CapitaCommercial Trust: Consistently outperform

Results were above expectation. CapitaCommercial Trust (CCT) reported a set of good results that exceeded our expectations. Gross revenue increased by 34.4% YoY and 2.6% QoQ to S$100m and the increase came from the acquisitions of One George Street and Wilkie Edge and also positive rent reversions. Increase in operating costs was partly mitigated by the lower property tax. A loss of S$684.8m was recognized as a result of the downwards revaluation of its investment properties, which had already been announced during the Rights issue and has no impact on cashflow. As a result, a loss of S$636.1m was recognized in 2Q09 but distributable income to unitholders grew by 33.2% YoY and 5.8% QoQ to S$48m.
Good operating performance. Operating performance in 2Q09 remained encouraging. CCT signed new leases and renewals for 139,380 sq ft (4.1% of NLA) of spaces and achieved new rents at 45% higher than previously signed rents on aggregate. While this was weaker than that achieved in 1Q09, it is still a good achievement, considering the fact that average Grade A office rent had fallen by 17.5% QoQ in 2Q09. Even though CCT's portfolio occupancy rate had fallen from 96.7% in 1Q09 to 96.2% in 2Q09, this remained higher than market occupancy rate.

DPU of 1.71 S-cents for 2Q09. DPU of 1.71 S-cents has been declared for 2Q09, translating to an annualized DPU yield of 7.9%. Together with the DPU from 1Q09, unitholders will receive a semi-annual payout of 3.33 S-cents for 1H09, after accounting for the dilution from its Rights issue. The Rights units are also entitled to the DPU declared in 1Q09.

FY09 DPU forecast raised to 6.4 S-cents. We are now raising our FY09 DPU forecast by 5.3% from 6 S-cents to 6.4 S-cents after taking into consideration better-than-expected rent reversions in 2Q09. Our new forecast translates to a DPU yield of 7.3% for FY09. Our FY10 DPU forecast has also been raised by 10.5% from 5.4 S-cents to 5.9 S-cents.

Fair value raised to S$1.07; Maintain BUY. Our fair value of CCT has now been raised to S$1.07 (previously S$0.96), which is pegged at par to our RNAV estimate. While the office sector continues to face oversupply issues, we expect CCT to outperform its peers on the operating aspects, given its strong track record. We believe that this will be a justification for the valuation premium of CCT over its peers. We maintain our BUY rating on CCT.

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