Category: CCT
CCT – CIMB
Rising from the ashes
• Top pick in commercial sector, upgrade to Outperform from Underperform. CCT is the largest REIT office landlord with almost 3.5m sf of commercial space. Even with asset devaluation, the likelihood of breaching impairment levels is limited. To reach impairment, CCT’s assets would have to be devalued by 40% over a single year. Assuming a 20% devaluation, CCT would still remain within 45% gearing, which is the optimal level. With management’s track record in past refinancing and access to debt markets, as well as support from sponsor CapitaLand, we believe that it should be able to secure refinancing.
• Concerns already priced in. We have priced in occupancy levels falling to the last crisis levels but with moderate rental declines in view of CCT’s resilient income from 5-year minimum income support for One George Street, long leases for HSBC Building and a stable retail segment in Raffles City. We also increased our cost of debt to 5%, 140bp above its current all-in cost of debt of 3.6%. Despite this, forward yields for CCT remain attractive at 11% for a portfolio of its quality.
• Unchanged DDM-derived target price of S$1.17 (discount rate 10.4%). At our target price of S$1.17, CCT has potential price upside of 30%, vs. the potential 15% upside for the STI. We upgrade CCT to Outperform from Underperform based on valuation. The sharp fall in its share price has more than compensated for various concerns, in our opinion. Early success in securing refinancing before Mar 09 may provide a catalyst for the stock. At 0.29x price to NAV, CCT is the second-lowest valued REIT after FCOT (0.21x). We believe this is an opportune time to accumulate the stock at such attractive levels.
REITs – CIMB
Ripe for the picking
• Looking cheaper than ever. YTD, the Singapore REIT index has fallen 56% (vs. the STI’s 48% decline), driven by fears of REITs’ inability to secure refinancing, and falling rents and occupancy in an economic downturn. Average P/BV for the S-REIT sector has fallen to 0.51 while average yields have doubled to 14% in the last two months.
• REITs with strong credit and risk metrics get gold. Despite the credit crunch, there are still REITs that exhibit strong credit and diversified risk metrics. The presence of strong sponsors and government-linked sponsors is advantageous at this juncture. To these, banks are not only willing to lend but lend on more favourable terms. Some REITs have even managed to move away from borrowings that require pledges on their assets or rental income, thereby retaining financial flexibility.
• Asset devaluation risks small, financing ability not impaired yet. Most of the REITS are still within safe gearing levels. This implies a low risk of breaching impairment levels and could mean debt funding would still be available to them.
• Look for efficiency. In the midst of the credit crunch, acquisitions and asset enhancements requiring significant outlay would be difficult, particularly in 2009. More attention should be focused on the operational efficiency of the REIT manager in pushing every dollar of rent from the top down to the distribution level. CDLHT stands out as an efficient REIT manager with a remarkably close match between its revenue growth (222%) and DPU growth (211%), in our comparison.
• Overweight on S-REITs; top picks are PLife and CCT. With the strong selldown of REITs, we see an opportune time to accumulate positions. We maintain our Outperform ratings on A-REIT, CIT, FCT and PLIfe. We upgrade CCT and MLT to Outperform from Underperform and Neutral respectively. We maintain our Underperform on ART but downgrade CDLHT to Underperform from Neutral. While PLife remains our top pick for its limited earnings downside and strong financial flexibility, CCT emerges as a deep-value pick with the lowest P/BV of 0.28x among REITs under our coverage, and below the S-REIT average of 0.5x. We believe that all negatives have been priced in and forward yields at 12.2% (CY09) look attractive.
Link – Table
CCT – CIMB
Concerns remain
• Met expectations. 3Q08 results were in line with Street and our expectations. DPU of 3.1cts grew 45.1% yoy to form 29% of our forecast of 10.55cts for FY08. Gross revenue of S$92.5m was up 52.6% yoy primarily on maiden contributions from One George Street and strong rental reversions. YTD DPU forms 78.4% of our full-year estimate, in line.
• One George Street diversified earnings. One George Street has diluted the concentration of revenue from Raffles City. In order of significance, the top three revenue contributors were: Raffles City (31.2%), 6 Battery Road (22.1%) and One George Street (15.5%). Together, they contributed 69% to CCT’s gross revenue in the quarter.
• Occupancy at 99%. Committed occupancy on a portfolio basis remained high at 99%, above islandwide office occupancy of 92.2% as at 2Q08. Average monthly rents for CCT’s office properties were S$7.20 psf in the quarter.
• Our key concerns for CCT are: 1) downward asset revaluation which would decrease its debt headroom and increase asset leverage; and 2) 57% of its debt (S$1,456m) is due over 2009-10. The pressure to refinance significant debt at a reduced credit rating of Baa1 (from an earlier A3) is likely to increase its cost of debt. A saving grace is CCT’s resilient income from a 5-year minimum income support for One George Street, long leases for HSBC Building and a stable retail segment in Raffles City.
• Maintain Underperform and target price of S$1.17. Our target remains based on DDM valuation with a discount rate of 10.4%.
CCT – BT
CCT Q3 distributable income rises 46.1%
Results boosted by higher gross rental income and income from 1George St
CAPITACOMMERCIAL Trust (CCT) has reported distributable income of $43.2 million for the third quarter ended Sept 30, up 46.1 per cent from $29.6 million a year earlier and 3.8 per cent above the Reit manager’s forecast.
The strong result was attributed to higher gross rental income from CCT’s portfolio and income from 1 George Street from July 11. Q3 net income from 1 George Street was $11.09 million.
The trust’s distribution per unit (DPU) of 3.1 cents for Q3 is 44.9 per cent more than in Q3 2007 and 4 per cent above forecast.
Its gearing ratio rose to 36.3 per cent in Q3, from 29.1 per cent previously. Total debt increased to $2.54 billion, from $1.83 billion.
Lynette Leong, CEO of the Reit manager, said: ‘We have always employed a pro-active approach in the execution of our capital and risk management strategies. CCT’s current gearing is at a prudent level of 36.3 per cent and the interest cost for 2008 is 100 per cent fixed.’
The trust’s interest service coverage ratio at end September was 3.1 times and its average cost of debt was 3.6 per cent.
Ms Leong said that for $580 million of debt maturing next year, CCT is evaluating refinancing proposals received from banks and the cost is expected to be competitive. ‘We intend to finalise the refinancing well in advance of the debt maturity,’ she said.
Property operating expenses of $25.8 million rose $8.4 million or 48 per cent in Q3 due to the acquisition of 1 George Street, as well as higher property tax, utility costs and maintenance costs for other properties.
The trust’s expenses of $2.4 million rose $1.1 million or 83.7 per cent, due to higher professional fees and unit-holders’ expenses.
Borrowing costs of $25.5 million rose $12.8 million or 101.5 per cent, due mainly to an increase in borrowing from the issue of $335 million of fixed-rate notes, a $650 million term loan and $370 million of convertible bonds and amortisation cost on upfront fees and expenses incurred on the convertible bonds.
CCT said its office properties are likely to perform well for the rest of the year as it expects positive rental reversions for leases expiring in the current Q4.
‘This is because the average passing rent for CCT’s office portfolio is only $7.20 psf per month and is significantly below market,’ it said.
CCT also expects rental declines to be mitigated by low new office supply for the rest of 2008 and in 2009.
Q3 earnings per unit on a fully diluted basis were 1.51 cents, down from 1.69 cents a year ago.
CCT’s unit price closed unchanged at $1.02 yesterday.