• CapitaLand Commercial Trust's 2Q/1H19 DPU of 2.2/4.4 Scts was in line with expectations.
• Positive rental reversion; planning new AEIs to enhance portfolio.
• Maintain ADD with an unchanged Target Price of S$2.25.

2Q19 Results Highlights

• CAPITALAND COMMERCIAL TRUST (SGX:C61U) posted a 3.8% y-o-y increase in 2Q19 DPU to 2.2 Scts, thanks to a 3% increase in revenue from Galileo, 21 Collyer Quay, Asia Square Tower 2 and Capital Tower as well as a tax exempt income of S$3.85m, partly offset by lower occupancy at 6 Battery Rd and Bugis Village.
• 1H19 DPU of 4.4 Scts, +2.8% y-o-y, was within our expectations at 48.1% of our FY19 forecast.

Positive Rental Reversion Across Its Portfolio

• Portfolio occupancy slipped 0.7% pt q-o-q to 98.3% at end-2Q even as average portfolio rent ticked up 3.5% q-o-q to S$10.05psf. The trust renewed 257k sq ft of space in 2Q, of which 25% were new leases. Demand came from banking, financial services and energy, maritime, commodities and logistics sectors.
• CapitaLand Commercial Trust enjoyed positive rental reversion with signing rents ranging from S$9.50-13.50psf vs. expiring rents of S$9.10-11.70psf.

New AEIs to Enhance Portfolio

• Following the planned HSBC from 21 WeWork, commencing interim period, CapitaLand Commercial Trust plans to undertake a S$45m upgrade exercise on the property, including enhancement of equipment, common and lettable areas. It expects a 9% ROI from this exercise. We tweak our FY20/21F estimates to factor in income vacuum during the downtime between 2Q20 and 4Q20.
• Meanwhile, CapitaLand Commercial Trust also plans to enhance 6 Battery Rd with a S$35m AEI to refurbish 129k sq ft of space comprising a podium block and part of the low zone office space. Scheduled to take place between 1Q20 and 3Q21, this exercise targets to achieve an 8% ROI.

Deepening Purchase

• CapitaLand Commercial Trust has also announced the proposed acquisition of a 94.9% interest in Main Airport Center (MAC) in Frankfurt for €251.5m. The office property, located within the Frankfurt Airport office submarket, has a 90% committed occupancy. The transaction is subject to cost of 1.1%, CapitaLand Commercial Trust expects to achieve proforma DPU accretion of 1-2.5%, assuming debt funding of 40-100% and gearing rises to 37% from 34.8% at end- 2Q.
• We have currently baked in 40/60 debt/equity funding for this transaction into our estimates.

Maintain ADD

• We tweak our FY20-21F DPU down by CapitaLand Commercial Trust’s share price has 7.5%. Hence, we maintain ADD with an unchanged Target Price of S$2.25.
• Upside risks include further accretive acquisitions while downside risks include slower office demand due to a soft macro outlook.

Source: CGS-CIMB Research - 17 Jul 2019