Limited Core CBD supply pipeline ahead

• Limited Core CBD pipeline ahead
  
• Grade A rentals likely to recover
  
• Firm operational traction
  

To benefit from limited pipeline in Core CBD sub-market

We expect CCT to benefit from an improving Grade A office market in FY14 as rental levels reach a turning point in an environment of resilient absorption (9M13: 671k sq ft) and limited supply pipeline, with only CapitaGreen (~700k sq ft NLA) coming online in FY14 in the Core CBD sub-segment. After CapitaGreen, the next large set of Core CBD office supply in the pipeline will only come in 2016 with Marina One by M+S Ltd (1,880k sq ft), 5 Shenton Way by UIC Land (290k sq ft) and the redevelopment of International Factors Building and Robinson Towers by Tuan Sing (215k sq ft).

Grade A office rentals likely to recover ahead

Looking ahead to 2014, we are keeping our optimistic stance on the Grade A office rental market. The subsector has weathered through a cycle of changing fortunes over the past few years, with office rentals in a downturn since 3Q11. However, we note that the rate of decline has moderated over the past few quarters, and 3Q13 Grade A office rents are now flat QoQ at S$9.55 psf pm respectively. In addition, the Grade A office space continues to see steady net absorption of 235k sq ft in 3Q13.

Firm operational traction

Over 3Q13, CCT’s overall portfolio occupancy edged up QoQ to 97.6% from 95.8% with ~347k sq ft of space being renewed or signed under new leases. In particular, we note that leasing activity was fairly positive at OGS as the group managed to backfill the bulk of the 9.4% in NLA vacated over 2H13 to maintain the asset’s occupancy level at 94.2%. Due to continued positive reversions, average committed office portfolio rentals also increased QoQ to S$8.03psf from S$7.96psf. AEIs at 6BR and Raffles City remains on track to complete in 4Q13 and 2Q14, respectively, and we expect CCT to begin its S$40m AEI in Capital Tower in 4Q13. Maintain BUY with an unchanged fair value estimate of S$1.61.

Stable with slow growth

CCT posted flattish 4Q13 results, with revenue and DPU growing at 1.5% and 2.0% yoy respectively. We deem the full-year results largely in line as they are only 2% and 1% short respectively of our FY13 revenue and DPU estimates. The next phase of growth is expected to be driven by the upcoming CapitaGreen that is scheduled for completion in 4Q14. We maintain our Hold rating, but trim our FY14-15 EPS for the slower commitment rates, resulting in a lower target price of S$1.51

Stable set of results

4Q13’s results came in flattish, with a topline of S$98.6m (+1.5% yoy) and DPU of 2.1Scts (+2.0% yoy). The growth in revenue was due mainly to higher revenue contribution from most properties, in particular Six Battery Road, Raffles City Singapore, HSBC Building and the full-year contribution from Twenty Anson. During the period, c.S$4m worth of savings as a result of lower interest cost raised CCT’s distributable income to S$234.2m (+2.5% yoy) while portfolio occupancy continued to creep up to 98.7% (vs 97.6% a quarter ago).

Strong balance sheet

Gearing stayed stable at 29.3% (29.5% in 3Q13), while the average cost of debt dipped slightly to 2.6% (2.7% in 3Q13). Having completed all its FY14 financing needs, we believe management will continue to look at its refinancing needs for 2015 in the coming quarters. 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

During the briefing, management highlighted that it aims to achieve a rental rate of S$12-14 psf/mth when CapitaGreen stabilises. Given the average spot rent of c.S$9.75 psf/mth for Grade A offices at the moment, we believe it will be sometime before this level can be achieved. With a slightly slower than expected progress in the commitment rates (no pre-commitments currently), we have fine-tuned our model and lowered our earnings by c.1% for FY14 and FY15. We maintain Hold with a slightly lower target price of S$1.51 as we await more impactful catalysts.

Poised to benefit from CBD office recovery

• FY13 within expectations
  
• To benefit from CBD rental recover
  
• S$1.2b of debt headroom
  

FY13 figures within expectations

4Q13 distributable income increased 3.3% YoY to S$60.2m. This cumulates to a distributable income of S$234.2m for FY13, which is up 2.5% YoY mainly due to higher revenue contributions across portfolio properties and a full-year contribution from Twenty Anson. FY13 distributable income constitutes 102.1% of our annual forecast and we deem this this performance to be within expectations. The group reported 4Q13 DPU at 2.09 S-cents, adding up to a total FY13 DPU of 8.14 S-cents – a 5.6% distribution yield based on the traded price of S$1.45 per unit.

Poised to benefit from recovering CBD office market

Portfolio occupancy came up to 98.7% as of end 4Q13 versus 97.2% a year ago. In particular, we highlight that management has successfully addressed the issue of weak occupancies in Capital Tower and One George Street over FY13, bringing the occupancy rate up from 90.6% and 94.4% as at end FY12 to current levels of 100% and 99.5%, respectively. As a result of continued rental reversions, CCT’s average committed office portfolio rentals increased over the year from S$7.64 (end FY12) to S$8.13 (end FY13). Finally, greenfield-asset CapitaGreen remains on track to attain TOP by end FY14; recall that this is the only asset completing in the core CDB sub-market over FY14-15. The group also completed its S$86m enhancement program at Six Battery Road, resulting in an estimated 8.6% ROI from incremental rentals and savings in operating expenses.

Significant dry powder – debt headroom of S$1.2b

We continue to like CCT for its exposure to the relatively attractive CBD sub-market. With its low gearing of 29.3%, there is significant dry powder for accretive acquisitions with a debt headroom of S$1.2b (40% gearing). We believe this puts CCT in an advantageous position to capitalize on the sector, particularly if the recovery should surprise on the upside given its valuable call option to purchase the remaining 60% of CapitaGreen within three years after TOP.

Maintain BUY with an unchanged fair value estimate of S$1.61.

In-line results; eyes on CapitaGreen

• FY13 results are in line with our and market expectations. Reiterate HOLD and TP of SGD1.50.
  
• No pre-commitments signed to-date for CapitaGreen. CCT still in active talks to lease ~350k sq ft of space (50% of total NLA).
  
• FY14E NPI decline for One George Street estimated to be no more than SGD4.5m vs FY13’s.
  

Results in line with expectations

CCT saw a 3% YoY rise in FY13 revenue to SGD387m, bolstered by higher income from most properties and full-period contribution from Twenty Anson, which was acquired in Mar 2012. Though full-year revenue formed 101% of our and 102% of consensus estimates, it was dented by lower revenue from Capital Tower and the loss of yield protection from One George Street since Jul 2013. Full-year DPU grew 1.3% to 8.14 SGD cts, in line with our expectations. Balance sheet remains strong with a low gearing of 29.3% and 80% of borrowings on fixed rates. CCT has debt headroom of SGD1.2b, assuming a gearing of 40%. Portfolio occupancy edged up to 98.7% from 97.2% thanks to a mix of new and renewed leases (tenants include CapitaLand/CMA, JPMorgan and Royal Bank of Scotland).

All eyes on CapitaGreen

CapitaGreen, with 700,000 sq ft of net lettable area, is on track to complete by 4Q14. CCT has a 40% stake in this development but has yet to announce any pre-commitments. It is in active talks with prospective tenants to lease ~350,000 sq ft of space, with asking rents of SGD12-14 psf per month for smaller tenants and below that for the first few large floor-plate anchor tenants (loss-leader strategy). We see CCT’s pre-leasing activities coinciding 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 uplift in DPU to occur only in FY15 after the completion of CapitaGreen. Reiterate HOLD with an unchanged DDM-derived TP of SGD1.50 (discount rate of 8.5%).

Resilient to absence of OGS income support

• 3Q13 numbers within expectations
  
• Resilient DPU despite loss of OGS support
  
• Expect Grade A turning point in FY14
  

Distributable income up 1.6% YoY

Distributable income for 3Q13 increased 1.6% YoY to S$58.8m mostly due to lower interest expenses and the distribution of S$1.7m in tax-exempt income from Quill Capita Trust (QCT), which offset the loss of income support from One George St (OGS). Note that, going forward, CCT can still draw from S$10.9m of retained tax-exempt income from QCT, and also S$0.9m of retained taxable income from RCS Trust to be released in 4Q13. 9M13 distributable income cumulated to S$174.0m, up 2.2% YoY, which made up 75.9% of our FY13 forecast and is judged to be mostly within expectations. 3Q13 DPU is 2.04 S-cents which translates to a 5.7% distribution yield based on the last closing price of S$1.44.

Overall portfolio occupancy edged up to 97.6%

Over 2Q13, CCT’s overall portfolio occupancy edged up QoQ to 97.6% from 95.8% with ~347k sq ft of space being renewed or signed under new leases. In particular, we note that leasing activity was fairly positive at OGS as the group managed to backfill the bulk of the 9.4% in NLA vacated over 2H13 to maintain the asset’s occupancy level at 94.2%. Committed rents at OGS are in the range of S$8.6-S$10.0 psf pm and we understand management expects OGS occupancy to further improve ahead. Due to continued positive reversions, average committed office portfolio rentals increased QoQ to S$8.03psf from S$7.96psf. AEIs at 6BR and Raffles City remains on track to complete in 4Q13 and 2Q14, respectively, and we expect CCT to begin its S$40m AEI in Capital Tower in 4Q13. CapitaGreen also remains on track to complete by 4Q14.

Maintain BUY with unchanged S$1.61 fair value estimate

We expect CCT to benefit from an improving Grade A office market in FY14 as rental levels reach a turning point in an environment of resilient absorption and limited supply, with only CapitaGreen (~700k sq ft NLA) coming online in FY14 in the Core CBD sub-segment. Maintain BUY with an unchanged fair value estimate of S$1.61.