CCT – OCBC

1H DPU of 3.9 S cents; CCT more positive on office Sector

1H DPU of 3.9 S cents. CapitaCommercial Trust (CCT)’s 2Q10 gross revenue of S$100.2m edged up 0.2% YoY but slipped 1.6% QoQ. Similarly, net property income gained 1.3% YoY but fell 4.3% QoQ to S$74.2m. The QoQ declines may be due to lower contributions from Robinson Point, sold on 19 Apr. Tax claims on capital equipment and lower interest expenses due to reduced leverage (32.3% versus 41.9% a year ago) resulted in a 15.9% YoY increase in distributable income to S$55.7m. CCT has declared a 1.97 S cents DPU for 2Q10. Unitholders will receive a total of 3.9 S cents for 1H10, translating to an annualized DPU yield of 5.8%. CCT will trade ex-distribution on 28 Jul.

CCT more positive on office sector. CCT signed 277,000 square feet of new leases and renewals during the quarter; demand stemmed from banking, financial and professional services. About half of new leases signed were driven by the expansion plans of existing tenants. Portfolio occupancy improved to 95.6% from 95.1% three months ago, with Grade A office occupancy hitting the 100% mark compared to 99.1% three months ago. The manager’s tone was fairly positive, citing strong pre-commitment for new space, the QoQ up-tick in market rents over 2Q10, and the pick up in leasing momentum at its assets. CCT said that “given Singapore’s strong economic growth, the prospects for further rental growth for Grade A and prime office space appear positive for the rest of 2010.” Negative rent reversions still remain a key risk, in our view.

Scouting for acquisitions. Last week, CCT said it will sell non-Grade A office building StarHub Centre to Frasers Centrepoint Ltd, the property arm of Fraser & Neave [FNN, NOT RATED] for S$380m. This is its second asset sale in the year. Sale proceeds will be used for growth opportunities and/ or to reduce debt. With “ample resources” in the form of sales proceeds and debt headroom up to its long-term 45% target, CCT said it was looking for “well-located Grade A” office assets in Singapore. The re-development of Market Street Car Park, shelved during the crisis, could be an alternative use of the funds (contingent on CCT’s ability to re-obtain Outline Planning Permission from the URA to convert the allowed use of the asset). With a change in analyst coverage, we will be reviewing our assumptions and earnings estimates. As such, our previous HOLD rating and S$1.26 fair value for CCT is UNDER REVIEW.