CCT – OCBC

Better-than-expected 1Q10 results

Better-than-expected results. CapitaCommercial Trust (CCT) reported its 1Q10 results which came in above our expectations. Net property income increased 11% YoY to S$77.6m, driven by positive rent reversions and lower property tax. CCT signed new leases and renewals of 144,373 sq ft in the last quarter and portfolio occupancy rate improved to 95.1% at end 1Q10. DPU of 1.93 S-cents has been declared for 1Q10, translating to an annualised DPU yield of 6.9%. This exceeds our estimate of 1.79 S-cents by 7.8%.

Further hint of divesting Starhub Centre for condominium redevelopment. There is no new update on Starhub Centre as the development plan is still pending government approval. Despite the increase in occupancy rates at most of CCT’s office buildings in 1Q10, occupancy rate at StarHub Centre had remained flat at 68.2% since the end of 2009. If CCT plans to divest Starhub Centre as an office building, achieving a higher occupancy rate for the building would help to secure a better price for the asset. However, by not doing so, we believe that this could be a further hint that the most likely outcome of the asset review would be a divestment of StarHub Centre for redevelopment into a condominium. Based on our estimates, CCT could potentially reap a gain of S$33.2m (S$0.01 per share) to S$93.9m (S$0.03 per share) from the divestment.

Managing refinancing through CB buyback. CCT had also announced that it repurchased a further S$125.5m of its convertible bond due 2013 for a consideration of S$135m, including accrued interest, and the outstanding amount has now been reduced to S$229.5m. This brings down its potential refinancing requirement in 2010, from S$1,025m at end FY09 to S$658m at end 1Q10. Refinancing for 2011 is making significant inroad and its average debt maturity to put has also increased to 2.1 years. After the bond repurchase and the recent issue of convertible bond, the gearing ratio will edge up marginally from 33.2% to 33.8%.

Fair value raised to S$1.26; Maintain BUY. We have adjusted our FY10 rental growth assumption from -15% to -10%. So far, Grade A office rents have held up better than non-Grade A offices. With the bulk of the FY10 expiring leases coming from its Grade A buildings, we believe that the negative rent reversion this year may not be as bad as we have expected earlier. However, we still hold a cautious view on the office market, given the upcoming supply of new office spaces. Our fair value, which is pegged at parity to RNAV, has now been raised to S$1.26 (previously S$1.19). With a potential total return of 16.4%, we maintain our BUY rating on CCT.