Holding up well

• Results in line; Upgrade to Outperform. 1Q10 results met Street and our expectations (26% of full year forecast). With strong economic recovery and good take up of new office supply, we believe a revival in office rents and occupancy will come sooner than expected. We increase our rental growth expectations for CCT’s Grade A assets by 1-4%, taking into account updated lease expiry information; and assume 3-5% growth for other assets (from flat growth). After our changes, our DPU estimates rise 7-9% between 2010-12. Our DDM target price (discount rate 7.8%) rises accordingly to S$1.26 (from S$1.09). Our new target price offers a prospective total return of 15.2% from a potential price upside of 8.6% and forward dividend yield of 6.8%. CCT is the cheapest large cap SREIT (0.8x P/BV) with CMT and AREIT already above book value. We believe this is opportune time to accumulate the stock in view of improving office demand indicators. Upgrade to Outperform from Underperform.

• 1Q DPU of 1.93cts (CIMB-GK 7.3cts). Distributable income of S$54.3m and DPU of 1.93cts formed 26% of full year forecast. DPU grew 19.3% yoy and 2.6% qoq. Net property income (NPI) of S$77.6m was up 11% yoy mainly on positive rental reversions and/or higher average occupancies for Capital Tower, Six Battery Road, Robinson Point, Market Street Carpark and Wilkie Edge. CCT portfolio occupancy rose 0.3%-pts to 95.1%. Grade A offices in the portfolio As at 31 Mar 09, average portfolio passing rents stood at S$8.64 psf, a marginal 1.4%-point improvement from S$8.52 psf (31 Dec 09).

• Recovery of office market could be sooner than expected. Net new demand for office space has traditionally shown high correlation to economic movements. Strong GDP numbers and good pre-leasing of new office supply suggests that recovery of rents and occupancy could be sooner than expected.

• CCT well-prepared to take on acquisition opportunities. We view CCT’s strategy to 1) divest non-core assets, 2) undertake capital management and 3) prepare for the debt maturity in 2011 positively. We believe CCT will be ready to take on acquisition opportunities when they arise.

CCT posts 19.7% higher Q1 distributable income

CAPITACOMMERCIAL Trust has posted a distributable income of $54.3 million for the first quarter of 2010, up 19.7 per cent from the same period a year ago.

Reflecting the resilience of its portfolio, committed occupancy rate rose to 95.1 per cent for the quarter from 94.8 per cent for the fourth quarter of last year. Its Grade A office committed occupancy rate also rose to 99.1 per cent from 98.7 per cent.

The office landlord’s distribution per unit (DPU) is 1.93 cents, a year-on-year decrease of 40.4 per cent from 3.24 cents in Q1 2009. On an adjusted for rights basis, DPU rose 19.1 per cent from 1.62 cents. However, there is no distribution payment this quarter as CCT distributes semi-annually, which will be in July.

Q1 gross rental income rose 7.1 per cent year-on-year to $93.6 million, while Q1 gross revenue rose 4.5 per cent to $101.8 million. Net property income improved 11 per cent to $77.6 million. Its total current assets stand at $401.6 million while its current liabilities are lesser at $313.1 million. Its cash and cash equivalents at the end of the period are $172.73 million, up from $70.49 million a year ago.

In addition, the repurchased convertible bonds due 2013 have been cancelled and the outstanding aggregate principal amount of convertible bonds due 2013 has been reduced to S$229.5 million.

Lynette Leong, chief executive officer of CCT Management, said: ‘The strong performance for this quarter is attributed to our good track record of proactive leasing, with the signing up of leases with positive rental reversions, and further strengthening building occupancies.’

She added: ‘Moreover, successful efforts in refinancing debt well ahead of maturity dates, lengthening the average debt maturity, diversifying the sources of funding, and keeping the proportion of secured debt low also boosted the bottom line.’

CCT shares closed two cents higher yesterday, at $1.16.

Better-than-expected 1Q10 results

Better-than-expected results. CapitaCommercial Trust (CCT) reported its 1Q10 results which came in above our expectations. Net property income increased 11% YoY to S$77.6m, driven by positive rent reversions and lower property tax. CCT signed new leases and renewals of 144,373 sq ft in the last quarter and portfolio occupancy rate improved to 95.1% at end 1Q10. DPU of 1.93 S-cents has been declared for 1Q10, translating to an annualised DPU yield of 6.9%. This exceeds our estimate of 1.79 S-cents by 7.8%.

Further hint of divesting Starhub Centre for condominium redevelopment. There is no new update on Starhub Centre as the development plan is still pending government approval. Despite the increase in occupancy rates at most of CCT’s office buildings in 1Q10, occupancy rate at StarHub Centre had remained flat at 68.2% since the end of 2009. If CCT plans to divest Starhub Centre as an office building, achieving a higher occupancy rate for the building would help to secure a better price for the asset. However, by not doing so, we believe that this could be a further hint that the most likely outcome of the asset review would be a divestment of StarHub Centre for redevelopment into a condominium. Based on our estimates, CCT could potentially reap a gain of S$33.2m (S$0.01 per share) to S$93.9m (S$0.03 per share) from the divestment.

Managing refinancing through CB buyback. CCT had also announced that it repurchased a further S$125.5m of its convertible bond due 2013 for a consideration of S$135m, including accrued interest, and the outstanding amount has now been reduced to S$229.5m. This brings down its potential refinancing requirement in 2010, from S$1,025m at end FY09 to S$658m at end 1Q10. Refinancing for 2011 is making significant inroad and its average debt maturity to put has also increased to 2.1 years. After the bond repurchase and the recent issue of convertible bond, the gearing ratio will edge up marginally from 33.2% to 33.8%.

Fair value raised to S$1.26; Maintain BUY. We have adjusted our FY10 rental growth assumption from -15% to -10%. So far, Grade A office rents have held up better than non-Grade A offices. With the bulk of the FY10 expiring leases coming from its Grade A buildings, we believe that the negative rent reversion this year may not be as bad as we have expected earlier. However, we still hold a cautious view on the office market, given the upcoming supply of new office spaces. Our fair value, which is pegged at parity to RNAV, has now been raised to S$1.26 (previously S$1.19). With a potential total return of 16.4%, we maintain our BUY rating on CCT.

Within expectations

At a Glance

• 1Q10 results in line; positive yoy performance but slight dip qoq

• Office rents expected to have troughed but outlook on turnaround point mixed on large incoming supply

• Maintain Hold, TP at $1.23

Comment on Results

Within projections. CCT announced 1Q10 DPU of 1.93cts, up 19.1% yoy and +2.7% qoq, largely boosted by lower interest cost. The results were in line, representing 28% of our full year forecast. At NPI level, income fell 3% qoq to $77.6m on a 1.4% dip in revenue to $101.8m as well as a small hike in cost ratio. In terms of operations, occupancy rose marginally to 95.1% as CCT contracted or renewed 144373sf of leases with tenants from the banking and financial services, legal and real estate services sectors. As part of its capital management exercise, CCT also bought back $140.5m of its 2013 CBs, reducing the quantum to $229.5m.

Jury still out on office rent inflexion point. Management guided that demand for office space had improved and office rents may have reached a trough, although the timing and extent of recovery is still unclear due to the large 4.5m incoming supply. Our view is that office rents have reached a low and are likely to hover at the bottom until more of the new stock is digested. As a result, we expect negative reversions to kick in from 2H10 and 2011. This will put a drag on CCT’s earnings with 12% and 22% of its income due to be renewed this year and next.

Still awaiting asset review plan for Starhub Centre. Redevelopment of Starhub Centre is still awaiting govt approval. It has obtained outline permission to convert the building into a residential/ commercial property.

Hold call retained, TP $1.23. We believe share price catalyst could appear when the group announces further details on its portfolio review exercise, including acquisitions and plans for Starhub Centre. Balance sheet is healthy with gearing of 33.8% and debt maturity of 2.5 years. In the near term, DPU yields are expected to remain at 6.1-5.9% over FY10-11 on the moderated office outlook. Maintain Hold.