CCT – UOBKH
More Than An Office Play
With the largest portfolio of prime office properties in Singapore, CapitaCommercial Trust (CCT) has the highest exposure to the Singapore office segment. Its portfolio also consists of office and business park properties in Malaysia through a 30% stake in Quill Capital Trust (QCT) and a 7.4% stake in Malaysian Commercial Development Fund.
Strong rental reversions to drive DPU. CCT will benefit from substantial office lease renewals in the next few years. 70.8% of its portfolio comprises office assets. Of these, 74.6% will see their leases expire between now and FY09. We expect strong positive rental reversions to drive its DPU. Asking rents for 6 Battery Road is already at a high of S$17.5 psf pm, and that the momentum will last well into FY09.
Retail yields to improve from Raffles City asset enhancement. CCT will begin its RCS phase 1 AEI works in 2Q07, which are scheduled for completion by 4Q07. This will add 41,000 sf (+12%) of net lettable area (NLA) and increase net property income (NPI) by S$7.0m p.a. following an increase in average rentals from S$14.55 psf pm to S$15.05 psf pm. Phases 2 and 3 will add another 0.15m-0.2m sf of NLA with the creation of retail space at Basement 2 and 3, with direct access to City Hall MRT station and the new Esplanade MRT station. Estimated net increase in monthly rents for the increased retail NLA is S$10.00-15.00 psf, contributing to a net increase in NPI of S$12.6m-25.2m and yielding an ROI of 20-29%.
Aggressive acquisition trail not without risks. CCT will likely stay focused on office as it targets to grow its asset size to S$5.0b-6.0b by FY09, with QCT as its preferred vehicle for exposure to Malaysia. QCT intends to double its portfolio to RM500m from RM276m by end-07 with the injection of four new assets. Key risk, however, arises from the difficulty of acquiring yield-accretive office assets amid keen competition going after high capital values, which results in lower yields. This could be the fundamental reason for CCT to look to China for potential acquisitions. Also, CCT’s unsuccessful offer for Temasek Tower may suggest limited leverage on its parent CapitaLand for potential yield-accretive injections.
Initiate with BUY; target price S$3.72. We initiate coverage of CCT with BUY at a target price of S$3.72, implying a 17.0% upside and a total return of 23.9%. We factor in acquisitions of S$500m-800m p.a. to reach an investment portfolio size of S$5.6b by end-09.