• CapitaLand Commercial Trust (SGX:C61U) reported 3Q19 DPU of 2.20 S cents, supported by higher rental from 21 Collyer Quay, AST2, Capital Tower and Gallileo. CapitaLand Commercial Trust will benefit from tight vacancies for Grade-A office buildings within core CBD. It should continue to achieve positive rental reversion as the rents for leases expiring in 2019-20 average S$10.18psf pm and S$9.60psf pm.
• Capitaland Commercial Trust's share price has retraced 11.3% from its recent peak at S$2.30 in early-July.
• Upgrade to BUY. Target price: S$2.30.

CCT's 3Q19 RESULTS

• CAPITALAND COMMERCIAL TRUST (SGX:C61U) reported 3Q19 DPU of 2.20 S cents (flat y-o-y), bringing 9M19 DPU to 6.60 S cents (+1.9% y-o-y). See Capitaland Commercial Trust Dividend History; Capitaland Commercial Trust Announcements.
• Advanced distribution of 0.62 S cents for 1-28 Jul 19 had already been paid on 29 Aug 19. The balance of distribution of 1.58 S cents for 29 Jul 19-30 Sep 19 will be paid together with 4Q19 DPU in Feb 20.
• The results are in line with expectations with 9M19 DPU representing 74.4% of our full-year forecast.

Steady growth from Grade-A offices.

• CapitaLand Commercial Trust's 3Q19 gross revenue and net property income (NPI) grew by 3.3% and 0.9% y-o-y, respectively, due to higher rental from 21 Collyer Quay, AST2, Capital Tower and Gallileo, which was offset by lower revenue from Six Battery Road and Bugis Village, as well as the divestment of Twenty Anson in Aug 18.

Positive rental reversions.

• AST2 (ranges from +20.8% to +25.6%), Six Battery Road (+1.4% to +8.6%), One George Street (+11.7% to +15.0%), Capital Tower (+26.2% to +34.8%) and Raffles City Tower (-1.3% to +20.2%) saw positive reversions (committed rents vs average expired rentals) for 3Q19.
• CapitaLand Commercial Trust signed 480,000sf of new and renewal leases. New demand came mainly from business consultancy, IT, Media & Telecommunications and Financial Services.

Occupancies remain resilient.

• Occupancy for CapitaLand Commercial Trust's Singapore portfolio is 98.1% (2Q19: 98.4%), significantly above the market occupancy of 96.0% for Core CBD.
• Occupancy for Gallileo located at Frankfurt remains unchanged at 100%. Frankfurt office vacancy remains low at 7.1% in 3Q19 (Banking District: 5.1%), and further reduction of vacancy rate is expected as demand for centrally located and modern office spaces rises.
• Occupancy for Main Airport Centre has improved 3.1ppt q-o-q to 93.1%.

Aggregate leverage increased slightly to 35.5% in 3Q19 (2Q19: 34.8%).

• Gearing has inched up slightly due to the acquisition of 94.9% interest in Main Airport Centre and debt drawn down by CapitaLand Commercial Trust’s JV. The weighted average term to maturity was 3.3 years (-2.9% q-o-q), and average cost of debt was 2.5% (flat q-o-q).

Stock Impact

Positive outlook for Singapore office rental.

• According to CBRE, Grade-A office rents rose 9.6% y-o-y to S$11.45psf pm in 3Q19. Occupancy rate in Singapore’s Core CBD buildings was 96.0% as at Sep 19, slightly higher than the occupancy rate of 95.8% recorded in Jun 19.
• CapitaLand Commercial Trust should achieve positive rental reversion in 2019 and 2020 as the average rent for leases expiring is S$10.18psf pm and S$9.60psf pm respectively, which is lower than existing market rents.

Proactive marketing for 51-storey CapitaSpring.

• Committed occupancy has ramped up to 31% ahead of CapitaSpring’s scheduled completion in 1H21. Besides anchor tenant JPMorgan, two leases for 45,000sf have been signed. CapitaSpring will offer conventional workspaces and flex options, which include spaces incorporating lifestyle experiences, such as lounges, conference rooms and activity-based workspaces.

AEI plans for HSBC Building.

• Management plans to close and upgrade HSBC Building (21 Collyer Quay) from 2Q20 to 4Q20 as the HSBC lease is set to expire by Apr 20. The planned asset enhancement initiative (AEI) includes upgrading the common and lettable areas and essential equipment with the goal of achieving the BCA Green Mark Gold Plus rating. Through these refurbishment efforts, management is targeting a return on investment (ROI) of about 9%.

Reconfiguration of Six Battery Road.

• Management has identified opportunities for value creation by refurbishing and reconfiguring about 129,000sf of space over several upgrading phases between 1Q20 to 3Q21. During this time, the office tower and anchor tenant Standard Chartered will remain in operation. This AEI is expected to cost S$35m and management has targeted an ROI of about 8%.

Earnings Revision / Risk

• We maintain our earnings forecasts.

Valuation / Recommendation

• Upgrade to BUY. Our target price of S$2.30 is based on DDM (required rate of return: 5.5%, terminal growth: 1.5%). See Capitaland Commercial Trust Share Price; Capitaland Commercial Trust Target Price.
• We have lowered our risk-free rate from 2.5% to 2.0% due to the environment of persistently low interest rates.

Share Price Catalyst

• Higher office rentals and positive newsflow on leasing activities.
• Higher-than-expected signing rentals and occupancies at CapitaSpring.
• More accretive acquisitions in Singapore or Germany.

Source: UOB Kay Hian Research - 24 Oct 2019