Morningstar | CCT’s 3Q18 In Line; AST2, Gallileo Acquisitions and CapitaSpring Development Underpin Growth
CapitaLand Commercial Trust's, or CCT's, third-quarter 2018 results were in line with expectations. Net property income increased by 37.3% year over year to SGD 80.4 million on the back of a 35.6% year-over-year increase on revenue to SGD 100.5 million. Distribution per unit increased by 8.9% year over year to SGD 0.022 on an adjusted basis to take into account the enlarged total unit base. The increase in net property income was driven by higher contributions from CapitaGreen and a full-quarter contribution from Asia Square Tower 2, or AST2 (acquired in November 2017), and Gallileo (acquired in June 2018), partly mitigated by the loss of contribution from Twenty Anson (divested on Aug. 29, 2018) and Wilkie Edge (divested on Sept. 11, 2017). After making minor adjustments to our forecast, we lowered our fair value estimate to SGD 1.68 per unit from SGD 1.70 per unit. Our narrow economic moat and stable moat trend ratings are unchanged. We think the units are fairly valued at the current price, with future growth mainly driven by AST2, Gallileo, and the development of CapitaSpring, which is due to be completed by first-half 2021.Occupancy rates for the firm's portfolio improved to 99.2% in third-quarter 2018 from 97.8% in second-quarter 2018, mainly due to the acquisition of Gallileo, which is at 100% occupancy, and a big improvement at AST2 as the remaining vacant space continued to be leased out following its acquisition in November 2017. As a result, the occupancy rates at AST2 improved to 98.1% from 91.9% in second-quarter 2018. For the rest of the properties, occupancy rates remained largely stable, with some minor improvements at Capital Tower, Raffles City, and CapitaGreen. We expect occupancy rates to remain stable with limited upside, as most of their properties are at close to 100% occupancy rates. Renewal for leases expiring in 2018 have been completed, and around 40% of the leases due to expire in 2019 have also been renewed. Overall, CCT has managed to secure above-market rents for most of the renewals; however, due to the high average rents due for renewal in 2019, we are only forecasting a small increase on rental revision in 2019. New leases in third-quarter 2018 were largely from the real estate and property services, business consultancy, IT, media and telecommunications, financial services, energy, commodities, maritime, and logistics sectors.
Average grade A office monthly rental rates in the third quarter of 2018 continue to increase to SGD 10.45 per square foot after hitting a bottom of 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. This 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, we expect a large increase in rental revision in 2020, as the average rents for leases that will expire then are significantly below the current market rents. 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, which is expected to be completed in the first half of 2021, 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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