CapitaCommercial Trust

DBS Group Research, July 18

CAPITACOMMERCIAL Trust (CCT) announced Q2 2013 gross revenue of $97.5 million (+1.8 per cent y-o-y), net property income (NPI) of about $75 million (-0.5 per cent) and distributable income of $59.6 million (+1.9 per cent). This translates into a quarterly distribution per unit (DPU) of 2.07 cents and H1 DPU of 4.01 cents (+1.3 per cent y-o-y).

The slight uptick in gross revenue was attributable to better performances from Six Battery Road and higher rental contribution from HSBC Building. CCT signed about 192,000 sq ft of office space commitment, of which about 40 per cent were new tenants.

Management reported an unweighted average reversion rate of $9.93 per square foot per month (psf pm), higher than the market rate of $9.55 psf pm (as provided by CBRE).

Management guided that they expect the loss of yield protection income for H2 2013 to be about $8.0 million. However, they have indicated a willingness to utilise portion of their retained distributable income from Quill Capita Trust (amounting to about $11 million) in order to stabilise the DPU going forward. As plans are still tentative at this point, we have not factored any additional payout in our DPU projections.

In addition, the decline should also be mitigated by an improvement in our portfolio occupancy assumption to 95-98 per cent from the present 95.8 per cent. Looking ahead, we expect office rents to be rather flat over the next 12 months as new demand remains bite-sized.

CCT will also be conducting $40 million worth of asset enhancement initiatives works at Capital Tower which will focus on the upgrading of common areas and certain technical specifications of the building, with a target of achieving a return on investment (ROI) of 7.8 per cent, upon completion by Q2 2015.

Maintain "hold", target price at $1.62. We made slight downward adjustments to our rental assumptions for CapitaGreen to $12 psf/ month as well as raised our risk- free rate assumptions to about 2.7 per cent from 1.8 per cent, to reflect the higher rate expectations going forward. The stock is offering DPU of 5.4 per cent for FY2013 and FY2014, at the lower end of peers' comparison range. With relatively minimal DPU growth to act as share price catalyst, we maintain our "hold" call.

HOLD