CCT – DBSV
In a sweet spot, for now
- DPU grows 3.7% despite dilution from 2014 CBs
- Higher income from Capital Tower and 6 Battery Road offset loss of income support at One George Street
- CapitaGreen: income contribution pushed back as Manager prefers to wait for 2015
- Maintain HOLD, TP S$1.67
Highlights
Strong set of 2Q14 results. CapitaCommercial Trust (CCT) reported gross revenue of S$65.8m (+3.2% y-o-y). The increase in rental income came mainly from an improvement in occupancies at its major buildings (namely Capital Tower, 6 Battery Road) which more than offset the loss of income support from One George Street. Net property income grew at a smaller 2.0% y-o-y to S$52.0m, mainly due to higher property taxes and operating costs. Distributable income to unitholders came in at S$64.1m (DPU of 2.18 Scts), which was 3.7% higher y-o-y, boosted by release of QCT distribution income (S$2.35m, nil a year before).
Stable valuations. Portfolio valuations were written upward slightly, supported by higher rents achieved across the portfolio. Due to a change in valuers, cap rates expanded slightly by c.10bps for its Grade A buildings, but remain at the 3.75%-4.25% range. NAV remain stable at S$1.67 per unit.
Our View
Portfolio occupancy remained robust at 99.4% During the quarter, the Trust renewed/leased 83.5k sqft of office space and 14k sqft of retail space, with 31% of leases coming from new tenants in the financial services, retail products/services and energy/commodities/maritime & logistics industries. Strong demand for office space also resulted in significantly higher committed rents at 6 Battery Road (S$12.50-14.00 psf pm vs S$11.84) and One George Street (S$10.40-11.00 psf pm vs S$9.55) relative to both expiring rents, as well as comparable market rents.
CapitaGreen 23% pre-leased. CapitaGreen has achieved precommitments for 23% of NLA. We understand that the average rents for these initial leases are still below market rates of S$10.60 psf pm but the latest leases signed are starting to inch higher. Given that this is still some way off from target rents of S$12-14 psf pm, the Manager has indicated that it is content to hold off some leasing activity until 2015, and has guided for positive DPU contribution only in 2016. While we like this wait-and-see strategy, we remain cautious about the strength of new demand, given that we haven’t seen much new demand for floor plates that would have traditionally been a catalyst for sharp increases in rent levels.
Recommendation
Maintain HOLD, TP S$1.67. We have raised our estimates slightly to account for higher portfolio occupancies and rents achieved. While we believe that CCT will continue to be a main beneficiary of the supply crunch in the CBD over 2014-2015, with CapitaGreen only contributing meaningfully from 2016 onwards, immediate term growth is likely to be flattish, diluted by conversions of the CBs. The stock offers dividend yields of 5.0-5.1%, which is fair.
CLT – OCBC
Appears fairly priced now
- 2Q14 DPU flat YoY at 2.147 S cents
- Moving towards multi-tenanted lease profile
- Upside likely limited at current level
In-line 2Q14 results
Cache Logistics Trust (CACHE) reported its 2Q14 results last evening, with NPI flat YoY at S$19.6m and distributable income up by 0.5% to S$16.7m. DPU stood at 2.147 S cents, unchanged from 2Q13 but up 0.3% QoQ. For 1H14, DPU cumulated to 4.287 S cents, down by 2.1% YoY due to a 5.0% increase in unit base over the period. We deem the results to be within expectations, as 1H14 distribution formed 49.3% of both our and consensus full-year DPU forecasts.
Still on a stable footing
CACHE’s portfolio remained largely resilient in our view. There was a slight dip in portfolio occupancy to 99.6% from 100% in 1Q, as the master lease at Jinshan Chemical warehouse has expired. However, as we were previously guided, underlying portfolio tenancy was close to fully occupancy, hence limiting the downward pressure. CACHE shared with us its strategy to transform the portfolio into a more multi-tenanted lease profile to reduce the concentration risk and capture the benefits of market cycles going forward. We are more neutral on the move in view of the substantial supply in warehouse space over the next two years and imposition of several cooling measures in the industrial market, including recent revision in JTC subletting policy. Nevertheless, we note that sponsor CWT Limited and C&P Group will remain as major tenants, occupying ~50% of the total NLA at the end of their respective master leases in Apr 2015. Over at C&P Changi Districentre, CACHE also disclosed that it has made good progress on its lease renewal, securing ~63.0% commitment ahead of its master lease expiry in 2015. This should limit any volatility in occupancy and income once the assets are converted into multi-tenancies.
Downgrade to HOLD on valuation grounds
CACHE’s units have enjoyed a good run-up in prices, and as a result, the last transacted price is just a tad lower than our fair value of S$1.25. While we continue to like CACHE’s strong financial position and quality portfolio assets, we believe that the stock is fairly priced at current level (1.27x P/B). As such, we downgrade CACHE from Buy to HOLD on valuation grounds.
FCOT – OCBC
Further growth ahead
- 3QFY14 DPU flat YoY
- Robust leasing activity
- Strong rental uplift likely at ATC
3QFY14 results mostly in line
Frasers Commercial Trust (FCOT) reported a consistent set of 3QFY14 results last evening. NPI came in marginally lower by 0.7% YoY at S$22.9m, due to the effects of the weakening AUD on the income of FCOT’s Australia properties and higher repair and maintenance expenses for Caroline Chisholm Centre. However, FCOT continued to benefit from savings from its convertible perpetual preferred unit (CPPU) distribution, which led to a 2.9% YoY increase in distributable income. On the back of a larger unit base, DPU stood flat YoY at 2.19 S cents. This brings the 9MFY14 DPU to 6.29 S cents (+9.2%), forming 71.8%/70.7% of our/consensus FY14 distribution forecasts.
Robust underlying performance
We note that leasing activity has remained very robust during the quarter. In Singapore, positive rental reversions ranging from 10.7% to 11.5% were achieved for leases commenced in 3Q, while occupancy rate improved 0.5ppt QoQ to 98.4%. Notably, the office tower at China Square Central attained 100% committed occupancy as it continued to benefit from its recent asset enhancement initiatives and better connectivity with the opening of Telok Ayer MRT station. In Australia, occupancy also inched up by 0.3ppt to 97.3%, whereas an 87.0% jump in secured rents was registered at Central Park following the replacement of a long lease contracted more than 10 years ago with a new tenant. As a result, portfolio occupancy rose to 98.0% from 97.5% in 2Q, and only 2.7% of the remaining portfolio leases will be expiring for FY14.
Maintain BUY
Looking ahead, FCOT shared with us that it will continue to focus on maintaining the high occupancy rates across the portfolio and refinancing its maturing debts. It also reiterated that the upcoming expiry of the master lease at Alexandra Technopark (ATC) in Aug 2014 will further boost the portfolio performance as the average underlying gross rent is twice the net rent received under the master lease. We make some adjustments to our forecasts to reflect a firmer portfolio going forward. Our fair value is raised marginally from S$1.45 to S$1.48. Maintain BUY on FCOT.
CLT – AmFraser
Delivered on expectations. Cache’s 2Q14 gross revenue and NPI were within 0.8% and 2.2% of our forecasts, with 1H14 DPU of 4.287c forming 50% of our FY14 estimate. The 2Q distribution of 2.147c will be paid on 26 August. Gross property revenue and distributable income were respectively 1.7% and 0.5% higher YoY.
Strategic shift towards multi-tenanted assets… While only 1% of leases is set to expire in the rest of FY14, management has already begun to plan ahead for FY15, securing 63% of pre-committed leases by NLA for C&P Changi Districentre. This comes as management and major tenants CWT and C&P have jointly agreed to wind down the master tenancies, though they will still occupy c.50% of total NLA at the end of their master leases in April 2015.
…but outlook clouded by new JTC policy, record supply. The new JTC requirement for anchor subtenants to lease ≥70% of GFA for a minimum of 3 years, coupled with the record supply of industrial space coming online in FY14, will put further pressure on an already-soft market. According to Colliers, 2Q14 warehouse rents declined 1.6-2.4%, the third consecutive quarterly decline.
Venturing beyond core markets? Interestingly, we note management highlighted quality deal flow in investible markets such as Australia and China had increased. With a 2013 Moody’s rating of Baa3 Stable and current aggregate leverage of 28.9% as of 2Q14, we think Cache could potentially make opportunistic acquisitions outside its core markets should something attractive come along, while remaining at comfortable gearing levels of c.40%, implyingS$95.9m of debt headroom above FY14F levels.
FV $1.41 unchanged on solid results. We keep our DCF-derived target price unchanged on Cache’s solid performance and FY14F yield of 6.9% despite headwinds in its core market, keeping an eye on both market reactions to leasing policy and developments overseas.
CCT – OCBC
CapitaGreen’s completion on track
- 2Q14 figures within expectations
- CapitaGreen 23% pre-committed
- Call option within 3 years of completion
2Q14 results within expectations
CapitaCommercial Trust (CCT) reported 2Q14 distributable income of S$64.1m – 7.6% higher YoY. This cumulates to an YTD distributable income of S$124.0m, which is within expectations and makes up 51.0% of our FY14 forecast. 2Q13 DPU is 2.18 S-cents, which is 5.3% higher than the 2.07 S-cents paid in 2Q13 and translates to a 5.1% distribution yield as at the last closing price of S$1.67. The growth in distributable income over the quarter was mainly due to stronger contributions from assets, lower interest expenses and the release of retained tax-exempt income distribution (S$2.4m). In terms of the topline, 2Q14 gross revenues increased 3.2% YoY with all properties, except One George Street, clocking higher income over the quarter.
Stable portfolio performance
Portfolio occupancy remained stable at 99.4% as of end 2Q14 versus the previous quarter. As a result of continued rental reversions, CCT’s average committed office portfolio rentals increased marginally QoQ from S$8.22 to S$8.23/sq ft. Over the quarter, the trust signed leases for 97.5k sq ft of space, of which 31% are new leases, and the portfolio WALE (weighted average lease term to expiry) as at end Jun-14 stands at 7.8 years. CCT continues to enjoy a healthy balance sheet, with gearing improving to 28.8% as at end 2Q14 from 30.0% the previous quarter, and an average cost of debt of 2.4%.
CapitaGreen achieved “top-out” and now ~23% pre-committed
CapitaGreen’s structural work has reached the top floor and remains on track to complete by the end of this year. The trust has secured aggregate lease commitments for ~23% (165k sq ft) of total NLA, and expects CapitaGreen to contribute revenue to MSO Trust from 2H15 onwards, and to distributable income from FY16. We also note that CCT has a call option to acquire, from its JV partners, the remaining 60% stake in CapitaGreen at market valuation within three years of completion. Maintain HOLD with an unchanged fair value estimate of S$1.67.