CCT’s Q3 distributable income rises to $29.6m

Better result due to Raffles City, higher office rental income

CAPITACOMMERCIAL Trust, one of Singapore’s biggest office landlords, has posted distributable income of $29.6 million for the third quarter ended Sept 30, 2007, which is 13.5 per cent higher than the trust manager’s forecast based on a circular dated August last year, and a 52.4 per cent improvement from the same period last year.

‘The better financial performance year-on-year is a result of the accretive acquisition of Raffles City last year and the higher rental income from our quality office portfolio,’ CapitaCommercial Trust Management Ltd’s CEO Lynette Leong said in a news release.

CCT owns Raffles City complex jointly with CapitaMall Trust (CMT). The two real estate investment trusts yesterday gave an update on the asset enhancement works and leasing programme of retail space in the property. New tenants committed include the first Singapore stores of Spanish brands Cortefiel and Pedro del Hierro being introduced here by Ossia.

The stores will be on level one of Raffles City Mall, which will also feature flagship stores for Springfield and Kate Spade.

Ms Leong also highlighted that more than 50 per cent of CCT’s office leases (by gross rental income as at Sept 30 this year) expire in 2008 and 2009, positioning the trust for strong positive rental reversion to be realised from its office portfolio.

CCT’s Singapore properties include 6 Battery Road, Capital Tower, Robinson Point, HSBC Building, StarHub Centre and the Golden Shoe and Market Street car parks in addition to the 60 per cent stake in the Raffles City complex.

CCT’s Q3 gross revenue was $59.7 million, up 9.1 per cent from the forecast figure for the period and 60.1 per cent higher than that reported for the same year-ago period. Net property income was $42.5 million, which was 6.7 per cent higher than forecast and a 55.1 per cent year-on-year improvement.

CCT is not making any payout to unitholders for Q3 but its result for the quarter reflects a DPU of 2.14 cents. DPU for the first nine months of this year is 6.37 cents or an annualised figure of 8.52 cents, reflecting a distribution yield of 3.3 per cent based on CCT’s closing price yesterday of $2.57. The counter ended 10 cents higher yesterday.

CCT will be asking unitholders to approve its proposed acquisition of Wilkie Edge along Selegie Road at a coming extraordinary general meeting. The approval, if given, will boost the trust’s asset size to nearly $4.8 billion. The trust is targeting to grow this further to $5-6 billion by 2009.

CCTML says it expects the trust’s full-year 2007 performance to surpass the forecast DPU of 7.60 cents.

Delayed earnings

• Slightly below. DPU grew 16.1% yoy to 2.1cts in 3Q07, driven mainly by strong rental reversions for office assets. However, YTD DPU of 6.5cts represents 72% of our forecast and 73% of consensus’s.

• Strong reversions, but NPI margins fell. Strong office rental reversions continued amid a supply crunch, driving up 3Q07 gross revenue by 57.2% yoy to S$60.7m. However, net property income margins dipped 2% pts qoq to 71.2%. This was attributed to the temporary loss of income during asset enhancement work and the repositioning of tenants in Raffles City, Golden Shoe Car Park and Starhub Centre, as well as increases in property tax for Capital Tower and higher utilities for Market Street Car Park. In view of rising property expenses, we expect net property income margins to stay at such levels for the rest of 2007.

• Expanding through asset enhancement and acquisitions. Phase 1 of CCT’s extensive asset enhancement and repositioning efforts at Raffles City is expected to end in time for Christmas. When completed, retail space is expected to increase by 40,000 sf, or 11.5% of the current retail NLA. Pre-commitments for the additional space stand at 99%. In addition, an EGM will be held next month to obtain unitholders’ approval to acquire Wilkie Edge, a mixed retail and office project at Selegie Road being developed by its parent, CapitaLand, for S$262m. Approval is very likely and the resulting income, expected from 2009, has been assumed in our valuation. We believe CCT is on target to achieve S$6bn of assets by 2009 via acquisitions from its parent.

• Maintain Neutral; DPU and target price adjustments. We are adjusting our DPU estimates to reflect increased earnings from asset enhancement in 2008, and continued strong office rental reversions in 2008-09 when more office leases expire. We have cut our DPU estimates by 11% to 8.5cts for 2007 and raised estimates by 2% to 10.7cts for 2008. Accordingly, we have raised our end-2008 DDM-derived target price from S$2.75 to S$2.80 (cost of equity 5.3%). As there is limited upside to our target price, maintain Neutral.

Focusing on organic growth

3Q07 DPU +19% yoy due to strong rental growth and accretion from Raffles City acquisition

Good set of results for 3Q07. CapitaCommerical Trust (CCT) 3Q07 results were in line with our expectation and ahead of its own forecast. Buoyed by strong rental growth and accretion from the acquisition of Raffles City, CCT achieved a 19% yoy growth in distribution per unit (DPU). At the end of Sep 07, the CCT achieved a committed occupancy of 99.9%.

Positive outlook from rental reversion and asset enhancement initiatives (AEI). We expect office rental to continue its up-trend as office supply remains tight and demand continues to be strong. With more than 50% of the office leases expiring in the next 2 years, CCT is poised to benefit the upward rental reversion. Following the completion of Phase 1 of the AEI by end of 4Q07, Raffles City could have an additional 40,307 sqf of retail space with S$10m of revenue per annum. While CCT is on track to meet our FY07 DPU estimates, CCT would need to some yield enhancing acquisitions to achieve our FY08 DPU forecast as we have factored in some acquisitions in our model.

One George Street could be a potential acquisition target. In 2007, most of the acquisitions for office properties were made by private property funds. In the active secondary market, capital values have risen ahead of rental rates, resulting in yield compression. With the current low passing rental, yield accretive deals are hard to come by for the reits. Looking at Capitaland portfolio of office assets, we reckon that One George Street (OGS) could be a potential target for CCT. Capitaland recently acquired the balance 50% stake in OGS for S$600m or S$2700 psf. While passing yield at OGS may be too low for a direct injection into CCT, with income support or similar financial arrangements, OGS could be structured into a yield accretive acquisition.

Maintain BUY with TP of S$3.04 as CCT’s diversified portfolio of prime office assets offer a good upside to the booming office sector in Singapore. Downside risks include unexpected downturn in the Singapore office market, failure to conclude any yield enhancing acquisition and higher than expected cost of funds.