Q1 distributable income at CCT jumps 90%

Retail space at Raffles City to be expanded by 12%

CAPITACOMMERCIAL Trust (CCT) yesterday reported a 90 per cent year-on-year jump in Q1 distributable income to $29.2 million as contributions kicked in from its acquisition of Raffles City on Sept 1 last year. Distributable income for Q1 ended March 31, 2007 was also 10.6 per cent above the trust’s own forecast.

And with more than 70 per cent of its office leases up for renewal from this year to 2009, CCT is poised to enjoy strong upside from rental reversions.

‘Over the next two years, this rental growth and the repositioning of Raffles City will contribute significantly to CCT’s income,’ said David Tan, chief executive of CapitaCommercial Trust Management Ltd (CCTML). ‘The market outlook is positive and we are confident of delivering strong performance this year.’

CCT also announced yesterday the first phase of refurbishment work at Raffles City Shopping Centre, which will cost $55.8 million and add 41,000 sq ft of net lettable retail space – a 12 per cent boost to the existing 352,088 sq ft.

Work is expected to start this quarter and finish by Q4 this year. The refurbishment is projected to achieve incremental annual net property income of $7 million, reflecting a 12.5 per cent return on an ungeared basis. The trust said it has in-principle approval from the Urban Redevelopment Authority to decant about 65,000 sq ft of gross floor area from mechanical and equipment use to new retail use.

The renovation project includes construction of a three-storey island podium in the Level 1 atrium, expansion of The Marketplace in Basement 1 and the reconfiguration and extension of the lease lines of some shops on levels 1 and 2. Levels 1 and 2 of the island podium will be designated for retail use and the third level will be a new elevated atrium for hosting events and promotions. ‘A new three-storey-high water feature integrated into the design of the island podium will serve as an iconic focal point of Raffles City,’ CCTML said.

The retail net lettable area of The Marketplace in Basement 1 will be enlarged by 26,412 sq ft or 30 per cent to 115,980 sq ft. Part of the Basement 1 car park will be converted to retail space to facilitate this. As well, a new car ramp will be built, linking Basements 1 and 3 to enhance vehicle traffic flow.

Besides a 60 per cent stake in the Raffles City office, retail and hotel complex, CCT owns office buildings here including Capital Tower, 6 Battery Road and HSBC Building, a 30 per cent stake in Malaysia-listed Quill Capita Trust and a 7.4 per cent interest in a private property trust, Malaysia Commercial Development Fund.

CCT also effectively owns Wisma Technip office tower in Kuala Lumpur through full control of junior bonds issued in connection with the building’s asset securitisation.

CCT’s Q1 distributable income of $29.2 million works out to a distribution per unit of 2.11 cents, up 22.7 per cent from 1.72 cents for Q1 last year and a 9.9 per cent outperformance on CCTML’s forecast DPU of 1.92 cents based on information in its August 15, 2006 circular.

The latest 2.11 cent DPU for Q1 2007 works out to an annualised payout of 8.56 cents, which reflects a distribution yield of 3.16 per cent based on CCT’s closing price yesterday of $2.71.

CCT’s Q1 2007 gross revenue of almost $56.7 million was a 4.8 per cent improvement on its forecast. This was due mainly to increased rental income, car park income and other income, but was partially offset by lower rental income from Capital Tower due to reconfiguration works.

The trust also booked a $4.5 million loss from the re-measurement of fair values of interest rate swaps in Q1, against a $2.9 million profit in the year-ago period. For full-year 2007, CCTML said it expects to surpass the 7.60 cent DPU reflected in its August 2006 circular.

Decent start to the year

• 1Q07 within expectations. 1Q07 DPU of 2.1cts represents 22% of our full-year forecast of 9.5cts and 24% of consensus’s 8.9cts. We have assumed that CCT’s portfolio will grow by 15% this year, in line with the trust’s target to reach S$6bn by end-2009 from the current S$3.8bn. Assuming a constant portfolio size, 1Q07 gross rental revenue would have met 24% of our full-year forecast.

• Gross rental revenue surged 95%, largely because of the consolidation of the 60% stake in Raffles City that CCT acquired in Sep 06. Excluding Raffles City, gross rental revenue would still have climbed 13% yoy. This was chiefly on account of strong rental growth at Six Battery Road, higher occupancy at Bugis Village, and contributions from Golden Shoe Car Park and Market Street Car Park, following the completion of asset enhancement work there. Overall portfolio occupancy remained technically full at 99%.

• Strong office rental reversions to continue. Asking rents at Six Battery Road reached S$16 psf per month in April, a 23% jump from the start of this year. About 10% of the leases in the prime office building are up for renewal this year. Similarly at Raffles City, the asking rent is up 15% from the beginning of this year to S$11.50 psf per month and 29% of the leases are due for renewal this year.

• Asset enhancement at Raffles City kicks off. About 41,000 sf of retail NLA (+12%) will be added during the first phase. Construction is scheduled to start this quarter and end by year-end. It was announced previously that the entire asset enhancement package would include the addition of 150,000 sf in NLA and a direct link to the new Esplanade MRT station nearby, which should be ready by 2009/2010. We expect CCT to announce the remaining phases of Raffles City’s asset enhancement in the next 12-18 months.

• Maintain Outperform. Our DPU forecasts remain intact and there is no change to our DDM target price of S$3.00 (cost of equity 5%, implied CY07 yield of 3.2%). Potential catalysts in the next 12-18 months include the announcements of the remaining phases of Raffles City’s asset enhancement, CCT’s move into China and possibly the trust’s maiden development project. Based on CCT’s latest asset size of S$3.8bn, CCT can undertake up to S$380m worth of projects.

Out of the picture

1Q07 in line, kick starting AEI for Raffles City. CCT announced 1Q07 DPU of 2.11 cents, which translates to an annualised yield of 3.1%, within expectations. Along with 1Q07 results, CCT also announced plans for phase 1 of asset enhancement works at Raffles City, creating an additional 41,000 sf of retail NLA. We expect Raffles City to progressively roll out AEI initiatives over a 2-3 year time frame and add another 150,000 sf of retail space, which we have factored into our projections.

Out of the picture for Capitaland’s Singapore assets. Following the sale of 12 floors of Springleaf Tower to MGPA for S$1,240 psf and 9 floors of Samsung Hub to Ho Bee and Chinese Chamber Realty for S$1,388 psf by Capitaland, we note from brokers that recent billion dollar transaction of the sale of Temasek Tower to MGPA at S$1,550 psf was yielding below 3%, against CCT’s current yield of 3.1%. While we recognize CCT could leverage on Capitaland’s network to source for acquisitions, CCT is passing out on office transactions with parent Capitaland cherry picking for the best deals in town. Low transacted physical yields are pricing CCT out of the market with competition from property funds that have more flexibility and less stringent regulations on investment and access to funds.

Positive reversions remain primary source of growth. Moving forward, we continue to see broad based rental recovery of the office sector, with both Grade A and prime office rents showing sequential growth 10.1% and 21.4% respectively for 1Q07, keeping up the bullish momentum into 2007. We expect DPU growth of 17% and 29% respectively for FY07 and FY08 to be mainly driven by strong reversions from CCT’s portfolio of office assets with 50% of leases up for renewal over the next two years, highlighted by asking rents for 6 Battery Road already hitting S$16 psf pm.

Maintain Hold, TP S$ 2.97. We are raising our DCF based target price from S$2.64 to S$ 2.97, factoring in higher reversion rents for CCT’s portfolio. While its 30% strategic stake in Quill Capita Trust (QCT) provides an additional platform for growth into the Malaysian market, we see minimum impact for CCT in the near term. Upside risks to our recommendation include acquisitions from both asset injections by Capitaland as well as 3rd party acquisitions, of which CCT has been quiet since the HSBC acquisition in 2Q05.