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 nest 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.
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