3 analyst reports on Capitaland Commercial Trust (CCT)

Golden shoe capitaland commercial trust

Capitaland Commercial Trust (CCT) is Singapore’s largest commercial REIT with a market cap of approximately S$6.5b, ahead of Mapletree Commercial Trust at approximately S$4.7b.

As Singapore’s largest commercial landlord, CCT’s performance is closely tied to that of the office market, and generally GDP growth and office activities in the country.

Before investors invest in CCT, what are some things to look out for?

This post consolidates the reports from a number of equity analysts and will hopefully serve to shed more light on how CCT is performing.

Phillip Securities

CCT’s FY2017 net property income and distribution per unit were within expectations on the back of an improved tenant retention ratio.

Portfolio occupacy of 97.3% was up from 97.1% in Dec 2016, together with tenant retention ratio moving from 62% in FY16 to 78% in FY17.

A strong tenant retention ratio means that less fit out works need to be done (which may constitute savings for CCT); downtime can also be avoided; With less churn in the building, tenants will also not be so affected than if there were engineering works being done.

For Asia Square Tower 2, occupancy has improved to 90.5%, up 2% points from acquisition in Nov 2017.

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About S$12.4m of divestment proceeds and tax exempt income were used to top up the loss of distributable income from One George Street’s and Wilkie Edge’s divestment.

Across the general office market, Grade A rents is continuing a recovery, growing 3.3% in the fourth quarter of 2017 compared to a quarter ago.

The improvement from the previous nine quarters of rental decline is a positive sign and likely to benefit CCT.

However, even though the general office market is improving, CCT’s portfolio is still experiencing negative rental reversions.

This has come about because the leases that were renewed or signed in 2017 are at a higher point than where market rents presently are.

As a comparison, today’s office rents, even though they have improved, are still 18% lower than its peak in 1Q15.

As a result of the negative rental reversions, Phillip Securities has an outlook on a stable distribution per unit in the near future, rising 0.9% by the end of 2018.

Phillip Securities has a target price of S$1.80 for CCT. This target price translates into a yield of 4.9% and Price-to-NAV ratio of 1.0.

DBS Research

DBS maintains their buy rating on CCT with a target price of S$2.10.

Despite near term DPU dilution post Asia Square Tower 2’s acquisition, DBS feels that with a patient mindset, investors will be able to reap the benefits of CCT’s capital recycling strategy.

In contrast to the thinking of some investors that CCT’s yield is on the lower (tighter) end, DBS does not view CCT’s yield as low. On the contrary, the asset recycling strategy would mark the beginning of a multi-year upturn of the stock price.

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According to DBS, the price premium commanded by CCT is contributed by Capital Tower and HSBC Building’s book pricing of S$1,847 and S$2,275 being below recent comparable transaction prices of between S$2,400 and S$2,700.

Simliar to Phillips, DBS shares the view that improving office rents (for the first time in 9 quarters) will trigger a boost in sentiment and a subsequent share price recovery.

According to DBS, CCT’s share prices have shown patterns of leading spot office rents by 6-12 months.

Even though the macro office environment is improving, there nevertheless remains episodes of negative rental reversions in the portfolio.

Some of the signings of new rents are CCT’s buildings include 6 Battery Road (new rents at S$10.69 to S$13.5 psf per month versus expiring rents of S$12.77), One George Street (new rents at S$9.00 to S$10.60 psf per month versus expiring rents of S$9.62).

With regards to Asia Square Tower 2, CCT’s management continue to seek tenants for the remaining vacant space. Asking rents are between S$11.5 to S$12.5 psf per month.

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CCT’s property values remained steady as the valuers have not used a different cap rates since the last revaluation in June 2017.

Portfolio metrics remain healthy, with cost of debt falling marginally from 2.7% to 2.6% and 80% of CCT’s borrowings on fixed rates.

The outlook for CCT by DBS is a target price of S$2.10. Price to book ratio will move higher to 1.2 times on the back of a recovery in office rents.

OCBC Research

OCBC views CCT 4Q2017 results as in line with their expectations, despite gross revenue and net property income declining 3.8% and 4.0% compared to the same period last year.

Similar to Phillip Securities and DBS research, OCBC views the office market as improving, which will likely support portfolio performance going forward.

With regards to Asia Square Tower 2, OCBC views the occupancy rate of 90.5% as being positive since there is room for the building to ride on rents in the improving office market.

CCT has set a target of S$11.5 to S$12.5 psf per month for new leases signed in Asia Square Tower 2.

OCBC has raised FY18 and FY19 distribution per unit forecasts by 2.5% and 2.8% respectively on the back of lower finance cost assumptions.

This is because of the continued lower for longer interest rate environment. One risk identified is the rise in interest rates, which are dependent on developments in the US, which may impact the REIT’s finance costs.

OCBC has a target price of S$1.84 for CCT. Based on a closing price of S$1.90, OCBC anticipates CCT to trade at a distribution yield of 4.7% and price to book ratio of 1.1 times by end 2018.


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