CCT – OSK DMG

Poised To Benefit From Rental Uplift

CapitaCommercial Trust’s (CCT) Q314 results were in line. CCT achieved 40% pre-commitment for CapitaGreen, with Cargill taking up additional space. CCT needs another 70,500 sqf before reaching the targeted 50% pre-commitments by year-end. Anchor tenant, GIC Pte Ltd, which contributes 5% to gross rental income, will renew its leases at Capital Tower in 2015. The management expects significant rental reversions. Assume coverage with BUY and TP of SGD1.80 (from SGD1.44), resulting in a 15.8% total return upside.

• Results in line with expectations. CCT saw a 2.9%/4.5% YoY increase in 3Q14/9M14 DPU to 2.10/6.32 cents, accounting for 26.0%/76.8% of our forecasts. Balance sheet remained strong, with a low gearing of 30.2% and 80% of borrowings on fixed rates. CCT has debt headroom of SGD1.2bn, assuming a gearing of 40%. Portfolio occupancy rate remained unchanged at 99.4%, while monthly average office portfolio gross rent continued its uptrend, increasing to SGD8.42 psf from SGD8.23 in 2Q14.
  
• CapitaGreen achieves 40% pre-commitment (2Q14: 23%). CCT secured leases for an additional 114,500 sqf at CapitaGreen, clocking in a total of 279,500 sqf leasing commitment. The new leases include additional space take-up by Cargill, and new tenants from the Banking, Insurance and Financial Services, Real Estate and Food & Beverage sectors. CCT is in advanced negotiation for another 75,000 sqf, on target to achieve its 50% leasing target by end of the year. We expect the new tenants to be signing up at rentals north of SGD10-11 psf/month vs “lossleader‟ Cargill, who contracted for 51,000 sqf in 1Q14 at a likely rental of SGD9-10 psf/month.
  
• Our view. Being one of two major prime office developments (the other is the 527,000-sqf South Beach Development) in the CBD due to complete this year and next, we expect CapitaGreen to be fully occupied by end-2015, with higher rentals of SGD11-12 psf/month progressively signed in 4Q14-2015. CCT is poised to benefit from higher office spot rents as it has one of the most favourable lease expiry profiles among office REITs: ~44% of office leases, by monthly gross rental income, are expiring in 2015-2016. Assume BUY with a DDM-derived TP of SGD1.80 (COE = 6.8%; TG = 2%) (from SGD1.44), implying a 15.8% total return upside.