• CapitaLand Commercial Trust's 4Q19 DPU +2.7 y-o-y.
• Cap rates compressed by 5 bps for office assets.
• Proposed merger with CapitaLand Mall Trust a positive.

4Q19 Results Within Our Expectations

• CAPITALAND COMMERCIAL TRUST (SGX:C61U)’s 4Q19 results met our expectations. Gross revenue and NPI increased by 8.9% and 3.3% y-o-y to S$107.8m and S$81.9m, respectively. DPU grew 2.7% y-o-y to 2.28 S cents.
• For FY19, both CapitaLand Commercial Trust’s NPI and DPU rose 2.1% to S$321.2m and 8.88 S cents, respectively, with the latter forming 100.2% of our full year forecast.

Rental Reversions Still Largely Positive

• CapitaLand Commercial Trust’s rental reversions remained largely robust, with the exception of Asia Square Tower 2 (AST2), which saw negative rental reversions. To put things in perspective, committed rents (psf/month basis) at AST2, Six Battery Road (6BR), CapitaGreen and Raffles City Tower were S$11.50-S$12.00, S$11.90- S$14.00, S$11.00-S$12.60 and S$9.20-S$11.00, versus average expired rents of S$12.69, S$11.67, S$9.83 and S$9.07, respectively.
• Looking ahead, although core Grade A CBD office rents appear to be peaking, we note that CapitaLand Commercial Trust’s average expiring rent of S$9.43 psf/month in FY20 is still at a significant level below current market rents of ~S$11.55 psf/month.
• In terms of portfolio valuation, there was a mild compression in cap rates by 5 bps across its properties as compared to end-2Q19, with the exception of Raffles City Singapore’s retail and hotel components (unchanged). A revaluation gain of S$94.7m was thus recorded in FY19.

Proposed Merger With CapitaLand Mall Trust

• Separately, there was also an announcement on a proposed merger between CapitaLand Commercial Trust and CapitaLand Mall Trust (SGX:C38U) via a trust scheme of arrangement. Under this scheme, CapitaLand Mall Trust will acquire all units of CapitaLand Commercial Trust for 0.72 new CapitaLand Mall Trust units and S$0.2590 in cash per CapitaLand Commercial Trust unit. This translates into a scheme consideration of S$2.1238 per CapitaLand Commercial Trust unit, of which 88% is in units and 12% in cash.
• The enlarged entity will be named CapitaLand Integrated Commercial Trust and is expected to have a portfolio property value of S$22.9b and market cap of ~S$16.8b, which would make it the third largest REIT in APAC by market cap.
• We are largely positive on this transaction from CapitaLand Commercial Trust unitholders’ perspective, as the scheme consideration price of $2.1238 is above our revised S$1.95 fair value (previously S$1.92) for CapitaLand Commercial Trust.
• Besides the clear benefits of an enlarged scale, DPU accretion on a pro forma basis is strong at +6.5% for CapitaLand Commercial Trust’s unitholders, although it is dilutive on its NAV/unit by 2.2%. Pro forma aggregate leverage is expected to be 38.3% after the merger (CapitaLand Commercial Trust: 35.1% as at 31 Dec 2019). ACCEPT THE OFFER.

Source: pitaLand Commercial Trust: OCBC Investment Research - 24 Jan 2020