Holding up for now

At a Glance
• Results slightly above expectations
• Lifted by new contributions, positive rental reversions and cost savings
• Visibility in office sector remain weak
• Maintain Hold with TP of $1.11

Comment on Results

Good showing in 1Q09. CCT’s distribution income of $45.4m (27% yoy, +20% qoq) translated to a DPU of 3.24cts and came in slightly ahead of market and our estimates. The better showing was achieved on a 37% yoy increase in topline to $97.5m on new contributions from OGS, Wilkie Edge and positive rental reversions. During the quarter the group renewed/leased 0.38sf of office space (14% of FY09 expiries) at 49% higher rents than preceeding levels. Occupancy remained at 96.7% at end Mar 09. NPI rose 41% yoy to $69.9m on implementation of cost savings measures and expense ratio dipped 5% pt to 28%. The group also secured refinancing for $160m of ST debt at 3% all-in interest margin.

Locked in 89% of forecast gross rental income for 2009. Outlook for the office sector remains soft in the near term owing to poorer economic activity and the large new incoming supply in the next 3 years. CCT’s strategy would remain focused on existing tenants and maintaining high portfolio occupancy. To date, it has locked in 89% of its forecasted gross rental income for FY09 or c$318m in committed leases. It has a remaining 7.7% of office and 3.9% of retail lease to renew this year and a further 27% and 23% of leases expiring in FY10/11. Given the current weaker market rents and higher average of some of the upcoming expiries, the reversion gap i s expected to narrow significantly.

Recommendation

Maintain Hold. We are maintaining our Hold call but have lifted our TP to $1.11. While we recognize that CCT’s valuation is inexpensive, at 0.3x P/bk NAV, the overhang from refinancing and/or potential for capital management exercises remains given that 58% of its total debt (72% if CBs get put) is maturing over 2010/11. Moreover, gearing is at 38.3% and would rise to 45-50% on a 15-20% depreciation of asset values, a scenario that is not improbable given the soft office outlook. The stock is currently yielding 14.5% and 12.9% in FY09 and FY10 respectively.

Results above expectations

Results exceeded our expectations. CapitaCommercial Trust (CCT) delivered a strong set of 1Q09 results that exceeded our expectations. Gross revenue increased 34.5% YoY to S$97.5m but on a QoQ comparison, the increase was a marginal 0.3% as higher contributions from the positive rental reversions of the office buildings were offset by the weaker contribution from Raffles City’s hotel revenue. Property operating expenses increased 27.9% YoY due to its acquisitions but fell 12.6% QoQ as cost savings measures took effect. As such, net property income for 1Q09 increased 40.8% YoY and 6.5% QoQ to S$69.9m. DPU for 1Q09 has also increased 25.1% YoY and 19.6% QoQ to 3.24 S-cents, translating to an annualized yield of 15.2%.

89% of FY09 forecast GRI locked in. During the first 4 months of 2009, CCT secured new leases and renewals for 335,800 sq ft of spaces. Positive rental reversion on a weighted average basis was ~49% higher than previously signed rents. This was also better than our expectations as we had expected weaker reversionary growth from CCT due to the declining office rental market. With that, CCT has now locked in 89% of our forecast gross rental income (GRI) for FY09, which amounts to S$318.1m. An additional GRI of S$35.8m had been locked in since CCT announced its FY08 results, which further enhanced DPU visibility for FY09.

Completed refinancing for FY09. CCT also announced that it had secured commitment for a 3-year secured term loan of up to S$160m. The loan is secured against HSBC Building and the all-in margin for the term loan is 3% per annum, which is lower than what we have expected in the current tight credit market. As at end-1Q09, CCT had a gearing level of 38.3% which we think, is unsustainable in light of the falling rents and capital values of office buildings in Singapore. With another S$885m and S$1,012m (assuming early redemption by bond holders) of borrowings due for refinancing in FY10 and FY11, we continue to believe that an equity fund raising will be inevitable over the mid-term.

Fair value raised to S$1.33; Maintain BUY. After a better-than-expected positive rental reversions in 1Q09, we are now raising our FY09 and FY10 DPU forecasts to 11.2 S-cents (previously 10.2 S-cents) and 9.9 S-cents (previously 8.7 S-cents) respectively, which translate to attractive FY09 and FY10 DPU yields of 13.1% and 11.6%. Our fair value has now been raised to S$1.33 (previously S$1.06). We maintain our BUY recommendation for CCT.

Still holding strong

• Broadly in line, occupancy stable. 1Q09 results are broadly in line with consensus and our expectations. DPU of 3.24cts forms 29% of our forecast for FY09, up 19.6% qoq due mainly to better net property income margins and trust expenses (down from one-off expense in 4Q08 for abortive cost for Market Street Carpark development). Net property income of S$69.9m was up 6.5% qoq as property-related expenses (excluding property tax and property management fees) declined 20%. Portfolio occupancy at 96.7% was up marginally from 96.2% in 4Q08, and remained materially higher than the islandwide average of 90%.

• Lease renewals on track. About 44.2% of office leases and 32.8% of retail leases expiring in FY09 have been renewed to date. Reversions were positive at 49% above preceding rates, typically signed three years earlier. Rents signed for CCT’s Grade A office buildings remain in the double-digit range amid market news that rents for some Grade A office buildings have fallen to single digits. Major tenants include Legg Mason (One George Street), CapitaLand (Wilkie Edge), BNI (Robinson Point) and foodcourt operator Koufu (Market Street Carpark). With good progress in lease renewals, committed occupancy at the end of April improved 1% pt over 1Q09 to 97.7%.

• Refinancing for debt expiring in 2009 secured. Management says it has obtained a letter of commitment for S$160m from a bank .This will be a 3-year-term loan secured on HSBC Building to be drawn down when its existing facility expires in mid-year. From the announced margin of 3% p.a. (inclusive of fees), we estimate an all-in cost of about 4.7%. This is still within our cost-of-debt estimate of 5%. With this, CCT has secured all refinancing of debt due in 2009.

• Maintain Outperform, earnings forecasts and target price of S$1.12. Management’s ability to improve occupancy in an environment of falling rents and rising vacancy is reassuring. We believe CCT’s distribution in FY09 will stay relatively stable, anchored by its top 10 tenants with a long weighted average lease term to expiry of 6.4 years. These top 10 tenants also contribute 50% to CCT’s monthly gross rental income. Maintain Outperform and DDM-based target price of S$1.12 (discount 10.4%).