Category: CCT
REITs – CIMB
Big caps grow expensive
• We downgrade the SREIT sector to Neutral from Overweight on a more negative view of sector heavyweights, CMT (fund flows away to CMA), CCT (negative rental reversions), A-REIT (falling industrial occupancy) and MLT (limited organic growth). Nonetheless, we believe that share prices have more room for appreciation as the sector P/BV of 0.83x remains below its mean level of 0.92x since inception (2002) till now, even after the sharp recovery from trough levels in March.
• Acquisitions and development projects will take centre stage in 2010. We believe that easy credit conditions coupled with recapitalised balance sheets and compressing dividend yields will revive acquisitions and project development in 2010. However, these will likely be less accretive than those in pre-Lehman times due to: 1) cash calls made in 2009 by a number of sponsor-backed REITs; 2) a more conservative outlook on asset leverage by REIT managers, which would result in a smaller quantum of acquisitions, or further equity-raising for acquisitions; and 3) insignificant spreads of asset yields over dividend yields, resulting in marginally DPU-accretive deals
• Asset inflation could lead to sector re-rating. An easing credit environment is drawing more institutional buyers of properties into the market. If the competition for investment assets intensifies, asset inflation is a possibility in the medium term.
• Negative reversions could set in. Most REITs will take time to catch up with market rents and occupancy due to standard leases set in place. We expect office, industrial business park and prime retail rents and occupancy to deteriorate further later in 2010.
• Suntec REIT our top pick for 2010. Our top pick for the sector is Suntec REIT for catalysts coming from the opening of two new MRT stations at Suntec City, and the Marina Bay integrated resort. Suntec REIT’s valuation of 0.65x P/BV is below the sector average of 0.83x, and also below its closest peer CCT’s 0.75x. However, 2010 dividend yields are higher than the sector’s 7.4% and CCT’s 5.8%.
• AREIT our top short. AREIT remains the most expensive REIT in the sector at 1.2x P/BV. We believe all the positives have been priced in. Downside risk is high as the attraction of low quasi-office rents in the Business Park and Hi-Tech segments gradually diminishes with a sharp fall in office rents.
CCT – DBS
Awaiting blue skies
• Results in line with estimates
• Leasing environment to turn challenging in 2010
• Downgrade to HOLD, TP S$1.02
Performance in line. CCT reported 3Q09 results in line with our expectations. Gross revenues increased to S$102.6m (+10.9% yoy) and net property income (+15.5% yoy) as a result of continued positive rental reversions achieved at its portfolio. As of 3Q09, CCT’s average portfolio rent increased by c17%yoy, 3%qoq to S$8.49 psf per month. Distributable income came in at 21% higher yoy to S$45.9m (+21% yoy), translating to a DPU of 1.85 Scts.
Lowly geared. Balance sheet remains strong with gearing at 31.2%, interest cover at a healthy 3.1x. NAV per share stands at S$1.49.
Leasing environment to turn challenging in 2010. With the office sector continuing to face a daunting supply over the next 3 years, we expect the operating environment to remain soft in FY10-11F. With average passing rents in FY10-11 higher than current asking rent levels, topline is expected to weaken from projective negative reversions during renewals.
Downgrade to HOLD, TP S$1.02. We are downgrading our call to a HOLD, but lifted our TP to S$1.02 on the back of lower cost of equity assumptions. While stock is trading at P/BV of 0.7x, offering prospective FY10F-11F yields of 6.5% a muted office outlook is also likely to mean a lack of rerating catalysts for the stock in the near term from current levels. As such, we downgrade to HOLD on valuation grounds given the limited upside to our target price.
CCT – BT
CCT posts 20.8% rise in Q3 distributable income
Boost from positive rent reversions and cost savings
CAPITACOMMERCIAL Trust (CCT) has posted a 20.8 per cent year-on-year increase in distributable income for the third quarter to $52.14 million.
Net property income rose by 15.5 per cent to $77.1 million on the back of positive rent reversions as well as cost savings from lower property taxes.
In addition, CCT’s distributable income for Q3 was boosted by lower interest expense arising from the prepayment in July of a $664 million debt from proceeds from the trust’s rights issue in June.
CCT’s distribution per unit (DPU) for Q3 ended Sept 30, 2009, was 1.85 cents, down from 3.10 cents in Q3 last year.
After adjusting for the issued rights units, the DPU rose from 1.54 cents to 1.85 cents, the trust manager said. Unitholders will not receive any distribution for Q3 as the trust distributes semi-annually.
The trust’s distributable income for the first nine months of this year rose 26.5 per cent to $145.6 million. Net property income improved 31.2 per cent to $220.2 million.
Given the positive rental reversions, the average monthly office rent for CCT’s portfolio has improved about 18 per cent over the past year, from $7.20 per square foot per month as at end-Q3 2008 to $8.49 psf as at end-Q3 2009.
CapitaCommercial Trust Management Ltd (CCTML) chief executive Lynette Leong is upbeat about Singapore office demand returning to positive territory and rental rates stabilising.
‘From our experience of recent increased office leasing enquires, our tenants’ feedback on better business prospects and, to some extent, a few tenants even asking for more space, I think that these are positive signs of demand returning,’ she said.
‘The recent better GDP figures also support the more upbeat economic environment, and we are comforted that the worst is behind us. What it also means is that the negative demand that we’d seen in the office market has been capped, and to what extent the ‘needle’ moves to positive will depend on the rate of economic recovery,’ she added.
CCT, with a total asset size of $6.3 billion as at Sept 30, 2009, has 11 properties in Singapore and holds investments in Malaysia. Among CCT’s Singapore properties that saw significant improvements in net property income between Q3 last year and Q3 2009 were Capital Tower, Six Battery Road and Raffles City.
While the rate of decline in office rents eased and leasing activity improved in Q3, uncertainties still loom over the office market, with pressure from secondary supply and new office supply that will be added to the market, CCTML acknowledged.
The trust owns 60 per cent of Raffles City, with the other 40 per cent held by CapitaMall Trust. The duo will begin reconfiguring basement 1 space in the mall this quarter.
The total capital expenditure for the initiative is about $33.2 million with an expected 8 per cent return on investment. The works will, among other things, connect the current City Hall MRT Station to the new Esplanade Station through Raffles City’s basements 1 and 2.
The Esplanade Station is expected to open by Q3 2010. ‘With this latest link to the Circle Line, there will be three train lines bringing shoppers to Raffles City,’ CCTML said.
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.