Ahead of market expectations

At a Glance

• Higher RCS contribution partially offset negative rental reversion, slightly ahead of consensus

• Healthy occupancy limited lease renewal for FY12

• Expect some interest savings, gearing at 30.2%

• Maintain BUY and S$1.36 TP

Comment on Results

Lifted by RCS. On a y-o-y basis, gross revenue and NPI fell marginally by 2.4% and 3.7% to $89.9m and $68.3m respectively. The steady performance was largely due to higher contribution from Raffles City Singapore (RCS). Consequently, DPU saw a marginal decline of 1% translating to DPU of 1.92cts including the S$1.1m retained income from RCS. Full year DPU exceeded consensus forecast by 5%. Book NAV rose by 3.3% as the trust took in a revaluation surplus of S$149.6m, with cap rates remaining at 4%.

Office occupancy dipped by 1.4ppt to 95.8%. Vacancies were largely coming from OGS (-4.2ppt) and 6 Battery Road (-5.6ppt). That said, the negative impact was mitigated as income from OGS is supported at a 4.25% NPI yield till July 2013, while the 93,700sf upgraded space at 6 Battery Road has been100% pre-committed. While negative rental reversion should still persist in 1H12, we believe the downside risk is mitigated with only 7.9% of its office leases by gross rental income in 2012 to renew.

RCS still performing well. RCS income rose 8.3% yoy and contributed about 34% of CCT’s FY11 income. Post completion of its AEI works, the retail and hotel revenues rose 13% yoy, while the hotel portion increased 7.9% on the back of strong tourist arrivals. Going forward, contribution from RCS should remain steady against the still healthy tourist arrivals and robust consumer spending backdrop.

Healthy balance sheet, some interest savings. Net gearing rose from 27.4% to 30.2% due to a drawdown of about $98m term loan for its 40% interest in the MSCP project. Separately, the trust has also secured funding for the S$570m term loan due in Mar at more attractive rates. Hence, we expect the 3.6% all-in- interest rate to head slightly down once the facilities are drawn down.

Recommendation

Maintain BUY. We continue to like CCT for its strong balance sheet and healthy cash reserve. While we believe sector headwinds persist, CCT is well placed to weather this given its low expiry profile and growing income from its non-office components. Our DCF-backed TP is lowered by 9.5% to S$1.36 as we roll forward our numbers and lower assumptions to account for the slower economy. The trust is offering FY12/13 DPU of 5.9-6.1%.

CCT posts declines in Q4, full-year DPU

Portfolio committed occupancy dips to 95.8% at end-2011, down from 99.3% a year earlier

CAPITACOMMERCIAL Trust (CCT) has posted declines in its Q4 and full-year distribution per unit (DPU) figures.

The trust, which makes semi-annual distribution payouts, will give unitholders 3.75 cents for the July 1-Dec 31, 2011, period, down from 3.93 cents in the same year-ago period.

For the fourth quarter ended Dec 31, 2011, DPU dipped one per cent over the year-ago period to 1.92 cents. Gross revenue eased 2.4 per cent to $89.9 million due mainly to lower revenue from Six Battery Road as a result of lower occupancy and negative rent reversions. The redevelopment of Market Street Car Park into an office project also contributed to the revenue drop. However, this was mitigated by higher income contribution from other properties, mainly Raffles City, in which CCT has a 60 per cent stake.

Net property income slipped 3.6 per cent year on year to $68.3 million in Q4 on higher property operating expenses.

Q4’s DPU of 1.92 cents reflects an annualised figure of 7.62 cents, translating to an annualised distribution yield of 6.66 per cent based on CCT’s $1.145 closing price yesterday. The counter ended 3.5 cents higher yesterday.

Net asset value per unit rose 6.8 per cent from $1.47 at end-2010 to $1.57 at end-2011, excluding distributable income to unitholders.

For full-year 2011, CCT posted a 4 per cent drop in DPU to 7.52 cents, on the back of a 7.8 per cent slide in gross revenue to $361.2 million. The decline was due mainly to loss in rental income arising from the divestment of Robinson Point and StarHub Centre, lower revenue from Six Battery Road and the Market Street redevelopment.

However, the drop in total revenue was offset by higher income contribution from Wilkie Edge resulting from higher occupancy and higher revenue from Raffles City from the retail and hotel components. Full-year net property income slid 7.2 per cent to $277.3 million.

CCT’s portfolio committed occupancy stood at 95.8 per cent at end-2011, down from 99.3 per cent a year earlier.

Lynette Leong, CEO of CapitaCommercial Trust Management Ltd, revealed that HSBC’s triple net lease (that is, HSBC pays for property tax, maintenance and repair) for HSBC Building at Collyer Quay expiring in April this year has been renewed for a seven-year term at a monthly rental rate of $8.50 per square foot, which is about double the expiring rental rate.

One George Street has achieved an occupancy rate of 93.3 per cent at end-December 2011, higher than the 76.9 per cent the trust manager had expected on the assumption that all expiring leases had not been renewed. New tenants secured in the building last year included The Bank of Fukuoka and Ashmore Investment Management (Singapore). Lease renewals were also secured from the likes of Diageo Singapore, Shinhan Bank and Legg Mason Asset Management Singapore.

At Six Battery Road, all of the 93,700 sq ft of space upgraded last year was precommitted at end-2011. Upgrading works will continue on a phased basis till 2013.

Some 20 per cent of Six Battery Road’s net lettable area (NLA) will be expiring in 2012, while 12 per cent of One George Street’s NLA will be expiring this year.

‘While negative rent reversions could continue for some of the trust’s office leases expiring in 2012, the downside risk is mitigated by the fact that office space representing only 7.9 per cent of the trust’s total portfolio gross rental income is due for renewal in 2012,’ said Ms Leong.

‘Furthermore, a substantial portion (36 per cent for FY 2011) of the trust’s total gross rental income is contributed by retail, and hotel and convention centre income, primarily from the 60 per cent interest in Raffles City Singapore. This additionally limits the trust’s exposure to the soft office market conditions,’ she added.

CCT’s gearing rose to 30.2 per cent as at Dec 31, 2011 from 28.6 per cent a year earlier.

Ms Leong also said that the trust has secured funding to meet its refinancing, having proactively secured borrowings ahead of debt maturities in 2011 and 2012.

Last month, it obtained $450 million in committed unsecured facilities and issued $200 million in medium-term notes. The aggregate $650 million is more than sufficient to refinance CCT’s $570 million term loan due in March 2012.

‘By then, seven out of nine of the trust’s assets (including all its Grade A assets), valued at about $4 billion, will be unencumbered, further enhancing our financial flexibility,’ said Ms Leong.