Prime beneficiary of asset reflation

FY06 results in line. 4Q06 DPU came in at 2.04 cents and 7.33 cents for FY06, in line with expectations. Portfolio occupancy continues to stabilize near 100% levels Renewals and new leases continue to achieve double-digit growth at 13.8% over preceding rents. Moving forward, CCT is likely to enjoy rental kicker from 52% of leases up for renewal in FY07 and FY08 for its office assets which is currently leased at below market rents.

Highest potential for debt capacity expansion. 4Q06 also saw revaluation surplus of S$356.5m which raised NAV per unit to S$1.86 from S$1.59 previously. This would be a broad based trend across the REIT sector, highlighting REITs with office exposure which will raise portfolio size on the balance sheet which translates to higher debt capacity. CCT would be the prime beneficiary as the largest office S-REIT in the market.

First foray into Malaysia. CCT has also recently subscribed to 30% stake in Quill Capita Trust (“QCT”), similar to CMT/CRCT. However initial investment size of S$28.8m is small relative to CCT and we see minimal impact from CCT’s perspective currently. As an alternate growth vehicle for CCT in Malaysia, although positive riding on the rising market, QCT would pale in comparison compared to CRCT. CRCT’s pipeline from Capitaland’s Development and Incubator funds include retail assets in any form, be it in development stage, incubation stage or stabilised assets across any geography in China.

Maintain Hold, TP S$ 2.64. We roll forward our DCF valuation to FY2011 and raise our target price to S$2.64 after incorporating contributions from QCT into our estimates and maintain our Hold recommendation.

Strong reversions expected

• FY06 within expectations. CCT’s DPU of 2cts for 4Q06 took full-year DPU to 7.3cts, vs. our forecast of 7.4cts and consensus expectations of 7.5cts. Gross rental revenue rose 89% yoy to S$56m in 4Q06, with growth mainly led by fullquarter contributions from Raffles City.

• Strong reversions to drive organic growth. All its properties remained almost fully occupied. About 24% of its office leases will be up for renewal this year and rates are likely to surprise on the upside. The latest lease at 6 Battery Road was signed at S$13 psf/month, with the asking rent reaching S$14 psf/month, vs. S$5-6 on average that its tenants are now paying. This was above expectations. We see CCT benefiting the most from strong office rent reversions in the next two years.

• Expanding in Malaysia and China. About 20% of CCT’s assets are likely to be in Malaysia and China by 2009. Quill Capita Trust (QUIL MK, RM1.33, NR), in which CCT has a 30% interest, will be the preferred vehicle for CCT’s expansion in Malaysia. The mode of investment in China is yet to be known but could be in the form of direct asset acquisitions or investments in a China-focused REIT, à la CMT’s (CT SP, S$3.24, NR) 20% stake in CRCT (CRCT SP, S$2.77, NR).

• We introduce our FY09 DPU estimate of 11.5cts, based on S$700m worth of acquisitions in 2009 taking CCT’s portfolio to S$5.9bn, a property yield of 3% for these acquisitions (40:60 debt-equity), and 34% and 23% of office leases up for renewal in 2008-09 respectively. We raise our FY07-08 DPU forecasts by 10-20% to reflect aggressive office rental reversions in the next two years.

• DDM target price accordingly raised to S$3.00 from S$2.55, still based on a cost of equity of 5%. Our FY07 DPU estimate of 9.5cts and target price of S$3.00 translate into a forward yield of 3.2%, in line with the CY06 yield that CCT has been trading at. Potential catalysts over the next 12 months could include asset enhancement plans for Raffles City, CCT’s move into China and possibly the trust’s maiden development project. Based on CCT’s latest assets of about S$3.8bn, we estimate CCT can undertake development projects worth S$380m. In light of the anticipated stronger DPU growth and favourable news flow, we upgrade our rating from Neutral to Outperform.

Visit Malaysia year

• Tapping rising rents in Kuala Lumpur. Last December, CCT invested in 30% of Quill Capita Trust (QCT), a Reit listed on Bursa Malaysia. QCT has an initial portfolio of four commercial assets in Kuala Lumpur, worth RM280m. Rents for commercial space in Kuala Lumpur are set to rise further, given the demandsupply imbalance. We believe CCT’s increasing exposure to this market is timely.

• Pipeline assured. MCDF, a development fund set up by parent CapitaLand and Maybank, is expected to give QCT access to completed properties for future acquisitions. As the number of properties that CapitaLand can itself inject into CCT dwindles, yield-accretive investment in other fast-growing commercial Reits such as QCT can provide CCT with an alternative growth avenue.

• Contributions still small at this stage. While we consider the investment in QCT a positive move, we estimate that QCT can only add 1-2% to CCT’s distributable profit over the next 2-3 years. QCT’s portfolio will probably make up just 3% of CCT’s overall assets over the same period.

• Yield is still demanding. Our FY07-08 DPU forecasts have been raised by 3-4% to reflect QCT’s contribution. Accordingly, our DDM-derived target price has been raised from S$2.30 to S$2.55, still based on a cost of equity of 5%. CCT’s forward yields of 3-4% are below the average 4.5-5% that S-Reits are trading at. Our target price of S$2.55 translates into a yield of 3.2%, which is in line with CCT’s current valuation. Maintain Neutral.