• While CapitaLand Commercial Trust (SGX:C61U)’s (NEUTRAL, Target Price: SGD 1.70) high quality Grade-A office buildings with diverse blue chip tenants offers resilience, we expect leasing activities to take a hit and pressure office rent. The proposed CapitaLand Mall Trust (SGX:C38U) (NEUTRAL, Target Price: SGD2.38) merger is on track.
• We are neutral overall on this, as the benefits of greater scale and diversification are partly offset by higher retail exposure, which has been hit hard by COVID-19.

Office Leasing Activities Come to a Pause – Lower Average Expiring Rent Provides Buffer

• The circuit breaker measures currently in place in Singapore have disrupted leasing activities, ie viewings, handovers, and fit out works. As such, CapitaLand Commercial Trust expects longer leasing lead time, with companies focusing on cost containment and prioritising renewals. Car parks and other income, which typically accounts for 5% of the total, have also taken a hit.
• About 14% of office leases by rental income are due for renewal this year, but the average expiring rent at SGD9.43psf – 20% below the market average pre-pandemic – provides some buffer.
• The retail and hospitality segments accounted for 22% of FY19’s income, derived mainly from CapitaLand Commercial Trust’s 60% stake in Raffles City Singapore, which has seen a more direct impact.

Downside Risks to CapitaSpring If COVID-19 Prolongs

• Associate CapitaSpring’s (45% stake) redevelopment remains on track for a 1H21 completion, although project site works have temporarily halted. The building is 35% pre-leased as at Dec 2019, and we foresee rental pressure on upcoming leases.
• Management has guided for a yield on cost of 5%, which translates into office rent of SGD11-12psf/month. We see downside risks to these assumptions if the pandemic prolongs.

Co-working Exposure 7% of Total

• Upgradation works at the 21 Collyer Quay building are on track for completion by 4Q20. Co-working operator WeWork is expected to take possession of the building on a 7-year lease starting 2Q21. CapitaLand Commercial Trust said the leasing agreements are still intact and, so far, management had not received any requests for changes to WeWork’s leases.
• For Six Battery Road, CapitaLand Commercial Trust expects some delay in phasing works and longer lease times for upgraded spaces.

No Changes to the Proposed Merger

• The CapitaLand Commercial Trust -CapitaLand Mall Trust merger – via scheme consideration – will be done through 0.72 CapitaLand Mall Trust (SGX:C38U) units and a cash component of SGD0.2590 per unit share of CapitaLand Commercial Trust. The merger is slated for completion by 3Q20, but is still subject to unitholders’ approvals.

Earnings and Assumption Changes

• We have lowered our FY20F-22F earnings by 5-8%, factoring in rent rebates and lower rent growth. Our cost of equity assumption is also raised 100bps to 8.2% to factor in higher risks.

Source: RHB Invest Research - 21 Apr 2020