• 1H20 NPI (-4.5%) and portfolio metrics were relatively stable. Occupancy was unchanged at 95.2% while valuations fell 1.7%.
• 1H20 DPU of 3.34 cents was 24.1% lower YoY and formed 43.5% of our FY20e DPU estimates, deemed in line considering the $7.5mn retained on the RCS level.
• Maintain ACCUMULATE, unchanged TP of $1.91. No change in our estimates. CCT offers a FY20e/21e DPU yield of 4.5%/5.3%.

The Positives

+ Portfolio occupancy remain unchanged at 95.2% QoQ, 176,000 sqft (3% of portfolio) of leases signed with positive rental reversions. Dip in occupancy in RCS (-1.0ppts) was offset by Asia Square Tower 2 (+0.8ppts) and Six Battery Road (+0.2ppts). Rental reversions ranged +0.4% to 26.1%, calculated as the average of newly signed rent over average expiring rents. New leases signed accounted for 13% of NLA committed in the quarter. Lower leasing activity in 2Q as physical viewing of space was suspended and only resumed in Phase 2 (19 June). 8% of leases expiries by GRI remain for FY20. Occupancy at Six Battery Road stands at 78.7% and has not been back-filled post-downsizing by Standard Charted Bank. The asset will undergo $35mn worth of AEIs which are expected to be delayed by 3-4 months due to delay in construction works. Prolonged lower occupancy expected as leasing can only commence after the space is ready.

+ FY20 refinancing completed, lowering average cost of debt from 2.3% to 2.2%.

The Negatives

– Portfolio valuation fell marginally by 1.7%. While cap rate assumptions were unchanged, lower valuations were the result of lower market rents and rental growth rates assumptions due to economic uncertainties and COVID-19.

– Construction delays to push back viewing/leasing activity and WeWork lease. Due to heighten regulation mandating the provision of twin-sharing accommodation for foreign workers, AEI works at Six Battery Road and 21 Collyer Quay has not commenced while the construction for CapitaSpring has resumed.

Outlook

While the leasing environment remains weak, average expiring rents for FY20-FY22 range $9.08 to $10.95 is lower in comparison to current market rents (CBRE: $11.15). Modest positive rental reversion is still achievable.

CCT committed $25.8mn in rental waivers in 1Q20, excluding additional rebates for the estimated 20% of qualifying SMEs tenants. To date, CCT has booked:

1. $6.48mn for its’s 60% share of RCS’ rental rebates as at 1H20,
2. $2.3mn/$2.6mn in rental rebates in 2Q20/1H20
3. Bulk of rebates are from the government’s property tax rebates and cash grants which are on a pass-through basis.

Germany portfolio largely resilient with no rental waivers granted.

$22mn of rental deferment were provided to all tenants, the bulk of which went to hotel operators in the RCS (JV) portfolio. Deferment was for hotel rents for the period April to September 2020, with the scheduled repayment to commence from January 2021.

Maintain ACCUMULATE with unchanged TP of S$1.91.

Headwinds persist for the office asset class. However, we believe offices will remain relevant in the evolving world of technology and telecommuting. The value added by office will evolve from being merely a physical workstation to a space synonymous with mentoring, collaboration, corporate culture and creativity. No change in our estimates. CCT offers a FY20e/21e DPU yield of 4.5%/5.3%.