Category: CCT
CCT – OCBC
Looking beyond the weak office market outlook
Wide tenant base mitigates tenancy risk. Tenancy risk for CCT is wellmanaged, with a wide base of 540 tenants. CCT’s maximum exposure to a single tenant is ~13% of its monthly gross rental income and this comes from RC Hotels. The top ten tenants contribute approximately 50% of monthly gross rental income. Other than RC Hotels and Standard Chartered Bank, the remaining tenants each contribute 5% of CCT’s monthly gross rental income.
Strong landlord-tenant relationship minimizes tenant turnover. CCT has maintained good relationship with its tenants. This is seen from the long term relationship between CCT and some tenants who have stayed with CCT since its establishment. Some tenants, such as Standard Chartered Bank, have also taken up long term lease contracts with CCT.
S$282.3m of gross rental locked in for FY09. CCT’s income visibility remains very healthy for FY09. At the end of FY08, CCT had already locked in 79% (~S$282.3m) of its forecast gross rental income for FY09. As prime and Grade A office average rents continue to decline, rental upside from lease renewals is expected to decline but the impact is mitigated by the small % of expiring lease in FY09.
An equity fund raising may be needed by 2011. While we do not foresee major issues with the refinancing of borrowings due in FY09 and FY10, chances of an equity fund raising appear to be higher in FY11 with the significant liquidity needs. Total borrowings due for refinancing in FY11 could increase to S$1,006m if convertible bonds holders exercise early redemption option. With the declining valuation of its properties, gearing level is expected to trend upwards and CCT may also have to consider equity fund raising to keep its gearing level in line with the S-REITs sector’s gearing level.
Go for the yield and assets; re-initiate with BUY. We advise investors to look beyond the weak office market outlook and focus on the quality of CCT’s assets and the DPU yield of CCT over the next 2 years. For FY09 and FY10, we still expect CCT to deliver DPU yields of 12.3% and 10.5%, respectively. Having a strong sponsor in CapitaLand could also provide support to CCT if there is any need for fund raising. We derive a RNAV estimate of S$1.06 per share for CCT and we peg our fair value estimate at S$1.06, which is at par to its RNAV. We re-initiate coverage on CCT with a BUY rating.
CCT – BT
CCT gets Moody’s downgrade
Moody’s Investors Service Tuesday downgraded CapitaCommerical Trust’s (CCT) corporate family rating to Baa2 from Baa1 and the senior unsecured ratings to Baa3 from Baa2. The outlook for both ratings is negative.
‘The downgrade of CCT’s ratings reflects the company’s strained credit metrics, particularly debt to EBITDA leverage and EBITDA/interest coverage which are in excess of 10 times and around 2.5 times respectively. These metrics are anticipated to weaken further to the extent that they would not be consistent with a Baa1-rated Reit,’ said senior analyst Kathleen Lee
‘Furthermore, Moody’s expects it will be difficult for CCT to improve these metrics over the intermediate term, as its operations will likely continue to be impacted by the slowing economy and constrained capital markets, which could be further exacerbated by upcoming new office completions from 2009 onwards,’ Ms Lee added.
CCT – DMG
Unencumbered Assets, But Economy Encumbers
FY08 performance met expectations. CapitaCommercial Trust (CCT) notched a 16.3% YoY jump (-12.5% QoQ) in 4Q08 DPU to 2.71¢, which was within expectations. For FY08, DPU came in at 11.00¢, matching the Street’s (11.10¢) and exceeding DMG’s (10.38¢) estimates. Underpinned by the introduction of 1 George Street and higher contribution from other properties, CCT’s 4Q08 revenue and NPI expanded to S$83.8m (+50.3% YoY, +5.1% QoQ) and S$65.6m (+47.8% YoY, -1.7% QoQ) respectively. However, 4Q08 EBIT was down 15.6% QoQ to S$51.3m due to higher trust expenses from the nonrecurring consultancy fees and expenses incurred for the aborted MSCP redevelopment. Most properties delivered improved or flat operating performances, aside from Capital Tower (higher property taxes) and MSCP
(redevelopment).
Birth of devaluations. CCT’s portfolio of assets devalued by 3.0% HoH to S$6.7b, attributable to valuers’ usage of higher cap rates (4.5 to 4.75%), premised on a weakened macroeconomic outlook, lower rents and occupancies. As such, NAV dipped 5.7% QoQ to S$2.97 per share. While gearing remain at a decent 37.6%, we believe this is prone to further upside pressures upon CCT’s subsequent semi-annual revaluation exercises this year and 2010. Given banks’ current comfortable LTV ratios of 30 to 40%, fresh refinancing concerns could surface when CCT’s S$850m worth of loans expire in 2010, from our view. From current levels, we estimate that CCT’s assets would need to drop by 7.0% (- S$467m) and 38.8% (-S$2.6b) to hit gearing of 40% and 60% respectively.
Remain NEUTRAL at lower S$1.00. Earnings visibility for this year should be rather stable for CCT, having locked in 79% of FY09 gross rental income, helped by full year contribution from 1 George Street and Wilkie Studio. While financial institutions’ confidence in CCT’s quality of assets has been affirmed with the respectable terms pertaining to its recent S$580m loan (a single securitized asset and spread of ~ 250bps), we believe the counter, similar to other landlords, would continue to be in the eye of the office re-rating storm, which should continue to stretch into 1H11. In light of the above, coupled with a continued deteriorating economic environment, we are lowering our occupancy levels and average rentals for CCT for FY10 and FY11 (portfolio occupancy: 85 – 90%, prime Grade A rentals: S$8 – 10 psf per mth, down from S$10 – 12, Rest of Central Area: S$6 – 8 psf per mth, down from S$8 – 10), but keeping our assumptions for FY09 intact as majority of the leases have been locked in. As such, FY09 DPU remains at 10.86¢ and FY10 DPU falls by 8.3% to 10.16¢. Maintain NEUTRAL at lower fair value of S$1.00.
CCT – CIMB
Smooth ride ahead
• Met expectations. 4Q08 results were in line with Street and our expectations. DPU of 2.71cts grew 16% yoy to form 26% of our forecast for FY08. Gross revenue of S$97.2m was up 56.6% yoy mainly on contributions from One George Street. Fullyear DPU of 11cts was in line.
• Moderate asset write-down of 3%. As at 1 Dec 08, CCT wrote down 3% of its asset values across its portfolio over their last valuation on 1 Jun 08. StarHub Centre was affected the most, by 7.9% and Raffles City, the least, at 1.4%. After the write-down, asset leverage moved up to 37.3% from 35.9% in 3Q08.
• Portfolio occupancy down to 96.2%. Committed occupancy on a portfolio basis was 96.2%, down from 98.9% in 3Q08. The drag was attributed to Wilkie Edge which was legally completed in Dec 08 and only 70% pre-committed. Average monthly rent for CCT’s portfolio was S$7.44 psf in the quarter, up moderately from S$7.20psf in 3Q08.
• No equity raising in “immediate” term; downside factored in. Refinancing nightmares in 2009 should ebb with S$650m of debt refinanced earlier this month. Management is confident of refinancing the remaining S$116m due in Jun 09. With eight unencumbered assets on hand, there should be sufficient financial flexibility for its upcoming refinancing negotiations. Management said there are no plans for equity-raising in the “immediate” term, although it would not define its duration. Weakening office demand has mostly been factored into our assumptions in the form of recession-level occupancy levels (80-85%) and weakening rents.
• Maintain Outperform; target price raised to S$1.12 (from S$1.08). We further refine our assumptions, factoring in rental declines from actual 2008 passing rents. We also introduce FY11 forecasts. Our DPU estimates for 2009-10 increase by 0.8- 3.6%. Our DDM-derived target price also rises to S$1.12 from S$1.08 (unchanged discount 10.4%). Concerns over widespread rights or equity issuance by REITs sprang after A-REIT’s surprise recapitalisation last week, sending REITs’ share prices down. With a P/BV of 0.29x, CCT remains a value stock with forward yields of 13%. Maintain Outperform.