Author: tfwee
CCT – CIMB
Outlook remains negative
• Maintain Underperform and target price of S$0.83. We now assume less severe declines in occupancy for 2010 in view of CCT’s resilience so far. However, we also expect steeper falls from current passing rents in 2010 (from no change earlier) as rents of expiring leases in CCT’s key office buildings over the next two years are significantly higher than market rents. Separately, we have assumed 20% growth for its hotel business in Raffles City in 2010, in line with our positive expectations for CDLHT. Our DPU estimates fall by 2.7% for 2010 but rise by 3% for 2011. We also roll our target price one year forward. Our DDM-derived target price remains S$0.83. Maintain Underperform as catalysts in the medium term are still lacking.
• In line. 3Q09 results met our expectations but were above consensus. YTD DPU of 5.18cts forms 74% of our full-year estimate. 3Q09 DPU of 1.85cts (24% of our fullyear forecast) declined 40.1% yoy due to a bigger unit base after its rights issue.
• Portfolio passing rents up 4.3% qoq. Net property income of S$77.1m in the quarter was up 15.5% yoy and 5.1% qoq, aided by strong rental reversions and improved operating margins, including a one-off property tax rebate. Average monthly passing rents rose 4.3% qoq to S$8.49psf from S$8.14psf in 2Q09. This was in-between CBRE’s estimate for Grade A office rents of S$8.80psf/month and prime office rents of S$7.50psf/month.
• StarHub’s lease ended; portfolio occupancy down to 94%. CCT’s portfolio occupancy dipped to 94% from 96.2% primarily due to the non-renewal of lease by major tenant StarHub at StarHub Centre. Improved occupancy at Golden Shoe Carpark (+6.4% pts), Wilkie Edge (+2.2% pts) and Six Battery Road (+1.5% pts) mitigated the impact.
• P/BV may increase. CCT’s P/BV of 0.7x is below the SREIT sector’s average of 0.8x. However, we do not think CCT is cheaper than its peers as we expect another round of asset devaluation in December to close the P/BV gap.
CCT – OCBC
Entering a challenging phase; Downgrade to HOLD
Results above expectations. CapitaCommercial Trust’s (CCT) 3Q09 results were above our expectations. Gross rental income increased 16.1% YoY to S$92.6m, aided by positive rental reversions but the rate of increase on a QoQ basis slowed to 1.7%. Net property income increased by 15.5% YoY and 5.1% QoQ to S$77.1m, on the back of lower property tax and cost savings effort. DPU of 1.85 S cents was announced for 3Q09 and this was 17.1% ahead of our expectations. CCT’s outperformance was attributable to the resilience of its asset portfolio which continued to turn in healthy positive rental reversions.
Mixed set of operating metrics. Average monthly passing rent for CCT’s office portfolio continued to increase in 3Q09, growing by 4.3% QoQ to S$8.49 psf pm. In addition, the pace of lease renewals had not slowed down in 3Q09 despite the continuing pressure on market rent. CCT signed new leases and renewals of 234,510 sq ft, which was 68.3% more than that the amount signed in 2Q09. CCT’s Grade A office occupancy rate remained firm, increasing from 97.4% in 2Q09 to 97.9% in 3Q09. However, the weak office market had started to take its toll on CCT’s prime office space occupancy rate, which resulted in the decline in overall portfolio occupancy rate from 96.2% in 2Q09 to 94.0% in 3Q09. This is the lowest
occupancy rate since 4Q04.
Expect greater challenges from 1Q10. With the bulk of the leases expiring in 2009 already renewed, we expect rental income to stay relatively stable for the rest of the year. However, negative rental reversions are likely to set in from FY10 onwards as the higher rents secured in 2007 are due for renewal in 2010. Some of these expiring rents (at Six Battery Road and Raffles City Tower) are significantly higher than the current Grade A office rents of S$8.80 psf pm. Even though the rate of decline in office rents had slowed, the downward pressure on rents is expected to persist which could widen the negative reversionary gap.
Fair value raised to S$1.13; downgrade to HOLD. We have raised our fair value from S$1.07 to S$1.13, after moderating our office rent decline expectation for 2009 (-23% YoY in market rent) and 2010 (-15% YoY). Our DPU estimates for FY09 and FY10 have also been raised by 5.8% and 8.4% to 6.7 S cents and 6.4 S cents, respectively, translating to DPU yields of 6.4% and 6.1%. CCT’s share price had performed well since our last BUY rating on 23rd July, gaining by 20.7%. In light of the limited upside potential, we are now downgrading CCT to HOLD.
CCT – CNA
CapitaCommercial Trust’s Q3 DPU up 20% to 1.85 Singapore cents
CapitaCommercial Trust (CCT) has said its distribution per unit (DPU) for the third quarter ended in September is 1.85 cents.
This is a 20.1 per cent on-year rise, with last year’s DPU restated to 1.54 cents after adjusting for a rights issue.
Distributable income for the third quarter came in at S$52.1 million, up about 21 per cent on-year.
CCT’s CEO, Lynette Leong, said the performance over the period was boosted by proactive lease and cost management strategies.
For the quarter, CCT successfully signed leases with companies such as serviced office operator Servcorp and financial services firm Exane SNC.
Going forward, Ms Leong said she expects positive demand for office space to return and rental rates to stabilise if Singapore’s economic recovery continues.
She noted that CCT is already experiencing an increase in leasing enquiries with more tenants planning for future expansion.
CCT announced a 1-for-1 rights issue in May this year to raise gross proceeds of about S$828 million.
SREITs – BT
Reits likely to see more drops in asset values
Prices of retail and industrial Reits have yet to reflect risks, says Nomura
REAL estate investment trusts (Reits) are likely to experience more drops in asset values and negative rental reversions, according to Nomura Singapore.
Furthermore, the research house believes that prices of retail and industrial Reits have yet to reflect these risks.
‘With asset values likely to see further downward adjustments, the fact that retail and industrial Reits are now trading near to or at premiums to book value appears somewhat inconsistent with property market trends,’ wrote analysts Tony Darwell and Sai Min Chow in an Oct 16 report.
Investor interest has returned to Reits in the last few months as the sector largely managed to refinance its loans. The FTSE Real Estate Investment Trust Index has risen by more than 50 per cent since the start of the year.
But Nomura believes that downside risks remain. It estimates that capitalisation rates – a rough measure of properties’ rates of return – have softened by around 25-75 basis points and could drop by another 25-50 basis points.
The outlook for rents also remains weak, Nomura said. And while prices of office Reits reflect the various risks, the same cannot be said of retail and industrial Reits.
‘We see risks being priced into the office sector, though we retain our view that the market has been too complacent in its assessment of the retail and industrial Reit sectors,’ its analysts wrote.
The research house is particularly bearish on CapitaMall Trust (CMT) and Ascendas Reit (A-Reit). CMT gained four cents to close at $1.80 yesterday, while A-Reit lost eight cents to close at $1.86.
DMG & Partners Securities expressed different views in a separate Oct 16 report. It is more pessimistic about the office sector’s prospects, because of the large amount of space coming on-stream.
Landlords in the Raffles Place district ‘will almost certainly be scrambling to put forward highly competitive rates, a scenario that could further dampen the already fragile rental market,’ wrote analyst Jonathan Ng. ‘We believe CapitaCommercial Trust could feel the biggest impact.’
DMG was more sanguine about the hospitality sector’s performance – the integrated resorts could draw more visitors, driving hotel occupancies and pricing powers up.
The house has a ‘buy’ call on CDL Hospitality Trust (CDLHT), and believes that the counter is the ‘best proxy to a multi-year tourism resurgence that will take place next year’.
CDLHT ended trading at $1.56 yesterday, one cent up.
SREIT – OCBC
3Q09 results preview
Results preview. Four of the S-REITs under our coverage are releasing 3Q CY09 results this week, with the rest following suit in the next two weeks. Ascott Residence Trust (ART) is likely to give a poor YoY showing compared to an exceptional Olympics-driven 3Q08. For Frasers Centrepoint Trust (FCT), we expect QoQ improvements due to greater contributions from Northpoint as asset works wrap up. Our 3Q forecasts for Mapletree Logistics Trust (MLT) are fairly cautious as we expect lower occupancy levels to put a dampener on 2H09 earnings. Dilution from equity fundraising activity drives our estimate of YoY declines in DPU for CapitaCommercial Trust (CCT), CapitaMall Trust (CMT) and MLT.
Focus on occupancy & reversion data… Our primary focus will be on occupancy and rent metrics provided by the various REITs, especially in the industrial and office space. Industrial space occupancy has continued to fall, potentially leading to a moderation in portfolio occupancy at MLT (prev: 98.3%). We expect the rate of decline of achieved office rents at CCT and Suntec REIT to slow versus 1H09. Occupancy at Suntec City Office Towers fell from 96.3% as of March-end to 92.5% as of June-end as tenants redelivered part of previously-leased space. We will be looking for Suntec to at least maintain or improve that level. We will also be looking for evidence of occupancy stabilization at ART – the next challenge will be increasing rates, which requires sustained high occupancy levels.
…and on forward guidance. The tone of manager guidance versus 2Q CY09 is also worth watching. We believe managers are likely to be more optimistic in describing the outlook for the next six months (whether it is calling for stabilization or some sort of recovery depending on the property sub-sector). Guidance provided on capital market activity is also significant. We had previously highlighted FCT, Suntec and MLT as likely candidates for an acquisition/cash call two-for-one in the near-term. At last quarter’s briefing, MLT’s manager indicated interest in third-party acquisitions, provided these buys are coupled with an equity issue to at least maintain (or reduce) current gearing levels. But in October, it walked away from a fund raising proposal. Market skepticism towards cash calls has increased in the past three months in our view, which may affect managers’ position on this issue. We maintain our NEUTRAL stance on the sector, and see continuing opportunities for yield arbitrage. Top picks are ART and FCT.