• 1Q19 DPU +3.8% YoY
• Positive rental reversions
• Valuations not appealing

1Q19 Results Within Our Expectations

CapitaLand Commercial Trust’s (CCT) 1Q19 results met our expectations. Gross revenue and NPI rose 3.5% and 3.4% YoY to S$99.8m and S$79.8m, respectively. Growth was driven largely by Gallileo and Asia Square Tower 2 (AST2), but partially offset by the divestment of Twenty Anson. DPU grew 3.8% YoY to 2.20 S cents due to lower finance costs and a distribution of tax-exempt income of S$3.4m (~0.091 S cents per unit). 1Q19 DPU formed 24.2% of our FY19 forecast.

Robust Signing Rents for Renewals/new Leases in 1Q19

Positive rental reversions were largely achieved in 1Q19. Committed rents (psf/month basis) at AST2, Six Battery Road, One George Street and CapitaGreen were S$11.00-S$12.50, S$11.70- S$13.50, S$9.50-S$10.80 and S$12.30-S$13.30, versus average expired rents of S$10.20, S$11.85, S$9.91 and S$12.13, respectively.

We believe this was underpinned by CCT’s good quality assets and continued momentum in Singapore’s office market. Core Grade A CBD office rents rose 3.2% QoQ to S$11.15 psf/month in 1Q19, the sixth consecutive quarter whereby rents grew more than 3% QoQ, based on data from CBRE.

Looking ahead, CCT’s average expiring rents of S$10.44 psf/month in 2019, S$9.60 psf/month in 2020 and S$10.72 psf/month in 2021 are currently below the market spot rent of S$11.15 psf/month, implying room for favourable rental reversions ahead, especially in 2020, barring any unforeseen circumstances. Portfolio occupancy remains high at 99.1%, versus 99.4% as at end-FY18.

FY19F Distribution Yield of 4.7%, as at 18 Apr Close

While we keep our forecasts unchanged, we lower our risk-free rate assumption from 2.7% to 2.3% on account of a more dovish interest rate environment. Correspondingly, our fair value estimate increases from S$1.83 to S$1.88. Based on CCT’s closing price of S$1.93 (18 Apr) and our forecasts, it is trading at FY19F distribution yield of 4.7% and P/B ratio of 1.05x. The former comes in at 1.4 standard deviations below its 8-year average forward yield of 5.6%. Maintain HOLD.

Source: OCBC Research - 22 Apr 2019