QoQ to S$10.45 psf/month in 3Q18. This augurs well for CCT’s leasing momentum ahead, in our view. For AST2, the average expiring rents are S$10.96 in FY19 and S$10 in FY20; for CapitaGreen, it is S$11.19 in FY19 and S$9.28 in FY20, and for Six Battery Road, the expiring rents are S$11.66 and S$10.17 in FY19 and FY20, respectively.

As there is still limited new office supply in those years, coupled with our expectations that core Grade A office rentals will continue its upward trajectory from current levels, we foresee firm rental reversions for CCT, especially in FY20. After fine-tuning our assumptions, our fair value moves to S$1.68 (previously S$1.69).

Source: OCBC Research - 29 Oct 2018