The Positives
+ Improved NPI margins at Capital Tower and Six Battery Road. Biggest improvements in YoY NPI growth (c.3%) and margins (+3ppts) were seen at these two properties in FY18. In addition, average committed rents at Six Battery Road – the property yielding the highest rent per square foot per month in CCT’s portfolio – had been trending upwards (QoQ), with average expiring leases seen to trend downwards in 2019 and 2020.
+ 99.4% portfolio occupancy is the highest in eleven years, lifted by AST2. The last time this figure was crossed was in 2007. Occupancy was largely lifted by AST2, which saw the introduction of co-working operator The Work Project Kingdom (TWPK) (which CapitaLand owns a 50% stake in). TWPK is also a tenant at Capital Tower.
The Negatives
– Fate of HSBC Building still up in the air. CCT is still evaluating options – including refurbishment and re-letting, redevelopment and divestment – for the HSBC Building, after the current lease to HSBC ends in Apr 2020. The Manager is leaning towards the first two options though it does not rule out a divestment if a good offer comes along.
Outlook
Taking CCT as an almost pure-play proxy (save for Galileo) for the Singapore prime Grade A CBD office market, we expect to see higher or more positive rental reversions as the committed rents progressively surpass their respective expiring rents. Already securing JP Morgan as a key anchor tenant for its upcoming CapitaSpring development, the marketing showsuite is slated to launch in 1H2019. In other inorganic growth pursuits, Germany is likely to continue being one of the next sources of CCT’s overseas acquisitions. However, a mooted Deutsche Bank-Commerzbank merger, as time closes nearer towards “Brexit day”, could potentially overhang the Galileo lease – Commerzbank is its sole office tenant.
Maintain ACCUMULATE with higher TP of S$1.93 (prev S$1.90).
Our target price has been adjusted upwards, in line with the continued upcycle in office rents. This translates to a FY19e yield of 5.0% and P/NAV of 1.0x.
