CCT – UOBKH
3Q07 DPU +19% yoy due to strong rental growth and accretion from Raffles City acquisition
Good set of results for 3Q07. CapitaCommerical Trust (CCT) 3Q07 results were in line with our expectation and ahead of its own forecast. Buoyed by strong rental growth and accretion from the acquisition of Raffles City, CCT achieved a 19% yoy growth in distribution per unit (DPU). At the end of Sep 07, the CCT achieved a committed occupancy of 99.9%.
Positive outlook from rental reversion and asset enhancement initiatives (AEI). We expect office rental to continue its up-trend as office supply remains tight and demand continues to be strong. With more than 50% of the office leases expiring in the next 2 years, CCT is poised to benefit the upward rental reversion. Following the completion of Phase 1 of the AEI by end of 4Q07, Raffles City could have an additional 40,307 sqf of retail space with S$10m of revenue per annum. While CCT is on track to meet our FY07 DPU estimates, CCT would need to some yield enhancing acquisitions to achieve our FY08 DPU forecast as we have factored in some acquisitions in our model.
One George Street could be a potential acquisition target. In 2007, most of the acquisitions for office properties were made by private property funds. In the active secondary market, capital values have risen ahead of rental rates, resulting in yield compression. With the current low passing rental, yield accretive deals are hard to come by for the reits. Looking at Capitaland portfolio of office assets, we reckon that One George Street (OGS) could be a potential target for CCT. Capitaland recently acquired the balance 50% stake in OGS for S$600m or S$2700 psf. While passing yield at OGS may be too low for a direct injection into CCT, with income support or similar financial arrangements, OGS could be structured into a yield accretive acquisition.
Maintain BUY with TP of S$3.04 as CCT’s diversified portfolio of prime office assets offer a good upside to the booming office sector in Singapore. Downside risks include unexpected downturn in the Singapore office market, failure to conclude any yield enhancing acquisition and higher than expected cost of funds.