Firm support established. CapitaCommercial Trust could see more upside potential, after recently staging a rebound off its $1.00 key resistance-turned-support and the lower boundary of its 9- month uptrend channel on increasing volume.

Indicators more upside biased. With the RSI trending higher after a rebound at the 30% oversold region and the MACD indicator on the verge of a bullish crossover inside the negative region, they suggest that the momentum is starting to turn bullish. Initial resistance at $1.14. On the upside, we peg the initial resistance at $1.14 (support-turned resistance and gap zone in Jan ‘10), breaking which, we see the subsequent resistance at $1.21 (support-turned-resistance).

Immediate support at $1.00. In the near term, $1.00 remains a firm support. Below this, the subsequent support is pegged at $0.91 (resistance-turned-support), ahead of $0.77 (key resistance- turned-support).

Note: We currently have a fundamental HOLD rating on CapitaCommercial Trust with $1.16 fair value.

Portfolio reconstitution on the cards

Results above expectations. CapitaCommercial Trust (CCT) reported its 4Q09 results yesterday that came in above our expectations. Net property income for 4Q09 increased by 21.9% YoY and 3.8% QoQ to S$80m, exceeding our estimate by 3.2% due to lower property expenses, tax and trust expense. Its investment properties had also been revalued downwards by S$327.6m, or 5.4% of its prior valuation, to S$5.7b. This resulted in a 6.6% QoQ decline in its NAV and an increase in its gearing from 31.2% (end 3Q09) to 33.2%. For the quarter, a DPU of 1.88 S cents has been declared, translating to an annualized yield of 6.4%.

Unlocked value for Robinson Point. CCT had signed the S&P agreement with AEW Capital Management to sell Robinson Point for S$203.25m (S$1,527 psf on NLA). A gain of S$19.2m is expected to be recognized from the transaction. Sales proceed from Robinson Point is unlikely to be returned
to unitholders as CCT wants to retain the cash for reinvestments, targeting at Grade A office buildings.

Starhub Centre is the potential game changer. CCT also announced that it is currently doing an asset plan review for Starhub Centre, which has already obtained Outline Planning Permission from URA to change its use to a mix of residential (max 80% of GFA) and commercial. We believe that converting Starhub Centre from office to residential use would be a sensible move to extract value for unitholders, given its low occupancy rate and prime location. A high-end residential project there could be sold at S$2,000 psf to S$2,500 psf and based on our assumptions, developers could offer as much as S$301m-S$362m (12.4%-35% premium over book value) for Starhub Centre. The change of use is still subject to other government authorities’ approval and final plan for Starhub Centre is still being evaluated.

Fair value raised to S$1.16; Maintain HOLD. In view of the resilience in occupancy rates of CCT’s Grade A office buildings, we have raised our FY10 occupancy rate assumption from 95% to 98%. Our RNAV estimate has now been raised to S$1.16 (previously S$1.13), which has also factored in the
gains from Robinson Point divestment. Pegging at parity to our RNAV, we derive a fair value of S$1.16. For FY10 and FY11, we expect DPUs of 6.7 S cents and 6.6 S cents, translating to DPU yields of 5.6% per annum. With a projected total return of 3.8%, we maintain our HOLD rating on CCT. Key re-rating catalyst will be the outcome of the asset plan review for Starhub Centre.

Divestments to come

• Results in line; maintain Underperform. Full-year results met Street and our expectations (101% of our estimate). Changes in our assumptions, reflecting more positive occupancy and lower cost of debt, raise our FY10-11 DPU estimates by 8-13%. We also introduce FY12 estimates. Following our upgrade, our DDM-based target price rises to S$1.09 from S$1.01 (discount rate 8.1%). Nevertheless, maintain Underperform as we expect negative rental reversions to set in from FY10. Possible re-rating catalysts could come from any positive portfolio repositioning, to improve the asset quality in its portfolio.

• Full-year DPU of 7.06cts (CIMB-GK 7.02cts). DPU declined 35.8% yoy due to increased units from a rights issuance in 2009. Net property income of S$300.2m was up 28.6% yoy mainly on positive rental reversions, full-year contributions from One George Street and Wilkie Edge and lower property-related expenses.

• Robinson Point sale to reduce exposure to non-Grade A assets. CCT announced a sale of Robinson Point to AEW Asia. The sale price of S$203.25m (S$1,527psf) is 11% above the property’s valuation of S$182.5m (S$1,370psf) and 70% above CCT’s purchase price of S$120m (S$901psf). Proceeds will be used to acquire Grade A assets although the time line for such acquisitions remains vague. The next asset under review would be StarHub Centre at Cuppage Road. The Urban Redevelopment Authority has given outline planning permission to change the use of this property from commercial to residential.

• Changes to our assumptions. We view the divestment of non-core assets positively and are less pessimistic on the degree of rental and occupancy erosion in 2010 in view of good progress in forward renewals, CCT’s ability to sustain occupancy and rents, and Singapore’s economic outlook. We raise our occupancy assumptions for CCT’s top-4 office buildings to 98-99% (from 92-100%); and lower our cost-of-debt assumptions to 4% (from 4.8%) in view of a much strengthened balance sheet after the divestment. Asset leverage following the sale of Robinson Point is expected to fall to 31.1% (from 33.2% as at Dec 09).

Proactive asset management

• Results slightly ahead of expectations
• Sells Robinson Point, reviewing asset plans for Starhub Centre
• Maintain Hold with TP $1.23

Results slightly ahead of street estimates. CCT reported 4Q09 NPI of $80m, 3.8% better sequentially, on a revenue of $103.2m, up 0.6% qoq, on cost savings and marginally higher leasing income. Distribution income rose 0.5% qoq to $52.9m, translating to a DPU of 1.88cts. The group wrote down the value of its property portfolio by 5.4% to $5.7b, translating to a book NAV of $1.37 per unit. Correspondingly, gearing rose to 33.2%.

Looking ahead, a return of business confidence has led to a recovery in demand for office space while lower rents has resulted in a flight back to quality. However, rents are expected to trend lower owing to the large new supply over the next 2-3 years. As such, we anticipate negative rental reversions to kick
in this year as re-contracted rents are likely to fall below expiring levels, dragging on earnings.

Proactive asset management.CCT has emerged as the first major Sreit to execute a portfolio reconstitution strategy. It is selling Robinson Point to AEW for $203m, 11% above Dec 09 book value, and is planning to redevelop Starhub Centre into a residential/commercial property. We believe such activities, although DPU dampening in the immediate term, would enable the group to actualize its NAV as well as deepen its financial flexibility with a capacity of $3.4b of unsecured assets and MTN programme. Proceeds from the sale, including the tax-free gains, are likely to be reinvested in newer properties with better locations or for asset enhancement activities.

TP raised to $1.23. We are retaining our Hold call on CCT with a revised DCF-backed TP of $1.23. While we expect the portfolio review exercise could narrow the gap between stock price and book NAV over time, other catalyst such as reinvestment may take longer to materialize as current prime office cap rates of 4.25-4.5% are lower than the group’s implied property yield of 5.7%.

CapitaCommercial Trust to revamp portfolio; value falls $328m

It is selling Robinson Point, looking at Starhub Centre redevelopment

OFFICE Reit CapitaCommercial Trust (CCT) wrote down the value of its investment properties by another $327.6 million and unveiled plans to revamp its portfolio.

The trust also said yesterday that it will receive $9.3 million from parent company CapitaLand to make up for a shortfall in income from One George Street.

CapitaLand sold One George Street to CCT in 2008 with a yield protection clause in case the net property income from the property is less than $49.5 million a year. The developer was required to pay for the shortfall for 2009, which resulted from lower operating performance as a result of global economic slowdown as well as the low rental rates for some of the existing leases that have not expired, CCT said.

The Reit also said it will sell Robinson Point to a private fund managed by AEW Asia for $203.3 million. CCT will book a gain of $19.2 million from the sale.

The trust is also looking at redeveloping Starhub Centre at Cuppage Road. The property is currently zoned for purely commercial use but CCT is hoping to convert it into a residential and commercial development.

It has obtained outline planning permission from the Urban Redevelopment Authority to change the use of the property, but the change of use is still subject to other government authorities’ approval. CCT will only decide on the next course of action after all relevant approvals are received, it said.

Both Robinson Point and Starhub Centre are non-Grade A properties, which the trust said have not performed as well as its Grade A projects in the current downturn.

‘Our Grade A offices continue to show resilience by recording an increased average occupancy rate in Q4 2009 to 98.7 per cent, significantly higher than the Grade A office market occupancy rate of 93.8 per cent,’ said Lynette Leong, chief executive of CCT’s manager. In comparison, the overall portfolio occupancy stood at 94.8 per cent in Q4.

Robinson Point was identified as being ripe for divestment. Selling it will allow CCT to re-invest in a Grade A property instead, Ms Leong said. Starhub Centre, which now suffers from lower than usual occupancy, could be given a revamp.

CCT also reported a downward revaluation of its properties from $6.03 billion in May 2009 to $5.7 billion at end 2009. The write-down follows an earlier one in May, where the value of CCT’s portfolio was reduced from $6.71 billion in December 2008.

CCT reported a 39 per cent climb in distributable income to $52.9 million for Q4 2009, from $38 million a year ago. Distribution per unit (DPU) – adjusted for rights units – rose to 1.88 cents from 1.36 cents.

For the full 2009 financial year, CCT reported a distributable income of $198.5 million, up 30 per cent from $153 million in 2008. The full year DPU (adjusted for rights units) of 7.06 cents is a 29 per cent year-on-year increase from 2008 DPU of 5.48 cents.