• Results are in line as CapitaLand Commercial Trust continues to achieve stellar portfolio occupancy of 99.1%. There is more upside for CapitaLand Commercial Trust, given acquisition and AEI opportunities in Singapore (HSBC Building, call option for 55% interest in CapitaSpring and ASB Tower).
• Management continues to explore opportunities overseas in selected gateway cities of developed markets, such as Germany, with target allocation of up to 20% of the portfolio property value.
• Maintain BUY and target price of S$2.16.

1q19 Results

Results in line with expectations.

• CAPITALAND COMMERCIAL TRUST (SGX:C61U) reported 1Q19 DPU of 2.20 S cents (+3.8% y-o-y). Gross revenue and net property income (NPI) grew 3.5% and 3.4% y-o-y respectively due to contributions from Gallileo (acquired in Jun 18), higher occupancy at Asia Square Tower 2 (AST2), which more than offset the divestment of Twenty Anson.
• Results were in line with our expectations, with 1Q19 DPU at 24.5% of our full-year forecast.

Active leasing in progress.

• CapitaLand Commercial Trust signed 225,000sf of leases in 1Q19, of which 18% were new leases. New leasing demand came from diverse sectors, such as retail (22%), financial services (20%), business consultancy, IT, media & telecommunications (18%), energy, commodities, maritime & logistics (15%) and manufacturing & distribution (13%).
• More than half of the expiring leases in 2019 have been committed.

CCT returned leasehold interest of Bugis Village to the State on 1 Apr 19.

• It received compensation sum of S$40.7m in return. At the same time, CapitaLand Commercial Trust signed a one-year master lease with the State for Bugis Village till 31 Mar 20, which is estimated to bring in net income of S$1m. Some 84% of the Bugis Village tenants have committed to extend their leases.

Portfolio occupancy maintained at 99.1% (-0.3ppt q-o-q).

• Singapore portfolio occupancy achieved a respectable 99.1% (vs Core CBD occupancy of 95.4%), while 00% occupancy. For over a decade, CapitaLand Commercial Trust has consistently achieved committed occupancy of above 90%.

Stock Impact

Positive reversions

• Positive reversions for majority of buildings (despite higher expiring rents). AST2 (+7.8% to +22.5%), Six Battery Road (-1.3% to +13.9%) and CapitaGreen’s (+1.4% to +9.6%) saw positive rental reversions (committed rents vs average expired rentals).

Refurbishment of HSBC Building.

• Management extended the HSBC lease to end-Apr 20 (from end-Apr 19), which will also enjoy an annual rental increase by 35%. Management sees the property as a gem, given its 999-year lease and prime location at the heart of Raffles Place. Their immediate focus is to refurbish and re-let the space.

Appetite for more accretive acquisitions.

• In Singapore, CapitaLand Commercial Trust has a call option to acquire the balance 55% interest in the commercial component of CapitaSpring that it does not own within five years of the building’s completion. CapitaSpring is due for completion in 1H21.
• CapitaLand Commercial Trust could also explore acquiring 29-storey ASB Tower at 79 Robinson Road given that CapitaLand (SGX:C31)’s acquisition of Ascendas-SingBridge was approved by shareholders.
• Management also continues to explore opportunities beyond Singapore, and is looking to increase depth in selected gateway cities of developed markets, such as Germany. The target is for overseas assets to account up to 20% of the portfolio property value.

Positive outlook for Singapore office market, given minimal supply-side pressure.

• Future island-wide office supply is expected to be limited, particularly for Grade A Core CBD offices as the URA announced its CBD incentive scheme to encourage landlords to consider redevelopment options. Overall demand growth remains healthy, which serves as a positive indicator for the office rental market.
• Grade A Core CBD office rent grew for the seventh consecutive quarter in 1Q19 to S$11.15psf pm (+3.2% q-o-q), and vacancy has also been compressed from 5.1% in 4Q18 to 4.8% in 1Q19, reflecting the good take-up of office spaces in these coveted locations.

Prime office market rent in Frankfurt to remain resilient.

• Management noted that prime office rent in Frankfurt is the highest among major German cities and also resilient through property cycles. In particular, the banking district in Frankfurt, where Galileo is strategically located, boasts record low vacancy rates.

Gearing remained stable at 35.2% (+0.3ppt q-o-q).

• Aggregate leverage increased slightly from 34.9% in 4Q18 to 35.2% in 1Q19, largely attributed to a debt drawdown of S$9m in relation to CapitaSpring. Average cost of debt declined to 2.5% (-0.1ppt q-o-q) and 92% of borrowings are in fixed rates in order to provide interest-expense certainty.

Earnings Revision / Risk

• We retain our earnings estimates.

Valuation / Recommendation

• Maintain BUY and target price of S$2.16, based on DDM (required rate of return: 6.25%, terminal growth: 2.0%).

Share Price Catalyst

• Higher office rentals and positive newsflow on leasing activities.
• More accretive acquisitions in Germany or Singapore.

Source: UOB Kay Hian Research - 22 Apr 2019