CapitaCommercial Trust

OCBC on 21 Aug 2012

CapitaCommercial Trust’s (CCT) 2Q12 distributable income of S$58.5m was 7.5% higher YoY and translated to a DPU of 2.06 S-cents per share. Judging from consensus estimates, we believe this to be above market expectations which had anticipated weaker rental reversion performances in the year to date. Going forward, we believe the dynamic of limited office completion and stabilizing office vacancy rates, seen over 2Q12, could continue till 2H13 as no major office completions are expected in the meantime. Moreover, with limited office leases in CCT’s portfolio up for renewal (4.1%) in 2H12, we judge its operating fundamentals to be reasonably sound ahead. All considered, we believe there is solid value at current valuations (0.87x PB with a forward yield of 5.6%) for CCT’s portfolio of prime office assets and operating track record. Upgrade to BUY with a higher fair value of S$1.53, versus S$1.31 previously, as we incorporate stronger cap values for CCT’s assets.

The Grade A office bellwether
CapitaCommercial Trust (CCT) is a commercial REIT focused on investing in quality income-producing commercial properties. Its current portfolio consists of 10 quality office commercial assets in the Central Area of Singapore, with a total NLA of approximately three million sq ft and ~550 tenants. One of the first REITs to list on the local bourse in May 04, it is a Grade A office bellwether with total assets of S$6.8b (as of end 2Q12) and market cap of S$3.9b. CCT’s sponsor is CapitaLand.

Better than expected 2Q12 results
2Q12 distributable income of S$58.5m was 7.5% higher YoY and translated to a DPU of 2.06 S-cents per share. Judging from consensus estimates, we believe this to be above market expectations which had anticipated weaker rental reversion performances in the year to date. Key drivers for CCT’s 2Q12 numbers were the revenue contribution from Twenty Anson, higher revenues from Raffles City and HSBC Building, and higher yield protection income for One George Street.

Upgrade to BUY with higher fair value estimate of S$1.53
In our view, the 4.7% dip in Grade A office rentals in 2Q12 was rather benign relative to more pessimistic market expectations. In 2Q12, we also saw the core CDB vacancy rate show a reversal from a rising trend to register a 0.9% dip to 8.4%, mostly due to limited supply completion and a stronger than expected office absorption during the quarter. We see this dynamic of limited office completion and stabilizing vacancy rates continuing till 2H13 (when Asia Square T2 and The Metropolis T1&2 are slated for completion). Moreover, with limited office leases in its portfolio up for renewal (4.1%) in 2H12, we judge CCT’s operating fundamentals to be reasonably sound ahead. All considered, we believe there is solid value at current valuations (0.87x PB with a forward yield of 5.6%) for CCT’s portfolio of prime office assets and operating track record. Upgrade to BUY with a higher fair value of S$1.53, versus S$1.31 previously, as we incorporate stronger cap values for CCT’s portfolio.