Ahead of market expectations

At a Glance

• Higher RCS contribution partially offset negative rental reversion, slightly ahead of consensus

• Healthy occupancy limited lease renewal for FY12

• Expect some interest savings, gearing at 30.2%

• Maintain BUY and S$1.36 TP

Comment on Results

Lifted by RCS. On a y-o-y basis, gross revenue and NPI fell marginally by 2.4% and 3.7% to $89.9m and $68.3m respectively. The steady performance was largely due to higher contribution from Raffles City Singapore (RCS). Consequently, DPU saw a marginal decline of 1% translating to DPU of 1.92cts including the S$1.1m retained income from RCS. Full year DPU exceeded consensus forecast by 5%. Book NAV rose by 3.3% as the trust took in a revaluation surplus of S$149.6m, with cap rates remaining at 4%.

Office occupancy dipped by 1.4ppt to 95.8%. Vacancies were largely coming from OGS (-4.2ppt) and 6 Battery Road (-5.6ppt). That said, the negative impact was mitigated as income from OGS is supported at a 4.25% NPI yield till July 2013, while the 93,700sf upgraded space at 6 Battery Road has been100% pre-committed. While negative rental reversion should still persist in 1H12, we believe the downside risk is mitigated with only 7.9% of its office leases by gross rental income in 2012 to renew.

RCS still performing well. RCS income rose 8.3% yoy and contributed about 34% of CCT’s FY11 income. Post completion of its AEI works, the retail and hotel revenues rose 13% yoy, while the hotel portion increased 7.9% on the back of strong tourist arrivals. Going forward, contribution from RCS should remain steady against the still healthy tourist arrivals and robust consumer spending backdrop.

Healthy balance sheet, some interest savings. Net gearing rose from 27.4% to 30.2% due to a drawdown of about $98m term loan for its 40% interest in the MSCP project. Separately, the trust has also secured funding for the S$570m term loan due in Mar at more attractive rates. Hence, we expect the 3.6% all-in- interest rate to head slightly down once the facilities are drawn down.

Recommendation

Maintain BUY. We continue to like CCT for its strong balance sheet and healthy cash reserve. While we believe sector headwinds persist, CCT is well placed to weather this given its low expiry profile and growing income from its non-office components. Our DCF-backed TP is lowered by 9.5% to S$1.36 as we roll forward our numbers and lower assumptions to account for the slower economy. The trust is offering FY12/13 DPU of 5.9-6.1%.

CCT posts declines in Q4, full-year DPU

Portfolio committed occupancy dips to 95.8% at end-2011, down from 99.3% a year earlier

CAPITACOMMERCIAL Trust (CCT) has posted declines in its Q4 and full-year distribution per unit (DPU) figures.

The trust, which makes semi-annual distribution payouts, will give unitholders 3.75 cents for the July 1-Dec 31, 2011, period, down from 3.93 cents in the same year-ago period.

For the fourth quarter ended Dec 31, 2011, DPU dipped one per cent over the year-ago period to 1.92 cents. Gross revenue eased 2.4 per cent to $89.9 million due mainly to lower revenue from Six Battery Road as a result of lower occupancy and negative rent reversions. The redevelopment of Market Street Car Park into an office project also contributed to the revenue drop. However, this was mitigated by higher income contribution from other properties, mainly Raffles City, in which CCT has a 60 per cent stake.

Net property income slipped 3.6 per cent year on year to $68.3 million in Q4 on higher property operating expenses.

Q4’s DPU of 1.92 cents reflects an annualised figure of 7.62 cents, translating to an annualised distribution yield of 6.66 per cent based on CCT’s $1.145 closing price yesterday. The counter ended 3.5 cents higher yesterday.

Net asset value per unit rose 6.8 per cent from $1.47 at end-2010 to $1.57 at end-2011, excluding distributable income to unitholders.

For full-year 2011, CCT posted a 4 per cent drop in DPU to 7.52 cents, on the back of a 7.8 per cent slide in gross revenue to $361.2 million. The decline was due mainly to loss in rental income arising from the divestment of Robinson Point and StarHub Centre, lower revenue from Six Battery Road and the Market Street redevelopment.

However, the drop in total revenue was offset by higher income contribution from Wilkie Edge resulting from higher occupancy and higher revenue from Raffles City from the retail and hotel components. Full-year net property income slid 7.2 per cent to $277.3 million.

CCT’s portfolio committed occupancy stood at 95.8 per cent at end-2011, down from 99.3 per cent a year earlier.

Lynette Leong, CEO of CapitaCommercial Trust Management Ltd, revealed that HSBC’s triple net lease (that is, HSBC pays for property tax, maintenance and repair) for HSBC Building at Collyer Quay expiring in April this year has been renewed for a seven-year term at a monthly rental rate of $8.50 per square foot, which is about double the expiring rental rate.

One George Street has achieved an occupancy rate of 93.3 per cent at end-December 2011, higher than the 76.9 per cent the trust manager had expected on the assumption that all expiring leases had not been renewed. New tenants secured in the building last year included The Bank of Fukuoka and Ashmore Investment Management (Singapore). Lease renewals were also secured from the likes of Diageo Singapore, Shinhan Bank and Legg Mason Asset Management Singapore.

At Six Battery Road, all of the 93,700 sq ft of space upgraded last year was precommitted at end-2011. Upgrading works will continue on a phased basis till 2013.

Some 20 per cent of Six Battery Road’s net lettable area (NLA) will be expiring in 2012, while 12 per cent of One George Street’s NLA will be expiring this year.

‘While negative rent reversions could continue for some of the trust’s office leases expiring in 2012, the downside risk is mitigated by the fact that office space representing only 7.9 per cent of the trust’s total portfolio gross rental income is due for renewal in 2012,’ said Ms Leong.

‘Furthermore, a substantial portion (36 per cent for FY 2011) of the trust’s total gross rental income is contributed by retail, and hotel and convention centre income, primarily from the 60 per cent interest in Raffles City Singapore. This additionally limits the trust’s exposure to the soft office market conditions,’ she added.

CCT’s gearing rose to 30.2 per cent as at Dec 31, 2011 from 28.6 per cent a year earlier.

Ms Leong also said that the trust has secured funding to meet its refinancing, having proactively secured borrowings ahead of debt maturities in 2011 and 2012.

Last month, it obtained $450 million in committed unsecured facilities and issued $200 million in medium-term notes. The aggregate $650 million is more than sufficient to refinance CCT’s $570 million term loan due in March 2012.

‘By then, seven out of nine of the trust’s assets (including all its Grade A assets), valued at about $4 billion, will be unencumbered, further enhancing our financial flexibility,’ said Ms Leong.

Partners may loan up to $794m for Market Street Car Park project

They are CapitaLand, CapitaCommercial Trust and Mitsubishi Estate Asia

UP to $794 million of funding for the redevelopment of Market Street Car Park could be provided via a unitholder loan from its project partners CapitaLand, CapitaCommercial Trust (CCT) and Mitsubishi Estate Asia (MEA).

CapitaCommercial Trust Management said yesterday that the unitholder loan will be drawn down in multiple tranches over time, with interest pegged to market rates on the relevant dates of drawdown.

CapitaLand, CCT and MEA are redeveloping Market Street Car Park for some $1.4 billion. Their respective interests in the joint venture are 50 per cent, 40 per cent and 10 per cent.

Assuming that $794 million of unitholder loan is drawn down in one tranche, with a loan tenure of four years, the estimated total interest expense for the loan will be $100 million.

CCT’s proportionate share of the unitholder loan would be $317.6 million, and its share of the estimated interest expense payable would be $40 million.

Separately, CCT’s manager also said that CapitaLand has agreed to renew its lease at Capital Tower, a property in CCT’s portfolio. The current lease expires in July next year and the new one will run for three years from July 2012, with an option to renew for another three years on terms to be determined. The lease consideration is about $7.7 million.

Because CapitaLand has a deemed interest of 32 per cent in CCT and is a controlling unitholder, the lease deal is seen as an interested person transaction.

CCT’s manager believes that the lease consideration is fair and reasonable, saying that CapitaLand has been prompt in its rental payment and the lease will help generate a stable income flow.

Independent valuer CB Richard Ellis also found that the rental rate for the lease is ‘at market level’ and the other terms are consistent with normal commercial terms.

Meanwhile, CapitaLand announced that its joint venture with CapitaMalls Asia (CMA) and Singbridge Holdings has incorporated a 100 per cent-owned project company in China with a registered capital of $377 million. The partnership won a site in Chongqing for the development of a mixed use project.

In another development, CMA said that its wholly owned subsidiary Chengdu Huayun Jiangnan Real Estate Development, which holds CapitaMall Tianfu in Chengdu, has increased its registered capital by over $58 million to $170.54 million.

Sturdy Balance Sheet

At a Glance

• 9M11 DPU accounted for 83% of our FY11 forecast

• Healthy renewals sustain high portfolio occupancy of 97.7%

• Gearing at 27.4%, the lowest among its office peers.

• Maintain BUY at a lower DCF-based TP of $1.49

Comment on Results

Revenue in line with expectations .3Q11 gross revenue and NPI declined by 8.6% and 9.2% yoy to S$91m and S$69.8m respectively largely due to negative rental renewals and impact of the ongoing AEI works at 6 Battery Road. However, Raffles City’s robust performance, lower property tax payment and interest savings mitigated the decline. Hence, DPU fell by a smaller 7.8% yoy to 1.83 cents. 9M11 DPU forms 83% of FY11 DPU.

Still healthy take-up rates sustain high occupancies. The trust renewed another 151,000 sf of its office leases in the current quarter, taking year-to-date renewals to about 415,000 sf. Meanwhile, pre-commitments for 6 Battery Road AEI works had also gained traction from 79% a quarter ago to 98% for the 93,700 sf of upgraded space.

Correction in market rents is likely to have minimum impact on performance. While office take-up is likely to moderate and asking rents should see some correction amid current uncertain economic environment, we expect minimum impact on CCT earnings with only 5.5% of office leases (in terms of total gross revenue) due for renewal this year and 9.3% in FY12. Meanwhile, average portfolio office rent in the 3Q remained flattish at S$ 7.79 psf VS the S$ 7.84 a quarter ago.

Recommendation

Strong balance sheet to withstand uncertain times. We like CCT for its strong balance sheet with net gearing of 27.4%, healthy cash reserve and its ability to drive renewals to sustain its portfolio occupancies. Maintain BUY with a lower DCF-based TP of $1.49 as we roll our numbers forward into FY12 and adopt flattish market rental growth for FY12.

No surprises for 3Q11 results

3Q11 results in line. For 3Q11, CapitaCommercial Trust (CCT) reported a distributable income of S$51.9m or a DPU of 1.83 S cents, bringing the total distribution YTD to 5.59 S cents. This is line with our expectations and YTD distributions form 75.0% of our annual forecast. We also saw gross revenue fall 8.6% on a YoY basis to S$89m. This was mainly due to the absence of contributions from StarHub Center sold in Sep10, and lower occupancy and rentals at Six Battery Road (6BR) which is undergoing asset enhancement works (AEI). Given the last unit price of S$1.10, the annualized distribution yield stands at 6.8%.

Firm occupancy numbers. Overall portfolio occupancy tracked down marginally to 97.2% versus 97.7% last quarter, mainly due to lower occupancy at One George Street (OGS) as a tenant moved out. Market talk is that Llyods, Wong Partnership and Julius Baer will also move out of OGS due to demand for more space, and CCT is currently seeking new tenants at ~S$11 psf. In terms of net property income (NPI), we saw a 30% YoY dip at 6BR due to ongoing AEI. NPI at Capital Tower also fell 6.5% YoY as a major tenant (11%) left the building and negative rental reversions continued.

Mixed rental reversions in FY12. We expect to see rental reversions stay negative in 4Q11 and turn mixed in FY12. Despite expectations of reduced economic growth next year, we could still see positive reversions at a few buildings, such as Raffles City with leases expiring at S$6.99 psf. Barring a severe economic crisis, we forecast rental reversions for CCT’s portfolio to turn positive in FY13. Note that the average rental of leases expiring then would be an undemanding S$7.62 psf.

6BR and Market St office on track. Demand for the upgraded space at 6BR continues to be firm with 98% of the upgraded space (19% of net leasable area) already pre-committed – up from 79% announced in 2Q11. Nomura, which occupies 12% of the building, would have its lease expire in Nov 11 and management plans to upgrade this space as well, with 29% of the space already pre-committed. The Market Street office tower is also on track to complete in 2014 as planned.

Maintain BUY. We had downgraded the office sector to NEUTRAL on 17 Sep 2011 and forecast office rentals to fall 5-10% by FY13. Despite a weaker office outlook, however, we still see value in CCT given its quality portfolio and prices trading at ~30% discount to NAV. Maintain BUY with a fair value estimate of S$1.41 due to softer rental assumptions, versus S$1.45 previously.