CCT – DBSV
Sturdy Balance Sheet
At a Glance
• 9M11 DPU accounted for 83% of our FY11 forecast
• Healthy renewals sustain high portfolio occupancy of 97.7%
• Gearing at 27.4%, the lowest among its office peers.
• Maintain BUY at a lower DCF-based TP of $1.49
Comment on Results
Revenue in line with expectations .3Q11 gross revenue and NPI declined by 8.6% and 9.2% yoy to S$91m and S$69.8m respectively largely due to negative rental renewals and impact of the ongoing AEI works at 6 Battery Road. However, Raffles City’s robust performance, lower property tax payment and interest savings mitigated the decline. Hence, DPU fell by a smaller 7.8% yoy to 1.83 cents. 9M11 DPU forms 83% of FY11 DPU.
Still healthy take-up rates sustain high occupancies. The trust renewed another 151,000 sf of its office leases in the current quarter, taking year-to-date renewals to about 415,000 sf. Meanwhile, pre-commitments for 6 Battery Road AEI works had also gained traction from 79% a quarter ago to 98% for the 93,700 sf of upgraded space.
Correction in market rents is likely to have minimum impact on performance. While office take-up is likely to moderate and asking rents should see some correction amid current uncertain economic environment, we expect minimum impact on CCT earnings with only 5.5% of office leases (in terms of total gross revenue) due for renewal this year and 9.3% in FY12. Meanwhile, average portfolio office rent in the 3Q remained flattish at S$ 7.79 psf VS the S$ 7.84 a quarter ago.
Recommendation
Strong balance sheet to withstand uncertain times. We like CCT for its strong balance sheet with net gearing of 27.4%, healthy cash reserve and its ability to drive renewals to sustain its portfolio occupancies. Maintain BUY with a lower DCF-based TP of $1.49 as we roll our numbers forward into FY12 and adopt flattish market rental growth for FY12.
Cambridge – DBSV
Growing distributions
• 3Q11 DPU of 1.08 Scts (+6% qoq) in line
• Deployment of cash to develop projects/new purchases; FY12/13 earnings continue to grow
• Offers F Y11-13F yields of over c10-11%, BUY!
Results in line; DPU growth continued in 3Q11 Gross revenues and net property income were up by 13.9% and 10.3% to S$20.7 m and S$17.6m respectively. This increase was contributed by additional rental income from new acquisitions, which more than offset income loss from its divestments. Occupancy levels remain high at 98.7%. Interest costs also saw a dip of 43% yoy due to refinancing at a lower all–in rate of 4.1% (5.9% previously). As a result, distributable income came in at S$12.9m, +19% yoy. DPU was lower by 8.8% yoy due to increased share base from share placement in April’11, but is an improvement from a quarter ago.
Deployment of cash to develop projects/new acquisitions. Cambridge REIT (CREIT) continue s to expand its portfolio with the announcement of the signing of a new built-to-suit project (BTS) at Seletar Aerospace Park View and the acquisition of 25 Pioneer Crescent for a total of S$23.7m. These properties will be leased back on long-term contracts with Air Transport Training College (ATTC) for the former site for 30 years, and the latter for 15 years lease with option to extend for further 15 years. This together with continued asset enhancement program at various properties and other BTS projects, we slightly raised our FY12/13 earnings to account for new acquisitions/BTS projects.
Attractive FY11-13F yield of c10-11%. Ongoing asset recycling by the manager will ensure that CREIT’s portfolio remain fresh and relevant. Gearing of 33% is comfortable and with no debt refinancing over the next 2 years. The credit & risk profile of CREIT has vastly improved compared to GFC period in 2008-09. Prospective FY11-12 DPU yield of 9.5-11.1% is attractive. Maintain BUY with revised TP of S$0.58 as we roll forward our numbers to FY12.
CCT – OCBC
No surprises for 3Q11 results
3Q11 results in line. For 3Q11, CapitaCommercial Trust (CCT) reported a distributable income of S$51.9m or a DPU of 1.83 S cents, bringing the total distribution YTD to 5.59 S cents. This is line with our expectations and YTD distributions form 75.0% of our annual forecast. We also saw gross revenue fall 8.6% on a YoY basis to S$89m. This was mainly due to the absence of contributions from StarHub Center sold in Sep10, and lower occupancy and rentals at Six Battery Road (6BR) which is undergoing asset enhancement works (AEI). Given the last unit price of S$1.10, the annualized distribution yield stands at 6.8%.
Firm occupancy numbers. Overall portfolio occupancy tracked down marginally to 97.2% versus 97.7% last quarter, mainly due to lower occupancy at One George Street (OGS) as a tenant moved out. Market talk is that Llyods, Wong Partnership and Julius Baer will also move out of OGS due to demand for more space, and CCT is currently seeking new tenants at ~S$11 psf. In terms of net property income (NPI), we saw a 30% YoY dip at 6BR due to ongoing AEI. NPI at Capital Tower also fell 6.5% YoY as a major tenant (11%) left the building and negative rental reversions continued.
Mixed rental reversions in FY12. We expect to see rental reversions stay negative in 4Q11 and turn mixed in FY12. Despite expectations of reduced economic growth next year, we could still see positive reversions at a few buildings, such as Raffles City with leases expiring at S$6.99 psf. Barring a severe economic crisis, we forecast rental reversions for CCT’s portfolio to turn positive in FY13. Note that the average rental of leases expiring then would be an undemanding S$7.62 psf.
6BR and Market St office on track. Demand for the upgraded space at 6BR continues to be firm with 98% of the upgraded space (19% of net leasable area) already pre-committed – up from 79% announced in 2Q11. Nomura, which occupies 12% of the building, would have its lease expire in Nov 11 and management plans to upgrade this space as well, with 29% of the space already pre-committed. The Market Street office tower is also on track to complete in 2014 as planned.
Maintain BUY. We had downgraded the office sector to NEUTRAL on 17 Sep 2011 and forecast office rentals to fall 5-10% by FY13. Despite a weaker office outlook, however, we still see value in CCT given its quality portfolio and prices trading at ~30% discount to NAV. Maintain BUY with a fair value estimate of S$1.41 due to softer rental assumptions, versus S$1.45 previously.
CCT – CIMB
Distress valuations!
We believe that market is valuing CCT’s assetsat distress valuations, unjustified given its much stronger balance sheet vs. lastcrisis. Also, CCT’s exposure should be mitigated by yield protectionfor One George Street and its under-rented portfolio.
CCT’s 3Q11 and 9M11 DPU were in line, forming 25% and 77% of our full-year estimates, respectively. Having already factored in an office slowdown, we are keeping our forecasts and DDM-based target price. Maintain Trading Buy.
Mitigation for rental downside
3Q11 NPI was down 9% on negative office rental reversions and absence of rental income from Starhub Centre (sold in 3Q10). While an office slowdown is imminent, we expect income downside to be mitigated by yield protection from One George Street (significant lease expiries next year), with rents on expiring leases pegged at levels closer to current market and a long WALE of 4.7years.
Renewing leases ahead of expiries
We believe that CCT’s proactive approach towards reducing upcoming lease expiries should mitigate risks from a sharp rental falloff on expiries. CCT signed office leases amounting to 151k sf of renewals and new leases in 3Q11, including a forward lease renewal with EDB. These took uncommitted office leases expiring in 2011 and 2012 down to 9% and 15% from 11% and 19% respectively in 2Q.
Strong balance sheet to tide through dark clouds
CCT’s strong balance sheet position should tide it through looming dark clouds. With potentially less revaluation downside risk given sub-peak asset valuations and rentals, we do not see CCT revisiting its previous trough.
Distress implied asset valuations unjustified
Trading at 0.7x P/BV, we believe that market is valuing its Grade A office portfolio at distress cap rate of 7% and capital values of S$1.4k psf, way below S$1.7k psf for prime office assets during the last downturn. We deem this unjustified given its stronger balance sheet this time round.
CitySpring – Lim and Tan
• It was unfortunate investors ignored news that CitySpring through Basslink, bought back on Sept 30th A$170 mln worth of bonds issued by the latter at A$155 mln, ie there should be a gain to be booked in, interest expense correspondingly reduced and cash flow boosted by the release of the A$20 mln escrow account.
• The 1- cent drop on Oct 3rd to 38 cents underscored the extent of the loss in confidence in this business trust. And Basslink has been a headache since CitySpring bought it just over 4 years ago.
• (The funds for the redemption came from the S$204.8 mln proceeds from the rights issue.)
• Hopefully, news that S&P has removed the Negative outlook rating and reinstated it to Stable will be better received. (The overall rating remains at BBB minus.)
• Key point is that CitySpring’s cash flow is stable enough to more than enable it to continue with its distribution policy, even though with the continued poor stock market performance, prospects for growth via acquisition are not bright.
• Treat CitySpring then as a utility stock / trust, offering yield of >7%.
• BUY