CCT – OCBC

Portfolio reconstitution on the cards

Results above expectations. CapitaCommercial Trust (CCT) reported its 4Q09 results yesterday that came in above our expectations. Net property income for 4Q09 increased by 21.9% YoY and 3.8% QoQ to S$80m, exceeding our estimate by 3.2% due to lower property expenses, tax and trust expense. Its investment properties had also been revalued downwards by S$327.6m, or 5.4% of its prior valuation, to S$5.7b. This resulted in a 6.6% QoQ decline in its NAV and an increase in its gearing from 31.2% (end 3Q09) to 33.2%. For the quarter, a DPU of 1.88 S cents has been declared, translating to an annualized yield of 6.4%.

Unlocked value for Robinson Point. CCT had signed the S&P agreement with AEW Capital Management to sell Robinson Point for S$203.25m (S$1,527 psf on NLA). A gain of S$19.2m is expected to be recognized from the transaction. Sales proceed from Robinson Point is unlikely to be returned
to unitholders as CCT wants to retain the cash for reinvestments, targeting at Grade A office buildings.

Starhub Centre is the potential game changer. CCT also announced that it is currently doing an asset plan review for Starhub Centre, which has already obtained Outline Planning Permission from URA to change its use to a mix of residential (max 80% of GFA) and commercial. We believe that converting Starhub Centre from office to residential use would be a sensible move to extract value for unitholders, given its low occupancy rate and prime location. A high-end residential project there could be sold at S$2,000 psf to S$2,500 psf and based on our assumptions, developers could offer as much as S$301m-S$362m (12.4%-35% premium over book value) for Starhub Centre. The change of use is still subject to other government authorities’ approval and final plan for Starhub Centre is still being evaluated.

Fair value raised to S$1.16; Maintain HOLD. In view of the resilience in occupancy rates of CCT’s Grade A office buildings, we have raised our FY10 occupancy rate assumption from 95% to 98%. Our RNAV estimate has now been raised to S$1.16 (previously S$1.13), which has also factored in the
gains from Robinson Point divestment. Pegging at parity to our RNAV, we derive a fair value of S$1.16. For FY10 and FY11, we expect DPUs of 6.7 S cents and 6.6 S cents, translating to DPU yields of 5.6% per annum. With a projected total return of 3.8%, we maintain our HOLD rating on CCT. Key re-rating catalyst will be the outcome of the asset plan review for Starhub Centre.