Morningstar | CCT’s 2Q18 In Line; AST2, Gallileo, and CapitaSpring Development Underpins Growth; FVE Unchanged. See Updated Analyst Note from 19 Jul 2018
CapitaLand Commercial Trust’s, or CCT’s, second-quarter 2018 results were in line with expectations. Net property income increased by 12.5% year over year to SGD 77.7 million on the back of a 12% year-over-year increase on revenue to SGD 98 million. Distribution per unit increased by 14.3% year over year to SGD 0.0216 on an adjusted basis to take into account the enlarged base of total units after a capital raising in May. The higher net property income was driven by higher contributions from CapitaGreen, Capital Tower, and Six Battery Road, as well as a full-quarter contribution from Asia Square Tower 2, or AST2. The acquisition of Gallileo, which was completed on June 18, also contributed to this quarter’s net property income for 12 days. These positive contributions were offset by lower contribution from Twenty Anson and the divestments of 50% stake in One George Street, Golden Shoe Car Park, and Wilkie Edge in 2017. We retain our fair value estimate of SGD 1.70 per unit, along with our narrow economic moat and stable moat trend ratings. We think the units are slightly overvalued at the current price, with future growth factored in. This is mainly driven by the development of CapitaSpring, which is due to be completed by first-half 2021.Occupancy rates remained largely stable at most of CCT's properties, with the exception of improvement at Twenty Anson and AST2 as the firm continues to lease out the remaining space at AST2 following its acquisition in November. This, together with the acquisition of Gallileo, which has a 100% occupancy rate, results in an increase in the average occupancy rate for its portfolio to 97.8% in second-quarter 2018 from 97.3% in first-quarter 2018. We expect occupancy rates to continue improving as management continues to ramp up the marketing of AST2. Renewal for leases expiring in 2018 has been largely completed, and
the tenant retention ratio remained healthy at 86% in second-quarter 2018. New leases in second-quarter 2018 were largely from the business consultancy, IT, media and telecommunications, financial services, retail products, and services sectors.
Average monthly rental rates in the second quarter of 2018 continue to increase to SGD 10.10 per square foot after hitting a bottom at SGD 8.95 per square foot in first-half 2017. This supports our view that office rental rates have troughed in 2017 and are expected to recover in the next few years, which is supported by improving demand and normalized supply for office space from 2018 to 2021 after a big increase in net supply in 2016 and 2017. It is expected that only around 0.6 million-0.8 million square feet will be added every year from 2018 to 2021, which is close to the long-term historical average of 0.8 million square feet of annual net supply additions. For CCT, as the average rents for leases that expire in 2018 are still above the current market rents, we still forecast negative rental revision in 2018. We expect rental revision to turn positive and increase from 2019 onward. However, we could see some downside risks in rental rates in 2022, as a huge supply of 1.8 million square feet is expected to be completed then.
In the medium term, we still expect contributions from AST2 and Gallileo to offset the net property income lost from Twenty Anson and Bugis Village. In the long run, we expect the development of CapitaSpring and potential overseas acquisition to drive growth.
CapitaCommercial Trust is a commercial real estate investment trust investing in properties predominantly used for commercial purposes. Through its subsidiary, Co. is engaged in the provision of treasury services, including lending to the Trust the proceeds from issuance of notes under an unsecured multicurrency medium term note program. As of Dec 31 2011, Co.'s portfolio comprised of nine properties including three office buildings, one prime office building, three mixed-use properties, one multi-story car park and an ongoing development for a new office tower, all of which are located in Singapore.
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