CCT – OCBC

All the right moves; poised to benefit from rental Recovery

Estimated 4Q10 DPU of 1.94 S cents. CCT’s 4Q10 gross revenue of S$92.1m dropped 10.8% YoY and 5.8% QoQ. Similarly, NPI fell 11.4% YoY and 7.08% QoQ to S$70.9m. Estimated 4Q10 DPU is 1.94 S cents, which is 3.2% above 4Q09 DPU of 1.88 S cents. The income declines were largely driven by the loss of rental income following the divestments of Robinson Point and Starhub Centre. There were also elements of negative rent reversion, as the expiring leases were contracted during the highs of 2007-2008.

All the right moves. In previous reports, we were concerned that CCT’s excess cash1 on the balance sheet could result in a cash drag, especially in this persistently low interest environment. In light of no further acquisition in sight, we were delighted that CCT had chosen to pare down its debt in 4Q10. It has prepaid its S$142.6m term loan, expiring in Jun 2012, using existing cash balance in Dec and will be repaying another S$100m MTN maturing on 24-Jan 2011. Following this, its gearing will be lowered to 27% from 31.5%. The prepayment has also unencumbered another of its assets (HSBC Building), increasing CCT’s number of unsecured assets to 7 out of 9. We continue to like CCT’s prudent capital management. It is able to maintain financial flexibility by having a large portfolio of unencumbered assets and reasonably low gearing, and yet having the nimbleness to acquisition growth opportunities when these arise. Assuming a gearing of 40%, CCT now has additional debt headroom of S$1.2B, which it can focus on investment opportunities. The challenge, however, lies in sourcing for yield-accretive Grade-A office acquisitions. Capital values of CBD office space have appreciated some 20%-25% YoY, on the back of heated investment sales2 , which some argued were driven by the conversion of office to residential use.

Positive rent reversion after 2011. CCT’s portfolio occupancy improved to 99.3%, from 94.8% a year ago. We were particularly impressed that the manager was able to uplift Wikie Edge’s occupancy from 78.4% in 3Q10 to 98.4% in 4Q10. According to our estimates, Grade A office rents will hit S$10.50 psfpm in 20113, more than S$11 psfpm in 2012 and above S$12 psfpm in 2013. We thus forecast CCT to continue to experience negative rent reversions in 2011 , but this should change in 2012. With its near 100% occupancy and active leasing strategy, CCT is poised to benefit from the rental upside ahead. We thus upgrade CCT’s rating to BUY, with a RNAVderived fair value of S$1.61 (10.3% total returns)

1 CCT received net proceeds of S$578.lm following the divestments of Robinson Point and Starhub Centre on 19 Apr 2010 and 16 Sep 2010 respectively.

2 According to CBRE, more than S$5 billion of office buildings have changed hands in 2010. Grade A office buildings are also benchmarked at about $2,400-$2,500 psf (end 2010), whereas a year ago, arguably it was below $2,000 psf,

3 According to CCT, its average Grade A office rent of leases expiring in 2011, 2012 and 2013 are S$13.77 psfpm, S$10.01 psfpm and S$7.73 psfpm respectively.