CapitaLand Commercial Trust gets ‘hefty’ increase from HSBC extension: Daiwa

Singapore two-dollar bills

CapitaLand Commercial Trust’s one-year lease extension with HSBC for the 21 Collyer Quay building marks a “hefty” 36 percent increase which will boost the distribution per unit, Daiwa said in a note last week.

The total rent payable for the one-year term beginning 30 April 2019 at S$27.7 million, CapitaLand Commercial Trust said in an SGX filing last week. Currently, HSBC is leasing the entire building and is one of CCT’s top ten tenants, contributing around 4 percent of the trust’s monthly gross rental income as of 30 June, the filing said.

Daiwa estimated that the rent increase alone would boost its distribution per unit forecasts by 1.2 eprcent for 2019 and 1.7 percent for 2020, assuming the rent extension is maintained over May to December 2020.

“We reckon that HSBC had to sign a lease extension to buy time so that it can relocate to a new office building in early 2020,” Daiwa said.

But despite the boost to income, Daiwa kept a Sell call with a target price of S$1.48 for CCT.

It noted that after the extension period, the fate of the building and its income stream wasn’t certain as the trust could refurbish, re-let, re-develop or divest.

Separatly, DBS called the deal a “disappointment.”

“We had originally assumed that HSBC would extend its lease for a longer period although the rent for the one-year extension is higher than the S$10 per square foot per month rent we had projected,” DBS said in a note last week. It noted that HSBC would pay the equivalent of S$11.54 per square foot per month, up from S$8.50 prior to the extension.

However, it noted that CCT would have two years to find a replacement tenant if it decides to continue owning the building.

DBS also pointed to the possibility that with higher demand for office buildings in Singapore, and with recent transactions at tight yields, CCT could sell the building at above book value.

It kept a Buy call, with a S$2.12 target price, pending the finalization of the trust’s plans for the building.

In a separate note on Friday, DBS noted that HSBC signed a long lease of 10 years at MBFC Tower 2 from 2020, taking around 140,000 square feet of space on high floors, compared with the around 200,000 square feet of space it occupies at 21 Collyer Quay.

“While we are surprised that HSBC is moving to MBFC Tower 2, it is encouraging to know that MBFC Tower 2 has been able to backfill the top
floor space vacated by tenants,” DBS said in the Friday note.

“This transaction also highlights the inherent strength and quality of the buildings that Keppel REIT and Suntec REIT own, in particular the ability to find replacement tenants when an existing tenant vacates, due to the high specifications and superior locations of the properties,” it added.

It kept Buy calls on Keppel REIT and Suntec REIT, noting they are trading below book value and that they are leveraged to the multi-year upturn in the Singapore office market.

DBS has a target price of S$1.41 for Keppel REIT and S$2.30 for Suntec REIT.

Units of CapitaLand Commercial Trust ended Friday up 1.72 percent at S$1.77. Keppel REIT ended up 1.72 percent at S$1.18, while Suntec REIT added 0.54 percent to S$1.86.

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