• CapitaLand Commercial Trust's 1Q19 DPU of 2.2 Scts is in line at 24.1% of our FY19 forecast.
• High portfolio occupancy, with most lease renewals enjoying positive uplift.
• Maintain ADD with a higher Target Price of S$2.03.

1Q19 Results Highlights

• CAPITALAND COMMERCIAL TRUST (SGX:C61U)’s 8% y-o-y higher distribution income of S$82.7m and 3.8% y-o-y increase in DPU to 2.2 Scts for 1Q19 was as expected and made up 24.1% of our FY19 forecast. This was achieved through a 3.4% y-o-y improvement in gross revenue, thanks to contributions from Gallileo and higher occupancy at Asia Square Tower 2 as well as lower interest expense, partly offset by the divestment of Twenty Anson.

High Portfolio Occupancy, Expect Positive Reversions for Lease Expiries

• CapitaLand Commercial Trust's portfolio occupancy remains high at 99.1% at end-1Q19. The trust leased/renewed 225,000 sqft of retail and office space in 1Q, 18% of which are new leases. Demand came from financial services, business consultancy, IT, media and telecoms as well as retail products and services. Rental reversions for most of the leases were positive.
• CapitaLand Commercial Trust's has a remaining 13% and 27% of office and retail leases to be re-contracted in FY19 and FY20. Expiring rents average S$10.44psf and S$9.60psf for FY19 and FY20. Hence, we anticipate the trust to continue seeing positive reversions upon renewal.

Robust Balance Sheet

• Gearing rose slightly q-o-q to 35.2% at end-1Q19 with additional debt drawdown for the CapitaSpring development. Scheduled to be completed in 2021, CapitaLand Commercial Trust's plans to ramp up marketing activities for this property with plans to open an interactive marketing showsuite in 2Q19.
• Balance sheet metrics remain robust with 92% of its gross borrowings on fixed rates and average term to maturity of 3.6 years.

Maintain ADD

• We leave our FY19-21 DPU estimates unchanged and retain an ADD rating with a higher DDM-based Target Price of S$2.03 as we lower our cost of equity projection to 7.2% from 7.4% on the back of a lower risk-free rate assumption. See attached PDF report for result comparison table and also the S-REITs peer comparison table. 
• Catalysts are faster-than-expected hike in office rents.
• Key risks include a slowdown in economic growth which could curb appetite for office space.

Source: CGS-CIMB Research - 18 Apr 2019