CCT – Kim Eng

Deep pockets, but what’s next?

Event

• CapitaCommercial Trust (CCT) reported an FY10 DPU of 7.8 cents, in line with expectations. Net property income declined marginally by 0.4% to $299m despite a 1.3% fall in gross rental income, due to lower OPEX and property tax. We remain cautious in view of the possible downward pressure on rents when more of the new supply comes on‐stream. Maintain HOLD.

Our View

• CCT’s Grade A office space continues to enjoy full occupancy as of end‐2010, but Six Battery Road suffered a 3% drop in gross revenue due to negative rental reversion. Management alluded that some of its existing tenants require space for expansion, but we remain mindful that nearly half of the new office supply coming on‐stream in 2011 has yet to be committed, which may limit CCT’s pricing power when it comes to seeking new tenants or retaining existing ones.

• After accumulating a warchest of more than $700m from the divestment of Robinson Point and Starhub Centre last year, CCT will pare down $242.6m of debt, saving about $7m of interest expense per year. CCT is exploring various refinancing options for its remaining debt, possibly by taking longer‐maturity loans of five years or more.

• The management intends to hold on to the remaining cash of about $535m for potential acquisitions. CCT has a potential investment capacity of $1.6b at its disposal, assuming a gearing of 40%. However, with other office buildings transacting at cap rates of 4% or less, it remains a challenge for CCT to find attractive acquisitions.

Action & Recommendation

While CCT has done well to maintain occupancy rates for now, it remains to be seen if it will be at the expense of softening rents when more International Grade A space gets completed in 2011 and 2012 (increasing the office stock in the Central region by nearly 3% p.a.). Maintain HOLD with a DDM‐derived target price of $1.25.