SINGAPORE (Apr 25): CapitaLand Commercial Trust (CCT) yesterday announced an 11.7% decline in its 1Q18 DPU to 2.12 cents from 2.40 cents in 1Q17, due to enlarged total units base.
Distributable income increased by 7.5% to $76.6 million from $71.3 million last year.
After adjusting for the enlarged total units base, the DPU would have been 7.6% higher y-o-y.
Gross revenue for the quarter was 7.7% higher at $96.4 million from $89.5 million in the previous year, which brought net property income (NPI) to $77.2 million, 10.5% higher than $69.9 million a year ago.
See: CapitaLand Commercial Trust posts 1Q DPU decline 11.7% to 2.12 cents due to enlarged total units base
Following the results announcement, Phillip Capital is upgrading its call on CCT to “accumulate” with a target price of $1.88.
In a Wednesday report, analyst Dehong Tan says, “We expect spot rents to continue growing over the next two years with the tapering of office supply and improving demand. We are thus less worried about the 31% of leases expiring in 2019 (by GRI) than those expiring this year.”
In addition, the trust’s lease renewal and interest rate refinancing risks have been largely reduced with only 5% of leases and zero debt expiring this year. Thus, the analyst reckon that DPU outlook is stable.
There is also potential earnings upside from higher occupancy at Asia Square Tower 2 (AST2), which stands at 90.8% currently.
“Our only major concern is the elevated gearing level at 37.9% which could prove inhibitive to future acquisitions. Nonetheless, near-term growth drivers are contributions from AST2 (acquired Sept 2017) and the completion of CapitaSpring in 2021,” says Tan.
On the other hand, OCBC is maintaining its “hold” call on CCT with a fair value estimate of $1.84.
Encouragingly, CCT highlighted that it managed to secure committed rents largely above its expiring rents in 1Q18.
Committed rents at AST2, Six Battery Road and One George Street were all higher compared to the average expired rents, in-line with the continued office market recovery, as core Grade A CBD office rents rose 3.2% q-o-q to $9.70 psf/month in 1Q18.
See: CapitaLand Commercial Trust kept at 'hold' on office market recovery
Meanwhile, the trust said that it received confirmation from the Singapore authorities that it will be taking back Bugis Village, which contributed 2.2% of its 1Q18 NPI, on Apr 1, 2019. It will then receive compensation of $6.6 million plus accrued interest compounded from 1989, which is well below its book value of $44 million.
In a Wednesday report, analyst Andy Wong Teck Ching says, “Although the total compensation was not disclosed, it would likely come in below the property’s $44 million valuation as at Dec 31, 2017.”
Similarly, CIMB is reiterating its “hold” recommendation on CCT with a target price of $1.93.
In 1Q18, CCT leased/renewed 96,000 sq ft of retail and office space, mainly at 6 Battery Rd and One George St. About 37% of these transactions were new leases.
However, even as the rental gap narrowed, there was still negative rental reversion and average portfolio office rents slipped 0.4% y-o-y to $9.70 psf.
In a Tuesday report, analyst Lock Mun Yee says, “We leave our FY18-20F DPU estimates unchanged post results and pending further details on the Bugis Village development. While we like the trust for its pure Singapore exposure into the office cycle recovery and ability to rejuvenate portfolio through AEIs and redevelopment activities, near-term upside remains limited.”
Maybank Kim Eng Research is also maintaining its “hold” rating on CCT with a target price of $1.80.
In a Tuesday report, analyst Derrick Heng says, “Reflecting a strengthening office market, signing rents were largely above expiring rents. But as the government has exercised an option to take back Bugis Village from the REIT on Apr 1 2019, we cut FY19-20E DPU by 2% for loss of income.”
The analyst prefers developer landlords, UOL and GuocoLand, for office exposure.
Meanwhile, RHB is keeping its “sell” recommendation on CCT with a target price of $1.63.
In a Tuesday report, analyst Vijay Natarajan says, “While the office market outlook remains rosy, we expect the positive effects to flow into CCT’s DPU only after 2020. This is mainly due to the relatively high average expiring rents (10-15% higher than market average), which minimises upside potential.”
CapitaSpring has also secured its anchor tenant well ahead of completion in 1H21.
JP Morgan, currently a tenant in its Capital Tower, would be extending its existing lease and relocating to CapitaSpring upon completion. It has committed to take up 155,000 sqf of space, or about 25% of total office NLA.
CCT currently has a 45% stake in the development and has a call option to acquire the balance 55% interest within five years from building completion.
As at 12.00pm, units in CCT are trading at $1.79 or 21.8 times FY18 earnings with a DPU yield of 4.9%.
