• 1Q20 DPU declined 25% y-o-y to 1.65 S cents as CapitaLand Commercial Trust retained cash of S$18.5m (estimated).
• While office tenants are resilient, CapitaLand Commercial Trust is focused on conserving cash and prefers to fund AEI for Six Battery Road and 21 Collyer Quay internally without relying on additional bank borrowings.
• Portfolio occupancy deteriorated 2.8ppt q-o-q to 95.2% due to the expiry of Standard Chartered’s lease in Jan 20 and start of AEIs.
• Maintain BUY with a lower target price of S$1.68.

CapitaLand Commercial Trust 1Q20 Results

• CapitaLand Commercial Trust (SGX:C61U) reported 1Q20 DPU of 1.65 S cents, a decline of 25% y-o-y. It retained cash of S$18.5m from taxable distributable income (S$6.4m held back by CapitaLand Commercial Trust and S$5.4m withheld by Raffles City Singapore (CapitaLand Commercial Trust’s 60% share)) and tax-exempt income (estimated: S$6.7m). The amount retained will be reviewed at end-2Q20.
• CapitaLand Commercial Trust pays distribution semi-annually (no payout for 1Q20 DPU).

Maintains Steady Growth

• 1Q20 gross revenue and net property income (NPI) grew by 3.8% and 0.7% y-o-y respectively, due to fresh contributions from the Main Airport Center (MAC) acquired in Sep 19, higher contributions from 21 Collyer Quay, CapitaGreen and Gallileo, but partially offset by lower income from AST2, Six Battery Road, and Bugis Village.

Continued Positive Rental Reversions

• Asia Square Tower 2 (ranges from +4.5% to +13.6%), Six Battery Road (-0.2% to +31.2%), CapitaGreen (+16.9% to +29.6%), One George Street (+1.4% to +4.5%) saw positive reversions (committed rents vs average expired rentals) for 1Q20.
• CapitaLand Commercial Trust signed 303,000sf of new (22%) and renewal (78%) leases. New demand came mainly from financial services, legal, energy, commodities, maritime & logistics sectors. Two-thirds of the leases expiring in 2020 have already been renewed. The bulk of the remaining 10% of office NLA to be renewed is under advanced negotiations.

Occupancies Declined to 95.2% (-2.8ppt Qoq)

• Occupancy for the Singapore portfolio declined to 95.1% (-3.5ppt q-o-q), and is below market core CBD occupancy of 95.4%. We attribute the decline to lower occupancy of 78.5% (-20.2% q-o-q) due to expiry of Standard Chartered’s lease in Jan 20 (Standard Chartered accounted for 2.8% of portfolio gross rental asset enhancement initiatives.
• Occupancy for Gallileo located at Frankfurt remains unchanged at 100%.

Aggregate Leverage Increased Slightly to 35.5% in 1Q20 (4Q19: 35.1%)

• The weighted average term to maturity was 3.5 years (-7.9% q-o-q), and average cost of debt was 2.3% (- 0.1ppt q-o-q). S$600m of green loans have been drawn down by CapitaLand Commercial Trust to replace existing bank borrowings for Asia Square Tower 2. CapitaLand Commercial Trust partnered with three banks for the green loans, namely OCBC (SGX:O39), UOB (SGX:U11) and HSBC in Singapore.

Office Tenants Are More Resilient

• CapitaLand Commercial Trust’s mix between office, retail and hotel & convention by gross rental income is 79:11:10. It will pass the 30% property tax rebate, which is equivalent to 0.3 month of rent, to office tenants. Beyond this, CapitaLand Commercial Trust is not providing further assistance to office tenants. Rental arrears ratio remains low and unchanged.
• Business sectors more affected by COVID-19 accounted for 25% of gross rental income as of Mar 20 (Travel and Hospitality: 9%, Flex space operators: 4% (excludes WeWork), Retail Products & Services: 7% and Food & Beverage: 5%).

Withholding Cash to Fund AEIs

• CapitaLand Commercial Trust plans to proceed with the planned asset enhancement of Six Battery Road (capex: S$35m) and 21 Collyer Quay (capex: S$45m) once circuit breaker measures are lifted. It is focused on conserving cash and prefers to fund the AEI for Six Battery Road and 21 Collyer Quay internally without relying on additional bank borrowings.

Exposure to Co-working

• CapitaLand Commercial Trust has embarked on an AEI for 21 Collyer Quay (previously known as HSBC Building) to upgrade common and lettable areas and essential equipment from 2Q20 to 4Q20. The HSBC lease expires in Apr 20. The new 7-year lease with WeWork Singapore for the entire building will commence in 2Q21.
• Given that WeWork is financially distressed, we have assumed that CapitaLand Commercial Trust would be able to backfill 50% of the office space at 21 Collyer Quay when the building commences commercial operations in 2Q21.

Assuming Soft Occupancy at CapitaSpring

• CapitaLand Commercial Trust secured its first anchor tenant for CapitaSpring, JP Morgan, which took up close to a quarter of NLA in 1Q18. Committed occupancy has since ramped up to 34.8% as of Dec 19. CapitaSpring is expected to complete in 1H21.
• We assumed that CapitaSpring will commence commercial operations with occupancy at 70% in 2Q21, given the slowdown caused by the COVID-19 pandemic.

Germany on the Road to Recovery

• Germany has embarked on fiscal stimulus, including a €750b emergency aid. The lockdown in Germany was lifted on 20 Apr 20 with gradual easing. Social distancing rules are to remain in place until 3 May 20. Frankfurt office vacancy remained low at 6.8% in 4Q19 (Banking District: 4.6% / Airport District: 3.2%), although leasing and investment activities have reduced as a result of the COVID-19 outbreak.

Maintain BUY

• We cut our 2020 DPU by 8.7% due to cash retained in 1Q20 and lower occupancy at Six Battery Road.
• Our target price of S$1.68 is based on DDM (required rate of return: 5.5%, terminal growth: 1.5%).

Share Price Catalysts

• Lower interest rates and wider yield spread.
• Higher-than-expected signing rentals and occupancies at CapitaSpring
• More accretive acquisitions in Singapore or Germany.

Source: UOB Kay Hian Research - 30 Apr 2020