CCT – DBSV

In a sweet spot, for now

• DPU grows 3.7% despite dilution from 2014 CBs
  
• Higher income from Capital Tower and 6 Battery Road offset loss of income support at One George Street
  
• CapitaGreen: income contribution pushed back as Manager prefers to wait for 2015
  
• Maintain HOLD, TP S$1.67
  

Highlights

Strong set of 2Q14 results. CapitaCommercial Trust (CCT) reported gross revenue of S$65.8m (+3.2% y-o-y). The increase in rental income came mainly from an improvement in occupancies at its major buildings (namely Capital Tower, 6 Battery Road) which more than offset the loss of income support from One George Street. Net property income grew at a smaller 2.0% y-o-y to S$52.0m, mainly due to higher property taxes and operating costs. Distributable income to unitholders came in at S$64.1m (DPU of 2.18 Scts), which was 3.7% higher y-o-y, boosted by release of QCT distribution income (S$2.35m, nil a year before).

Stable valuations. Portfolio valuations were written upward slightly, supported by higher rents achieved across the portfolio. Due to a change in valuers, cap rates expanded slightly by c.10bps for its Grade A buildings, but remain at the 3.75%-4.25% range. NAV remain stable at S$1.67 per unit.

Our View

Portfolio occupancy remained robust at 99.4% During the quarter, the Trust renewed/leased 83.5k sqft of office space and 14k sqft of retail space, with 31% of leases coming from new tenants in the financial services, retail products/services and energy/commodities/maritime & logistics industries. Strong demand for office space also resulted in significantly higher committed rents at 6 Battery Road (S$12.50-14.00 psf pm vs S$11.84) and One George Street (S$10.40-11.00 psf pm vs S$9.55) relative to both expiring rents, as well as comparable market rents.

CapitaGreen 23% pre-leased. CapitaGreen has achieved precommitments for 23% of NLA. We understand that the average rents for these initial leases are still below market rates of S$10.60 psf pm but the latest leases signed are starting to inch higher. Given that this is still some way off from target rents of S$12-14 psf pm, the Manager has indicated that it is content to hold off some leasing activity until 2015, and has guided for positive DPU contribution only in 2016. While we like this wait-and-see strategy, we remain cautious about the strength of new demand, given that we haven’t seen much new demand for floor plates that would have traditionally been a catalyst for sharp increases in rent levels.

Recommendation

Maintain HOLD, TP S$1.67. We have raised our estimates slightly to account for higher portfolio occupancies and rents achieved. While we believe that CCT will continue to be a main beneficiary of the supply crunch in the CBD over 2014-2015, with CapitaGreen only contributing meaningfully from 2016 onwards, immediate term growth is likely to be flattish, diluted by conversions of the CBs. The stock offers dividend yields of 5.0-5.1%, which is fair.