Pricing in bright prospects

CCT posted 2Q14 revenue growth of 3.2% and distributable income growth of 7.6% yoy. At half-time, the group’s results made up c.50% of our full-year estimates. CCT’s growth will be driven by the modest recovery in the office rental market as well as new contributions from CapitaGreen starting FY16. We have tweaked our FY14 DPU by 2% to 8.3cts to reflect a slightly better reversion outlook. While we remain upbeat on the office sector, given CCT’s

current 1x P/bk NAV multiple, we think much of the optimism has been factored in. We maintain our Hold call, with a revised DDM-backed target price of S$1.63 as we roll our numbers forward.

In line

Q2 distributable income was lifted by higher revenue, lower interest expense and the release of S$2.35m in retained tax exempt income. Gross revenue rose 3.2% yoy to S$65.8m, thanks to a 3.4% expansion in average portfolio rent on the back of positive reversions as well as high occupancy of 99.4%. CCT signed 97.5k sf of NLA of new and renewal leases largely from the financial services tenants in Q2. NPI rose 3.5% to $52m from a year ago due to lower ad hoc maintenance and marketing fees. Book NAV rose 1.8% to S$1.67/unit, largely coming from revaluation of CapitaGreen.

Brisk leasing activities

The Singapore office rental market continues to improve modestly amid tight supply in the CBD. CCT has a remaining 19% of portfolio rental income to be renewed in FY14, the bulk of which is pre-committed. Take-up at CapitaGreen has also improved to 23% of NLA to date and we expect the building to be at least 40-50% pre-leased when completed by year end. Another booster to income would come from Capital Tower and Raffles City Tower post completion of AEI works. Potential dilution from the remaining S$43.75m of CBs due FY15 (exercise price at S$1.23) is expected to be a marginal 1% and have been reflected in our numbers.

Maintain Hold

Although we maintain an upbeat view on Singapore’s prime office rental market, at 1x P/bk NAV multiple and an implied FY14 NPI yield of 3-3.5%, we think CCT is fairly priced at present.

Prospects bright but fairly valued

CCT posted 1Q14 revenue growth of 3.2% and DPU growth of 7.2% yoy. The topline and DPU account for 25% and 26% of our quarterly estimates, respectively. CCT’s next phase of growth is expected to be driven by the upcoming CapitaGreen, which is scheduled for completion in 4Q14. We lift our FY14 DPU estimate but tune down our FY15/16 forecasts by 3% to account for the slight dilution from the potential conversion of its CB due in FY15. We keep our Hold rating, but with a higher DDM-based (discount rate: 7.7%) target price of S$1.55 on the back of relatively good take-up for CapitaGreen which we believe will negate the potential dilution from the CB conversion.

Another stable quarter

CCT’s 1Q13 topline was S$64m (+3.2% yoy) while DPU was 2.1 Scts (+7.2% yoy). The growth in revenue was mainly attributed to higher revenue contribution from all the properties within its portfolio, with the exception of One George Street, which was affected by the cessation of income support. During the period, CapitaGreen (scheduled to be completed in 4Q14) secured pre-commitments for 12% of its total NLA of 700,000 sq ft, with an average rental rate of c.S$9 psf/mth. We believe CapitaGreen should be able to achieve a pre-commitment rate of c.60% prior to its completion in 4Q14, with an average rent of S$9.75 psf/mth. Portfolio occupancy for the quarter continued to creep up to 99.4% (vs. 98.7% a quarter ago).

Convertible bonds expected to be converted

Gearing stayed stable at 30.0% in 1Q14 (29.3% in 4Q13) while the average cost of debt dipped slightly to 2.4% (2.6% in 4Q13). Having completed all its FY14 financing needs, we believe CCT will continue to look at its refinancing needs for 2015 in the coming quarters. In our view, the S$190m CB due in FY15 (conversion price at S$1.23) is likely to be converted, in turn resulting in a DPU dilution of c.3.3%. Currently, with 80% of its total debt hedged as a fixed-rate debt, we believe CCT is fairly immune to any rate hikes.

Maintain Hold

Although we maintain a positive view on Singapore’s Grade-A office rental market, we believe CCT is currently fairly valued at 0.96x P/BV as it offers the lowest implied NPI yield of 3.1% vs. 3.5-6.2% for the office REIT space.

Looks fairly valued here

• 1Q14 figures within expectations
• CapitaGreen 12% pre-committed
• Downgrade to HOLD

Good start to the year

1Q14 distributable income increased 7.6% to S$59.9m mostly due to stronger contributions from portfolio assets and lower interest expenses. 1Q figures were mostly within expectations and YTD distributable income now constitutes 25.6% of our full year forecast. Topline for the quarter came in 8.5% higher YoY at S$57.1m versus S$52.6m in 1Q13 (restated due to the adoption of FRS 111 which reclassified income from RCS Trust and MSO Trust under “share of results of JV”). We note that the Trust enjoyed higher revenues from all properties due to a mix of stronger occupancies and positive rental reversions, except for One George St which was impacted by the cessation of yield protection income. 1Q14 DPU of 1.94 S-cents translates to a 5.2% yield as at the last closing price of S$1.635.

CapitaGreen now 12% pre-committed

Portfolio occupancy came up to 99.4%, up 70 bps from 98.7% as of end 4Q13. We continue to see positive rental reversions across CCT’s portfolio assets, with average committed office portfolio rentals increasing to S$8.22 psf as at end 1Q14 from S$8.13 as at end 4Q13. Management highlights that more than two thirds of leases expiring in FY14 has been renewed. Greenfield asset CapitaGreen remains on track to complete by end FY14 and the Trust has already pre-leased 12% of the 0.7m sq ft net lettable area to Cargill, Bordier & Cie and an international gym operator. Management expects to achieve commitment levels of ~50% by completion.

Downgrade to HOLD on valuation grounds

As our top pick in the REITs sector, CCT has outperformed significantly YTD, appreciating 12.8% versus the STI’s 2.7% movement over this period. We update our model for latest rental assumptions, and our fair value increases marginally to S$1.67 from S$1.61 previously. At this juncture, however, we believe CCT is almost fully valued; downgrade to HOLD on valuation grounds.

In-line results; eyes on CapitaGreen

• 1Q14 results in line with our expectations. DPU rose 7.2% YoY to 2.08 cts.
  
• 12% pre-commitment signed to-date for CapitaGreen. Cargill leases 51,000 sq ft and likely paying SGD9-10 psf per month.
  
• Reiterate HOLD with DDM-based TP raised to SGD1.66.
  

Results in line with expectations

CCT saw a 3.2% YoY rise in 1Q14 revenue to SGD64m, bolstered by higher income from most properties except One George Street, whose Deed of Yield Protection expired on 10 Jul 2013. 1Q14 DPU grew 7.2% YoY to 2.08 cts, driven by lower interest expense and higher NPI. Balance sheet remained strong, with a low gearing of 30% and 81% of borrowings on fixed rates. CCT has debt headroom of SGD1.2b, assuming a gearing of 40%. Portfolio occupancy rate edged up to 99.4% from 98.7% thanks to a mix of new and renewed leases, while monthly average office portfolio gross rent continued its uptrend, increasing to SGD8.22 psf from SGD8.13 psf in 4Q13.

CapitaGreen achieves 12% pre-commitment

CapitaGreen has secured a pre-commitment for 12% of its NLA of 700,000 sq ft from Cargill (51,000 sq ft), Bordier & Cie (12,000 sq ft) and an international gym operator (18,000 sq ft). These first-mover tenants are likely to be loss leaders, possibly paying a monthly rental of SGD9-11 psf, lower than CCT’s target of SGD12-14 psf for subsequent smaller floor-plate tenants. We see challenges ahead as CCT’s pre-leasing activities will coincide with those of the 782,000-sq-ft Asia Square Tower 2 (TOP 3Q13; 60% pre-committed) and 527,000-sq-ft South Beach Development. We expect the next significant increase in DPU to occur only in FY15 after the completion of CapitaGreen. We raise our FY14E-16E DPU estimates by 1.4-2.3% on interest savings and better growth prospects. Reiterate HOLD with a higher DDM-derived TP of SGD1.66 (previously SGD1.50).