CapitaLand Commercial Trust

OCBC on 25 Sep 2015

We lower our FY16 forecast for Grade A rentals and now expect a 0% to -5% dip in 2015 (unchanged) and a -10% to -20% correction in 2016 (versus -5% to -10% previously). Overall office demand from financial institutions and commodities firms have weakened and 2Q15 island-wide net absorption of 296k sqft came in significantly below the 5-year average of 459k sqft. In particular, we are concerned about the 2.79m sqft glut of CBD supply over 2H15 to 2016 and the growing trend of companies relocating outside the CBD to regional centres and business parks, which has yielded up considerable secondary supply. As at end Jun 15, CapitaGreen was 80.4% committed; despite weaker than anticipated conditions, we still see management achieving an occupancy rate above 90% by the end of this year given their strong execution ability, but operating in a challenging market likely points to below-forecast rentals over the current reversion cycle. Our fair value estimate dips to S$1.39 from S$1.54 previously due to lower overall rental assumptions in our valuation model. Maintain HOLD.

Lowering FY16 forecasts for Grade A office rentals
Due to mounting external uncertainties, the government recently downgraded its 2015 GDP growth forecast from 2.0%-4.0% to 2.0%-2.5% and private economists have similarly lowered their consensus from 2.7% to 2.2% in the latest quarterly MAS survey. In the Grade A office space, our channel checks indicate that overall demand from financial institutions and commodities firms have softened and 2Q15 island-wide net absorption of 296k sqft came in significantly below the 5-year average of 459k sqft. In particular, we are concerned about the 2.79m sqft glut of CBD supply over 2H15 to 2016 and the growing trend of companies relocating outside the CBD to regional centres and business parks, which has yielded up considerable secondary supply. Given a weaker outlook, we lower our FY16 forecast for Grade A rentals and now expect a 0% to -5% dip in 2015 (unchanged) and a -10% to -20% correction in 2016 (versus -5% to -10% previously). In 2Q15, Grade A rentals fell 0.9% QoQ to S$11.30 psf/mth after peaking at S$11.40 psf/mth in 1Q15. While capital values remain stable for now, we see a mix of falling rentals and rising rates likely putting downward pressure on valuations ahead.

Fair value estimate dips to S$1.39; maintain HOLD
As at end Jun 15, CapitaGreen was 80.4% committed. Despite weaker than anticipated conditions, we still see management achieving an occupancy rate above 90% by the end of this year given their strong execution ability, but operating in a challenging market likely points to below-forecast rentals over the current reversion cycle. We understand that passing rentals are currently below the forecasted S$12-$14 range. The trust had continued to report higher valuations on their office portfolio in 2Q15, with discount rates dipping 25 bps and higher rental assumptions, but further gains appear increasingly unlikely ahead given market conditions. Our fair value estimate dips to S$1.39 from S$1.54 previously due to lower rental assumptions in our valuation model. Maintain HOLD.

CapitaLand Commercial Trust

OCBC on 27 Jul 2015

CapitaLand Commercial Trust (CCT) reported 2Q15 distributable income and net property income of S$64.4m and S$53.9m which increased 0.5% and 3.6% YoY, respectively. Distribution per unit (DPU) for the quarter is an estimated 2.19 S-cents, and 1H15 DPU cumulates to 4.31 S-cents which increased 2.1% YoY. We judge this set of results to be within expectations, as 1H15 distributable income and net property income forms 49.0% and 47.4% of our full year forecast, respectively. In terms of the topline, the trust’s 2Q15 revenues similarly increased 5.0% YoY to S$69.1m mostly due to higher rentals and occupancy rates across its office portfolio. Including the newly completed CapitaGreen, the trust reports an overall occupancy rate of 98.0% and positive rental reversion trends for its Grade A office leases committed over the quarter (average portfolio rental up 1.1% QoQ to S$8.88 psf). We now expect Grade A office rentals to dip -5% in FY15F and -5% to -10% in FY16F, and reduce our fair value estimate down to S$1.54 from S$1.67 previously. Maintain HOLD.

2Q15 distributable income up 0.5% YoY to S$64.4m
CapitaLand Commercial Trust (CCT) reported 2Q15 distributable income and net property income of S$64.4m and S$53.9m which increased 0.5% and 3.6% YoY, respectively. Distribution per unit (DPU) for the quarter is an estimated 2.19 S-cents, and 1H15 DPU cumulates to 4.31 S-cents which increased 2.1% YoY. We judge this set of results to be within expectations, as 1H15 distributable income and net property income forms 49.0% and 47.4% of our full year forecast, respectively. In terms of the topline, the trust’s 2Q15 revenue similarly increased 5.0% YoY to S$69.1m mostly due to higher rentals and occupancy rates across its office portfolio.

Expect Grade A CBD office rentals to face headwinds
Including the newly completed CapitaGreen, the trust reports an overall occupancy rate of 98.0% and also continued positive rental reversion trends for its Grade A office leases committed over the quarter (average portfolio rental up 1.1% QoQ to S$8.88 psf). Aggregate committed occupancy at CapitaGreen rose to 80.4% as at end 2Q15. We understand that passing rentals at CapitaGreen currently run below the forecasted S$12-$14 range due to weaker than anticipated market conditions. Note that Grade A CBD Core office rentals passed an inflection point in 2Q15 (-0.9% QoQ) and, with a significant 3.6m sq ft of office supply coming online in FY16F (Marina One alone contributing 1.9m sq ft), we now forecast for rentals to dip 0% to -5% in FY15F and -5% to -10% in FY16F. 

Maintain HOLD on lower S$1.54 fair value estimate
CCT’s balance sheet remain healthy with gearing at 29.5% as at end 2Q15 and an unchanged average cost of debt of 2.4%. We note that the trust has a debt headroom of S$1.3b assuming a 40% gearing, and is holding a call option to buy the 60% remaining interest in CapitaGreen from 2015-17. Maintain HOLD. Our fair value estimate dips to S$1.54 versus S$1.67 previously mainly due to the impact of lower rental assumptions.

CapitaCommercial Trust

UOBKayhian on 23 Apr 2015

FY15F PE (x): 18.8
FY16F PE (x): 17.1

Results in line with expectations. CapitaCommercial Trust (CCT) reported 1QFY15 DPU of 2.12 cents, up 3.9% yoy, supported by positive rent reversions and improved occupancies across its portfolio. Results were in line with our expectations, accounting for 24.7% of our full-year DPU estimate of 8.6 cents. Securing 76.4% pre-commitment for CapitaGreen (4Q14: 69% 3Q14: 40%, 2Q14:23%) and targeting full occupancy by end-15. Capitagreen achieved rents in the S$12-16psf pm range during the quarter. Tenants span diverse sectors, including financial services, insurance, commodities, legal, technology, real estate, health and fitness, and food & beverage. Management highlighted that insurance companies took the lion’s share of committed office space. In what may seem to be a developing trend, firms in the technology, media and telecommunications (TMT) sector have taken up a significant portion of committed office space. Maintain BUY and target price of S$2.05, based on DDM (required rate of return: 7.2%, terminal growth: 2.2%).

CapitaCommercial Trust

Kim Eng on 23 Apr 2015

• 1Q15 DPU in line at 24% of FY15E. Better portfolio occupancy. 2% rental uptick. CapitaGreen now 76.4% committed at better rents.
• Option to acquire remainder of CapitaGreen priced in. Most expensive office REIT.
• Maintain HOLD with DDM-based TP of SGD1.77. Prefer Keppel REIT in office sector. 

1Q15 in line
1Q15 DPU of 2.12 SGD cts (+3.9% YoY) met at 24% of our FY15E. Occupancy improved to 97.0% from 96.8% in 4Q14. Average office rents were up 2.0% to SGD8.78 psf. Leverage remained low at 29.9% with debt headroom of SGD1.2b to a 40% ratio. This implies it can comfortably purchase the remaining 60% of CapitaGreen without raising equity. Average interest cost climbed to 2.4% from 2.3% in 4Q14. Still, the trust has low exposure to rising interest rates as 83% of its borrowings are on fixed rates.

CapitaGreen 76.4% committed
As of 21 Apr, 76.4% of CapitaGreen has been committed. Committed rents of SGD12-16 psf were broadly higher than 4Q14’s SGD9-16 psf and market rents of SGD11.40 psf for Grade A office space, as estimated by CBRE.

Most expensive office REIT
Maintain HOLD and DDM-based (COE 7.7%, TG 2.0%) TP of SGD1.77. While its option to acquire the rest of CapitaGreen from its JV partners is positive, the deal can only be assessed after the determination of its transaction price. Moreover, we believe the market has priced in potential positives at 1.0x P/BV and 5.2% FY15E yields. CCT is the most expensive office REIT. We prefer laggard Keppel REIT (BUY, TP SGD1.32) in the office sector.

CapitaCommercial Trust

OCBC on 23 Apr 2015

CapitaCommercial Trust (CCT) reported 1Q15 distributable income and net property income of S$62.8m and S$54.0m which increased 4.7% and 6.4% YoY, respectively. Distribution per unit for the quarter is announced to be an estimated 2.12 S-cents, up 3.9% YoY versus 2.04 S-cents for 1Q14. We judge this set of results to be within expectations, as distributable income and net property income from the quarter forms 24.2% and 23.7% of our full year forecast, respectively. In terms of the topline, the trust’s 1Q15 revenues similarly increased 6.5% YoY to S$68.2m mostly due to higher rentals and occupancy rates across its office portfolio. Including the newly completed CapitaGreen, the trust reports a healthy overall occupancy rate of 97.0% and continued positive rental reversion trends for its Grade A office leases committed over the quarter (average portfolio rental up 2.0% QoQ to S$8.78 psf). Our fair value estimate of CCT remains unchanged at S$1.67. Since we downgraded the counter to a Sell rating on 22 Jan 2015, the share price has fallen 8.2% and we now upgrade to HOLD on valuation grounds.

1Q15 numbers broadly in line
CapitaCommercial Trust (CCT) reported 1Q15 distributable income and net property income of S$62.8m and S$54.0m which increased 4.7% and 6.4% YoY, respectively. Distribution per unit for the quarter is announced to be an estimated 2.12 S-cents, up 3.9% YoY versus 2.04 S-cents for 1Q14. We judge this set of results to be within expectations, as distributable income and net property income from the quarter forms 24.2% and 23.7% of our full year forecast, respectively. In terms of the topline, the trust’s 1Q15 revenues similarly increased 6.5% YoY to S$68.2m mostly due to higher rentals and occupancy rates across its office portfolio.

Portfolio rentals holding firm
Management reported continued positive rental reversion trends for its Grade A office leases committed over the quarter, and average portfolio rental increased 2.0% QoQ to S$8.78 psf, with 6 Battery Rd and One George St achieving monthly rents between S$11.00 psf to S$14.60 psf, and CapitaGreen between S$12.00 to S$16.00 psf. Including the newly completed CapitaGreen, the trust reports a healthy overall occupancy rate of 97.0%. As at end 1Q15, CapitaGreen was 76.4% committed, up from 69.3% from at last quarter, and we understand management targets to achieve full occupancy by the end of the fiscal year. 

Upgrade to HOLD on valuation grounds
CCT’s balance sheet remain healthy with gearing at 29.9% as at end 1Q15 and an average cost of debt of 2.4%. We note that the trust has a debt headroom of S$1.2b assuming a 40% gearing, and is holding a call option to buy the 60% remaining interest in CapitaGreen from 2015-17. Our fair value estimate of CCT remains unchanged at S$1.67. Since we downgraded the counter to a Sell rating on 22 Jan 2015, the share price has fallen 8.2% and we now upgrade to HOLD on valuation grounds.

CapitaCommercial Trust

OCBC on 22 Jan 2015

CCT reported 4Q14 distributable income and net property income of S$63.6m and S$50.6m which increased 5.7% and 3.0% YoY, respectively. DPU for the quarter is an estimated 2.15 S-cents, up 2.9% YoY versus 2.09 S-cents for 4Q13. We judge this set of results to be within expectations, as FY14 distributable income and net property income forms 102.7% and 100.4% of our full year forecast, respectively. Excluding the newly completed CapitaGreen, the trust reports a healthy overall occupancy rate of 99.4% and positive rental reversions for its Grade A office leases committed over the quarter. The newly completed CapitaGreen is now 69.3% committed and we note that the trust, which holds a call option to buy the 60% remaining interest in CapitaGreen from 2015-17, has a debt headroom of S$1.3b assuming a 40% gearing. Our fair value estimate remains unchanged at S$1.67 but we downgrade our rating to SELL on valuation grounds.

4Q14 results within expectations
CapitaCommercial Trust (CCT) reported 4Q14 distributable income and net property income of S$63.6m and S$50.6m which increased 5.7% and 3.0% YoY, respectively. DPU for the quarter is an estimated 2.15 S-cents, up 2.9% YoY versus 2.09 S-cents for 4Q13. We judge this set of results to be within expectations, as FY14 distributable income and net property income forms 102.7% and 100.4% of our full year forecast, respectively. In terms of the topline, the trust’s 4Q14 revenue similarly increased 3.1% YoY to S$66.4m mostly due to higher rentals and occupancy rates across its office portfolio. 

Average portfolio rents up 5.9% YoY to S$8.61 psf
Excluding the newly completed CapitaGreen, the trust reports a healthy overall occupancy rate of 99.4% and positive rental reversions for its Grade A office leases committed over the quarter. Over the year, the trust signed leases for 900k sqft of NLA, of which 15% are new leases and management reports a tenant retention rate of 86% in 2014, significantly higher than 67% in 2013. Mainly due to positive rental reversions and the inclusion of CapitaGreen, CCT’s average portfolio rents continued its uptrend, rising 5.9% from S$8.13 psf as at Dec 13 to S$8.61 as at Dec 14. The group’s balance sheet remain healthy with gearing at 29.3% as at end 4Q14 and an average cost of debt of 2.3%.

CapitaGreen achieves 69% commitment
As at end 4Q14, CapitaGreen (which achieved TOP status on 18 Dec 2014) was valued at S$1,526m and CCT’s 40% interest held through MSO Trust is S$610.4m. The asset is now 69.3% committed, above the trust’s target occupancy of 50%. We note that the trust has a debt headroom of S$1.3b assuming a 40% gearing, and is holding a call option to buy the 60% remaining interest in CapitaGreen from 2015-17. Our fair value estimate remains unchanged at S$1.67 but we downgrade our rating to SELL on valuation grounds.

CapitaCommercial Trust

UOBKayhian on 27 Oct 2014

FY14F PE (x): 21.2
FY15F PE (x): 20.2

Results in line with expectations. CapitaCommercial Trust (CCT) reported a 3Q14
distributable income of S$61.6m (+4.8% yoy, -3.9% qoq) and a DPU of 2.18 cents
(+5.3% yoy, -3.7% qoq).
Securing 40% pre-commitments for CapitaGreen (2Q14: 23%) with pre-commitments in
3Q14 from A.M. Best Asia-Pacific (Singapore) Pte Ltd, BCD Travel Asia Pacific Pte Ltd,
Freight Investor Services Pte. Ltd., Total Gas & Power Asia Private Limited., and
Watson, Farley & Williams Asia Practice LLP. Management mentioned that they are in
advanced stages of negotiation for another 75,000sf of space, positioning them well to
achieve 50% target leasing commitments by end-14. We expect CCT to achieve rents
of over S$11psfpm for the entire building. Maintain BUY with an unchanged target of
S$1.88, based on DDM (required rate of return: 7.2%, terminal growth: 2.2%).

CapitaCommercial Trust

OCBC on 24 Oct 2014

3Q14 distributable income increased 4.8% YoY to S$61.6m. This cumulates to an YTD distributable income of S$185.6m, which we deem to be in line with expectations and comprises 76.4% of our FY14 forecast. 3Q13 DPU is 2.1 S-cents – this is 2.9% or 0.06 S-cents higher than the 2.04 S-cents paid out in 3Q13 and translates to a distribution yield of 5.2% based on CCT’s last closing price. The growth in distributable income in 3Q14 was mainly due to higher contributions from portfolio assets, except for Wilkie Edge, and stronger NPI and distributable income from RCS Trust as well. Management reports that CapitaGreen remains on track to be completed by the end of FY14. The trust has secured aggregate lease commitments for 40% (279.5k sq ft) of total NLA. We continue to expect contributions from CapitaGreen to MSO Trust from 2H15 onwards, and to CCT’s distributable income from FY16. Maintain HOLD with an unchanged fair value estimate of S$1.67.

3Q14 figures line with expectations
3Q14 distributable income increased 4.8% YoY to S$61.6m. This cumulates to a YTD distributable income of S$185.6m, which we deem to be in line with expectations and comprises 76.4% of our FY14 forecast. 3Q13 DPU is 2.1 S-cents – this is 2.9% or 0.06 S-cents higher than the 2.04 S-cents paid out in 3Q13 and translates to a distribution yield of 5.2% based on CCT’s last closing price. The growth in distributable income in 3Q14 was mainly due to higher contributions from portfolio assets, except for Wilkie Edge, and stronger NPI and distributable income from RCS Trust as well. In terms of the topline, gross revenues over the quarter also grew 8.4% YoY to S$66.4m due to overall positive rental reversions across CCT’s asset portfolio.

Positive rental reversion for leases committed
Portfolio occupancy remained stable at 99.4% as of end 3Q14 versus the previous quarter. As a result of strong office rentals and positive rental reversions for leases committed, we saw a significant QoQ increase in CCT’s average committed office portfolio rentals from S$8.23 to S$8.42/sq ft. Over the quarter, the trust also signed leases for 131k sq ft of space, of which 17% are new leases, and the portfolio WALE (weighted average lease term to expiry) as at end Sep-14 stands at 7.7 years. CCT continues to enjoy a healthy balance sheet, with gearing at 30.2% as at end 3Q14 and an average cost of debt of 2.3%.

CapitaGreen now 40% pre-committed
Management reports that CapitaGreen remains on track to be completed by the end of FY14. The trust has secured aggregate lease commitments for 40% (279.5k sq ft) of total NLA and is in advanced stages of negotiation for another 75k of NLA, which will bring commitments to 50% by end FY14. We continue to expect contributions from CapitaGreen to MSO Trust from 2H15 onwards and to CCT’s distributable income from FY16. Maintain HOLD with an unchanged fair value estimate of S$1.67.

CapitaCommercial Trust

OCBC on 27 Aug 2014

Earlier this week, S&P announced that it had upgraded CCT’s long-term corporate credit rating from ‘BBB+’ to ‘A-‘ with a stable outlook. The rating agency had reassessed CCT’s appetite for expansion and believes that the trust would likely “remain disciplined in using debt to fund new investments.” CCT has significant capital headroom for acquisitions ahead; by our estimates, the trust has a debt headroom of S$1.3b it hits a 40% gearing level. Looking ahead to FY15, we believe that management will likely exercise its call option to purchase the remaining 60% of CapitaGreen that it does not already own. Assuming a valuation of S$2.5k to S$2.8k psf NLA, this will cost S$1.1b – S$1.2b which CCT can wholly fund using debt and yet land under a 40% gearing ratio post-transaction. Maintain HOLD with unchanged fair value estimate of S$1.67.

Long-term corporate credit rating upgraded to A- (stable)
Earlier this week, Standard and Poor’s Rating Service (S&P) announced that it had upgraded CCT’s long-term corporate credit rating from ‘BBB+’ to ‘A-‘ with a stable outlook. The rating agency had reassessed CCT’s appetite for expansion and believes that the trust would likely “remain disciplined in using debt to fund new investments.” In addition, the trust’s risk profile has been reinforced by its stable business performance, consistent cash flows, high occupancies and an expanded asset portfolio with CapitaGreen’s anticipated completion by end-2014. We note that CCT currently enjoys one of the highest credit ratings in the S-REITs sector – only below that assigned to CapitaMall Trust (A2) by Moody’s.

Significant debt headroom of S$1.3b to 40% gearing
CCT’s gearing stood at a healthy 28.8% as at end 2Q14 – down 1.2 ppt QoQ from 30.0% as at end 1Q14 – which is the lowest amongst its peer group of office S-REITs (average gearing of 36.0%). Recall that MAS regulations stipulate S-REITs without a credit rating are required to cap their gearing below 35% while those with a rating are allowed to go as high as 60%. CCT has significant capital headroom for acquisitions ahead; by our estimates, the trust has a debt headroom of S$1.3b before it hits a 40% gearing level. 

Likely to exercise call option on remaining 60% of CapGreen
Looking ahead to FY15, we believe that management will likely exercise its call option to purchase the remaining 60% of CapitaGreen that it does not already own (50% owned by CapitaLand and 10% by Mitsubishi Asia). Assuming a valuation of S$2.5k to S$2.8k psf NLA for CapitaGreen, this will cost S$1.0b – S$1.2b which CCT can wholly fund using debt and yet land under a 40% gearing ratio post-transaction. Maintain HOLD with unchanged fair value estimate of S$1.67.

CapitaCommercial Trust

Kim Eng on 21 Jul 2014

• 23% pre-commitment leases signed to-date for CapitaGreen.
• The expanded scope for AEI at Capital Tower will delay the completion date by six months to 4Q15.
• GIC to renew leases at Capital Tower next year with significant reversion.

In-line results
CCT saw a 3.2% YoY rise in both 2Q14/1H14 revenue, bolstered by higher income from all properties except One George Street, whose Deed of Yield Protection expired on 10 Jul 2013. 2Q14/1H14 DPU grew 5.3%/5.2% YoY to 2.18/4.22 SGD cts, driven by lower interest expenses and higher NPI. Balance sheet remained strong, with a low gearing of 28.8% and 80% of borrowings are on fixed rates. Portfolio occupancy remained strong at 99.4%.

CapitaGreen achieves 23% pre-commitment
CapitaGreen has secured another 14,200 sq ft of lease commitments since its topping-out on 2 Jul, boosting its NLA take-up rate from 21% to 23%. To reach the 50% pre-commitments by year-end, an additional 185,000 sq ft needs to go. We expect the new tenants to be signing up at rentals north of SGD10-11 psf/month vs ‘loss-leader’ Cargill, who contracted for 51,000 sq ft previously at a likely rental of SGD9-10 psf/month. The AEI at Capital Tower has also expanded its scope at an unchanged budget of SGD40m, but completion will be pushed back by six months. GIC (CCT’s top 10 tenant contributing 5% of monthly gross rental income) will be renewing its leases at Capital Tower next year, with significant reversion, given its low base, according to management. CCT stands to benefit from higher office spot rents given its favourable lease expiry profile: ~49% of office leases, by monthly gross rental income, are expiring in 2014-2016.
Reiterate BUY with an unchanged DDM-derived TP of SGD1.83 (cost of equity = 6.7%; Tg = 2%).

CapitaCommercial Trust

OCBC on 21 Jul 2014

CCT reported 2Q14 distributable income of S$64.1m – 7.6% higher YoY. This cumulates to an YTD distributable income of S$124.0m, which is within expectations and makes up 51.0% of our FY14 forecast. 2Q13 DPU is 2.18 S-cents, which is 5.3% higher than the 2.07 S-cents paid in 2Q13. The growth in distributable income over the quarter was mainly due to stronger contributions from assets, lower interest expenses and the release of retained tax-exempt income distribution (S$2.4m). CapitaGreen’s structural work has reached the top floor and remains on track to complete by the end of this year. The trust has secured aggregate lease commitments for ~23% (165k sq ft) of total NLA, and expects CapitaGreen to contribute revenue to MSO Trust from 2H15 onwards, and to distributable income from FY16. Maintain HOLD with an unchanged fair value estimate of S$1.67.

2Q14 results within expectations 

 
CapitaCommercial Trust (CCT) reported 2Q14 distributable income of S$64.1m – 7.6% higher YoY. This cumulates to an YTD distributable income of S$124.0m, which is within expectations and makes up 51.0% of our FY14 forecast. 2Q13 DPU is 2.18 S-cents, which is 5.3% higher than the 2.07 S-cents paid in 2Q13 and translates to a 5.1% distribution yield as at the last closing price of S$1.67. The growth in distributable income over the quarter was mainly due to stronger contributions from assets, lower interest expenses and the release of retained tax-exempt income distribution (S$2.4m). In terms of the topline, 2Q14 gross revenues increased 3.2% YoY with all properties, except One George Street, clocking higher income over the quarter. 

Stable portfolio performance
Portfolio occupancy remained stable at 99.4% as of end 2Q14 versus the previous quarter. As a result of continued rental reversions, CCT’s average committed office portfolio rentals increased marginally QoQ from S$8.22 to S$8.23/sq ft. Over the quarter, the trust signed leases for 97.5k sq ft of space, of which 31% are new leases, and the portfolio WALE (weighted average lease term to expiry) as at end Jun-14 stands at 7.8 years. CCT continues to enjoy a healthy balance sheet, with gearing improving to 28.8% as at end 2Q14 from 30.0% the previous quarter, and an average cost of debt of 2.4%.

CapitaGreen achieved “top-out” and now ~23% pre-committed
CapitaGreen’s structural work has reached the top floor and remains on track to complete by the end of this year. The trust has secured aggregate lease commitments for ~23% (165k sq ft) of total NLA, and expects CapitaGreen to contribute revenue to MSO Trust from 2H15 onwards, and to distributable income from FY16. We also note that CCT has a call option to acquire, from its JV partners, the remaining 60% stake in CapitaGreen at market valuation within three years of completion. Maintain HOLD with an unchanged fair value estimate of S$1.67.

CapitaCommercial Trust

Kim Eng on 3 Jul 2014

• The new tenants for CapitaGreen are insurer Jardine Lloyd Thompson and a global law firm, Jones Day.
• Another 200,000 sq ft to go before reaching the targeted 50% pre-commitments by year-end.
• Reiterate BUY with an unchanged TP of SGD1.83.

What’s New
We attended the topping-out ceremony of CapitaGreen, which is on track to complete by year-end. CapitaCommercial Trust (CCT) also announced that it has secured YTD pre-commitment of 21% (150,800 sq ft) of total NLA for CapitaGreen vs 12% three months ago. The new leasees include Jardine Lloyd Thompson (an insurance/reinsurance firm; currently at One Raffles Quay) and Jones Day (a law firm; presently at Samsung Hub), alongside Cargill, Bordier & Cie (moving out of GB Building along Cecil Street) and an international gym operator. CCT had previously stated that it was in discussions with other prospects and was optimistic of achieving 50% (another 200,000 sq ft) pre-commitments by year-end.

What’s Our View
We expect the new insurance and business service tenants to be signing up at rentals north of SGD10-11 psf/month vs ‘loss-leader’ Cargill, who contracted for 51,000 sq ft at a likely rental of SGD9-10 psf/month. Being one of two major prime office developments (the other is the 527,000-sq-ft South Beach Development) in the CBD due to complete this year and next, we expect CapitaGreen to be fully occupied by end-2015, with higher rentals of SGD11-12 psf/month progressively signed in 2H14-2015. CCT is poised to benefit from higher office spot rents as it has one of the most favourable lease expiry profiles among office REITs: ~52% of office leases, by monthly gross rental income, are expiring in 2014-2016. Reiterate BUY with an unchanged DDM-derived TP of SGD1.83 (cost of equity = 6.8%; Tg = 2%).

Singapore REITS

OCBC on 30 June 2014

Our assessment of the recent performance of S-REITs show that their fundamentals have generally remained sound, and S-REITs continue to benefit from their past investments and higher secured rentals within their existing portfolios. On the capital management front, S-REITs have again stepped up their efforts to repay/refinance their borrowings ahead of their maturities and over a longer term, as well as hedge their interest rate exposure in anticipation of the potential hike in interest rates. We are retaining Suntec REIT [BUY, S$1.85 FV] and Starhill Global REIT [BUY, S$0.90 FV] as our sector picks. However, we now replace CapitaCommercial Trust with Frasers Centrepoint Trust [BUY, S$2.08 FV] as our preferred pick due to the former’s strong unit price run-up. Retain NEUTRAL on broader S-REITs sector.

Selecting the winners
The S-REITs sector has rallied 7.3% and outperformed STI by 4ppt YTD on US Fed Chair Janet Yellen’s forward guidance that interest rates are likely to stay low “for a considerable time”. However, against this backdrop, we note that the Fed will continue to cut the bond purchases meant to suppress the long-term borrowing costs low, keeping it on track to end the stimulus programme late this year. Even the recent forecasts by the Fed officials point to a possibility that the interest rates may rise faster than previously expected. Given these developments, we now make a conscious effort to select the S-REITs that are likely able to withstand any potential correction better and outperform the rest.

Fundamentals still sound
Our findings show that the fundamentals of S-REITs have generally remained sound, and S-REITs continue to benefit from their past investments and higher secured rentals within their existing portfolios. On a relative basis, the office REIT subsector outlook looks the rosiest, as the uptrend in office rents is likely to be sustained amid strong leasing activity, low vacancy and limited supply in the near term. This is followed by retail REITs, which are poised to reap the returns of their AEIs and the positive operating landscape. For FY15, we note that Suntec REIT and CapitaCommercial Trust are expected to experience one of the fastest increases in DPU, according to Bloomberg consensus forecasts.

Assessing impact from interest rate hike
On the capital management front, S-REITs have again stepped up their efforts to repay/refinance their borrowings ahead of their maturities and over a longer term, as well as hedge their interest rate exposure in anticipation of the potential hike in interest rates. This has resulted in an improvement in gearing, debt duration and hedge ratio. In fact, for a 1ppt growth in interest rate, we estimate the greatest fall in DPU among the S-REITs is contained within 10%, while several S-REITs such as Starhill Global REIT are likely to be unscathed as a result of fixing 100% of their rates via hedges or fixed-rate notes.

Our sector picks
In view of all this, we retain Suntec REIT [BUY, S$1.85 FV] and Starhill Global REIT [BUY, S$0.90 FV] as our sector picks. CapitaCommercial Trust, our third preferred pick, has performed very well YTD, clocking a 15.9% increase in unit price. At current level, we believe most of the positives have been priced in. As such, we replace CapitaCommercial Trust with Frasers Centrepoint Trust [BUY, S$2.08 FV] as our preferred pick. The latter has a strong financial position, trades at an attractive yield of 6.1% and P/B of 1.06x and is expected to see relatively robust earnings growth over the next year. RetainNEUTRAL on broader S-REITs sector.

Singapore REITs

Kim Eng on 2 June 2014

• A slower-than-expected hike in interest rates bodes well for S-REITs whose share prices have rebounded.
• We see room for further re-rating as sector yields are expected to compress to 5.6-5.7% from 6.0% currently.
• In view of this, we upgrade our sector call to NEUTRAL with CMT, CCT and AREIT being our top picks, in sequence of preference.

Interest rate expectations trimmed
Following the change of winds in the macro environment, we cut our year-end risk-free rate assumption from 3.0% to 2.5% and expect a more prolonged low interest rate environment. This lends supports to our view that physical property valuation will hold up better than we initially expected. We therefore revise our assumptions for physical property price change from -2% to -10% to +2% to -6% in 2014. With yield compression cycle at play again, we expect S-REITs to return in favour.

Sector raised to NEUTRAL; top picks: CMT, CCT, AREIT Unlike recent past event that straddled from early 2012 until May 2013, we expect current yield compression cycle to be more modest. Our view is premised on: 1) current risk-free rates are unlikely to decline significantly as QE tapering gets underway, and 2) there are pockets of property price weakness. We expect sector yields to compress to 5.6-5.7% from 6.0% presently, translating to a yield-spread of 3.1-3.2%.

In view of this, we upgrade our sector call to NEUTRAL. TPs for our coverage universe are raised after factoring in lower risk-free rate, while leaving our DPU forecasts unchanged. Retail sub-sector remains our preferred segment, followed by office and hospitality. The industrial REITs remain the most at risk of NAV depreciation. For exposure, we recommend CMT, CCT, and AREIT, in sequence of preference.

Property: REITs’ and developers’ 1Q14 results review

UOBKayhian on 20 May 2014

Developers’ results were impacted by slowing home sales although share prices
(+6.7% ytd) were supported initially by undemanding valuations, buoyed by
privatisation. REITs’ results were largely within expectations as anticipated. We like
deep-value and diversified property stocks, preferably those with exposure to the
commercial and hotel segments. CCT, Suntec REIT, Keppel Land, CDREIT,
CapitaLand and Wing Tai are our preferred picks. Maintain OVERWEIGHT.

Strong data points emerging for the office space as rental reversions remain positive
across almost all office buildings while occupancies remain tight. Leasing activity is
also picking up with CapitaCommercial Trust (CCT) signing 12% of available space in
upcoming CapitaGreen. We anticipate that office rents will rise 10-15% in 2014 on the
back of reduced supply and improving demand outlook.

Office REITs positioning for acquisitions with Suntec REIT raising S$350m in a private
placement to pare down debt in the near term, while exploring acquisition opportunities
in Australia and Singapore. On the other hand, Keppel REIT has divested Prudential
Tower for S$512m (4.5% above book) to free up capital for the upcoming acquisition of
Marina Bay Financial Centre Tower 3. CCT also has an option to acquire the remaining
60% of CapitaGreen from the JV with sponsor CapitaLand and Mitsubishi Real Estate.

Hotel RevPARs are bottoming out with hotel REITs reporting a flattish RevPAR post a
9% drop in 2H13. CDL Hospitality Trust reported a turnaround in Singapore RevPAR
after six consecutive quarters of decline, with RevPARs up a modest 0.5% yoy.

Industrial segment seeing divergence with stronger occupancies and rental reversions
in warehouse (17% for Mapletree Log from Singapore and Hong Kong) and factory
space (8% for Mapletree Industrial), while business park space continues to remain
weak as occupancies dipped (e.g. down 4.4ppt yoy to 89.6% for AREIT) driven by
slower take-up of older vacated space (eg The Signature for MIT) and newly upgraded
space (eg 31 International Business Park for AREIT).

Retail weakness in tenant sales (-4% yoy for CMT) and shopper traffic (-2% yoy for
CMT) for retail REITs as new malls drew shopper traffic from older malls, impacting
older malls such as Bedok Point (occupancy: 77%). A difficult retail environment is also
impacting retailers, with Japanese lifestyle brand Francfranc and Japanese skincare
brand Fancl closing their retail operations. However, yield-accretive acquisitions are still
possible with FCT's S$313m acquisition of Changi City Point (+1% DPU) to be funded
with a mix of debt and equity.

CapitaCommercial Trust

Kim Eng on 21 Apr 2014

• 1Q14 results in line with our expectations. DPU rose 7.2% YoY to 2.08 cts.
• 12% pre-commitment signed to-date for CapitaGreen. Cargill leases 51,000 sq ft and likely paying SGD9-10 psf per month.
• Reiterate HOLD with DDM-based TP raised to SGD1.66.

Results in line with expectations
CCT saw a 3.2% YoY rise in 1Q14 revenue to SGD64m, bolstered by higher income from most properties except One George Street, whose Deed of Yield Protection expired on 10 Jul 2013. 1Q14 DPU grew 7.2% YoY to 2.08 cts, driven by lower interest expense and higher NPI. Balance sheet remained strong, with a low gearing of 30% and 81% of borrowings on fixed rates. CCT has debt headroom of SGD1.2b, assuming a gearing of 40%. Portfolio occupancy rate edged up to 99.4% from 98.7% thanks to a mix of new and renewed leases, while monthly average office portfolio gross rent continued its uptrend, increasing to SGD8.22 psf from SGD8.13 psf in 4Q13.

CapitaGreen achieves 12% pre-commitment
CapitaGreen has secured a pre-commitment for 12% of its NLA of 700,000 sq ft from Cargill (51,000 sq ft), Bordier & Cie (12,000 sq ft) and an international gym operator (18,000 sq ft). These first-mover tenants are likely to be loss leaders, possibly paying a monthly rental of SGD9-11 psf, lower than CCT’s target of SGD12-14 psf for subsequent smaller floor-plate tenants. We see challenges ahead as CCT’s pre-leasing activities will coincide with those of the 782,000-sq-ft Asia Square Tower 2 (TOP 3Q13; 60% pre-committed) and 527,000-sq-ft South Beach Development. We expect the next significant increase in DPU to occur only in FY15 after the completion of CapitaGreen. We raise our FY14E-16E DPU estimates by 1.4-2.3% on interest savings and better growth prospects. Reiterate HOLD with a higher DDM-derived TP of SGD1.66 (previously SGD1.50).

CapitaCommercial Trust

OCBC on 21 Apr 2014

1Q14 distributable income increased 7.6% to S$59.9m mostly due to stronger contributions from portfolio assets and lower interest expenses. 1Q figures were mostly within expectations and YTD distributable income now constitutes 25.6% of our full year forecast. We note that the Trust enjoyed higher revenues from all properties due to a mix of stronger occupancies and positive rental reversions, except for One George St which was impacted by the cessation of yield protection income. 1Q14 DPU of 1.94 S-cents translates to a 5.2% yield as at the last closing price of S$1.635. As our top pick in the REITs sector, CCT has outperformed significantly YTD, appreciating 12.8% versus the STI’s 2.7% movement over this period. We update our model for latest rental assumptions, and our fair value increases marginally to S$1.67 from S$1.61 previously. At this juncture, however, we believe CCT is almost fully valued; downgrade to HOLD on valuation grounds.

Good start to the year
1Q14 distributable income increased 7.6% to S$59.9m mostly due to stronger contributions from portfolio assets and lower interest expenses. 1Q figures were mostly within expectations and YTD distributable income now constitutes 25.6% of our full year forecast. Topline for the quarter came in 8.5% higher YoY at S$57.1m versus S$52.6m in 1Q13 (restated due to the adoption of FRS 111 which reclassified income from RCS Trust and MSO Trust under “share of results of JV”). We note that the Trust enjoyed higher revenues from all properties due to a mix of stronger occupancies and positive rental reversions, except for One George St which was impacted by the cessation of yield protection income. 1Q14 DPU of 1.94 S-cents translates to a 5.2% yield as at the last closing price of S$1.635.

CapitaGreen now 12% pre-committed
Portfolio occupancy came up to 99.4%, up 70 bps from 98.7% as of end 4Q13. We continue to see positive rental reversions across CCT’s portfolio assets, with average committed office portfolio rentals increasing to S$8.22 psf as at end 1Q14 from S$8.13 as at end 4Q13. Management highlights that more than two thirds of leases expiring in FY14 has been renewed. Greenfield asset CapitaGreen remains on track to complete by end FY14 and the Trust has already pre-leased 12% of the 0.7m sq ft net lettable area to Cargill, Bordier & Cie and an international gym operator. Management expects to achieve commitment levels of ~50% by completion.

Downgrade to HOLD on valuation grounds
As our top pick in the REITs sector, CCT has outperformed significantly YTD, appreciating 12.8% versus the STI’s 2.7% movement over this period. We update our model for latest rental assumptions, and our fair value increases marginally to S$1.67 from S$1.61 previously. At this juncture, however, we believe CCT is almost fully valued; downgrade to HOLD on valuation grounds.

Office Reits

Kim Eng on 5 Mar 2014

• The key to rental rate increase in the Central Area lies in continued hiring in the financial, insurance and business services sectors.
• But an uptick in headcount is unlikely this year, considering sub-trend GDP growth, sluggish financial services activities, lower hiring expectations and tightening labour market
• Short-term reprieve next year but ample supply still looms. With vacancy rate tipped to rise in 2016, we see modest rental upticks of 3%/5% in FY14/15 before sliding 2% in 2016.

What’s New
The office REITs segment was recently abuzz with renewed interest from investors after the Urban Redevelopment Authority’s Office Property Rental Index recorded a ~1% YoY increase in rent for both the Central Area and Central Region in both 3Q13 and 4Q13. The uptick came on the back of four consecutive quarters of YoY decline since 3Q12.

What’s Our View
Abundant supply a nagging worry. While we anticipate a reprieve from new office space next year, the fact remains that there is still ample supply – an estimated 6.4m sq ft of net leasable area in the Central Business District (CBD) is expected to come on-stream in 2014-2017. With the labour market moderating and overall hiring expectations on the wane, we do not think headcount numbers will jump sharply this year, especially considering the sub-trend GDP growth and financial services activities remaining sluggish. We estimate net absorption during this year and next would balance out previous outstanding (~4.8m sq ft in the Central Area) and new incoming supplies, leading to an occupancy rate of 90-92% in the Downtown Core (4Q13: 90%). However, in 2016-2017, occupancy rate could slide to 88-90% as ~5m sq ft of new office space becomes available.

Maintain Neutral. With vacancy rate tipped to creep up only in 2016, we see rents rising a modest 3% in 2014 and 5% in 2015 before declining 2% in 2016. We maintain our Neutral stance on the office REITs sector, with HOLD calls on CapitaCommercial Trust (CCT, TP SGD1.50) and Keppel REIT (KREIT, TP SGD1.25). The key downside risk to our call is an abrupt capital flight from Asia. Liquidity outflows will not only hit asset prices sorely, but may also lead to a cutback in headcount for the financial, insurance and business sectors, causing a dent in rentals.

Singapore Property

UOBKayhian on 27 Jan 2014

The Urban Redevelopment Authority's (URA) real estate statistics for 4Q13 shows that prices of residential, office, retail and industrial properties changed -0.9% qoq (1.1% yoy), 0.5% (5.2% yoy), 0.0% (4.3% yoy) and -3.3% (3.2% yoy) respectively. Rentals for residential, office, retail and industrial properties adjusted by -0.5% (0.9% yoy), 0.6% (1.3% yoy), 0.1 % (-0.9% yoy) and 0.2% (5% yoy) respectively.

The recovery in the office sector is gaining momentum while the residential and industrial sectors are turning down. The retail segment is expected to remain stable. We prefer deep value and diversified stocks with exposure to the office sector. Top picks include CapitaCommercial Trust, Suntec REIT, Keppel Land and Ho Bee.

CapitaCommercial Trust

OCBC on 24 Jan 2014

4Q13 distributable income increased 3.3% YoY to S$60.2m. This cumulates to a distributable income of S$234.2m for FY13, which is up 2.5% YoY mainly due to higher revenue contributions across portfolio properties and a full-year contribution from Twenty Anson. FY13 distributable income constitutes 102.1% of our annual forecast and we deem this this performance to be within expectations. The group reported 4Q13 DPU at 2.09 S-cents, adding up to a total FY13 DPU of 8.14 S-cents – a 5.6% distribution yield based on the traded price of S$1.45 per unit. We continue to like CCT for its exposure to the relatively attractive CBD sub-market. With its low gearing of 29.3% and debt headroom of S$1.2b (to 40% gearing), there is significant dry powder for accretive acquisitions. Maintain BUY with an unchanged fair value estimate of S$1.61.

FY13 figures within expectations
4Q13 distributable income increased 3.3% YoY to S$60.2m. This cumulates to a distributable income of S$234.2m for FY13, which is up 2.5% YoY mainly due to higher revenue contributions across portfolio properties and a full-year contribution from Twenty Anson. FY13 distributable income constitutes 102.1% of our annual forecast and we deem this this performance to be within expectations. The group reported 4Q13 DPU at 2.09 S-cents, adding up to a total FY13 DPU of 8.14 S-cents – a 5.6% distribution yield based on the traded price of S$1.45 per unit. 

Poised to benefit from recovering CBD office market
Portfolio occupancy came up to 98.7% as of end 4Q13 versus 97.2% a year ago. In particular, we highlight that management has successfully addressed the issue of weak occupancies in Capital Tower and One George Street over FY13, bringing the occupancy rate up from 90.6% and 94.4% as at end FY12 to current levels of 100% and 99.5%, respectively. As a result of continued rental reversions, CCT’s average committed office portfolio rentals increased over the year from S$7.64 (end FY12) to S$8.13 (end FY13). Finally, greenfield-asset CapitaGreen remains on track to attain TOP by end FY14; recall that this is the only asset completing in the core CDB sub-market over FY14-15. The group also completed its S$86m enhancement program at Six Battery Road, resulting in an estimated 8.6% ROI from incremental rentals and savings in operating expenses.

Significant dry powder – debt headroom of S$1.2b
We continue to like CCT for its exposure to the relatively attractive CBD sub-market. With its low gearing of 29.3% and debt headroom of S$1.2b (to 40% gearing), there is significant dry powder for accretive acquisitions. We believe this puts CCT in an advantageous position to capitalize on the sector, particularly if the recovery should surprise on the upside given its valuable call option to purchase the remaining 60% of CapitaGreen within three years after TOP. Maintain BUY with an unchanged fair value estimate of S$1.61.