CCT – DMG

Unencumbered Assets, But Economy Encumbers

FY08 performance met expectations. CapitaCommercial Trust (CCT) notched a 16.3% YoY jump (-12.5% QoQ) in 4Q08 DPU to 2.71¢, which was within expectations. For FY08, DPU came in at 11.00¢, matching the Street’s (11.10¢) and exceeding DMG’s (10.38¢) estimates. Underpinned by the introduction of 1 George Street and higher contribution from other properties, CCT’s 4Q08 revenue and NPI expanded to S$83.8m (+50.3% YoY, +5.1% QoQ) and S$65.6m (+47.8% YoY, -1.7% QoQ) respectively. However, 4Q08 EBIT was down 15.6% QoQ to S$51.3m due to higher trust expenses from the nonrecurring consultancy fees and expenses incurred for the aborted MSCP redevelopment. Most properties delivered improved or flat operating performances, aside from Capital Tower (higher property taxes) and MSCP
(redevelopment).

Birth of devaluations. CCT’s portfolio of assets devalued by 3.0% HoH to S$6.7b, attributable to valuers’ usage of higher cap rates (4.5 to 4.75%), premised on a weakened macroeconomic outlook, lower rents and occupancies. As such, NAV dipped 5.7% QoQ to S$2.97 per share. While gearing remain at a decent 37.6%, we believe this is prone to further upside pressures upon CCT’s subsequent semi-annual revaluation exercises this year and 2010. Given banks’ current comfortable LTV ratios of 30 to 40%, fresh refinancing concerns could surface when CCT’s S$850m worth of loans expire in 2010, from our view. From current levels, we estimate that CCT’s assets would need to drop by 7.0% (- S$467m) and 38.8% (-S$2.6b) to hit gearing of 40% and 60% respectively.

Remain NEUTRAL at lower S$1.00. Earnings visibility for this year should be rather stable for CCT, having locked in 79% of FY09 gross rental income, helped by full year contribution from 1 George Street and Wilkie Studio. While financial institutions’ confidence in CCT’s quality of assets has been affirmed with the respectable terms pertaining to its recent S$580m loan (a single securitized asset and spread of ~ 250bps), we believe the counter, similar to other landlords, would continue to be in the eye of the office re-rating storm, which should continue to stretch into 1H11. In light of the above, coupled with a continued deteriorating economic environment, we are lowering our occupancy levels and average rentals for CCT for FY10 and FY11 (portfolio occupancy: 85 – 90%, prime Grade A rentals: S$8 – 10 psf per mth, down from S$10 – 12, Rest of Central Area: S$6 – 8 psf per mth, down from S$8 – 10), but keeping our assumptions for FY09 intact as majority of the leases have been locked in. As such, FY09 DPU remains at 10.86¢ and FY10 DPU falls by 8.3% to 10.16¢. Maintain NEUTRAL at lower fair value of S$1.00.