CCT - Signs of easing credit

CCT delivered a 25.1% yoy jump in its 1Q09 DPU to 3.24 cents (annualised distribution yield of 15.9%), and is on track to deliver its forecasted 12.34 cents for the full year. Despite the challenging business environment, the DPU grew by almost 20% sequentially, aided by lower property operating expenses and borrowing costs.

CCT signed on new leases and renewals for 335,800 sq ft of space in the first four months of 2009, leading to a 49% improvement in signed rents. About 89% of the management’s forecast gross rental income of $408m has already been locked in with committed leases. The current portfolio committed occupancy is 97.7%.

CCT has a buffer against the still-falling market rates, which are relatively higher than the office passing rent of $7.73 psf. The limited percentage of leases expiring for its four key office buildings (Capital Tower, Six Battery Rd, One George Street and Raffles City Tower) also lowers its downside risks associated with the weakening office market.

Pursuant to the $580m already refinanced earlier this year, CCT announced that it has obtained a commitment for a $160m, 3-year term loan secured over the HSBC Building. The all-in margin for the loan is 3.0%. This compares favourably against the 3.75% margin obtained by Suntec REIT in the refinancing of $825m in debt. CCT’s gearing level remains at a comfortable 38.3%.

Based on our forecasts and the current price, we expect CCT to be able to consistently pay an attractive annual DPU yield of about 14% over the next 3 years, despite the challenging business environment. We reiterate our BUY recommendation, trimming our DDM-derived target price of $1.32, assuming a 0% terminal growth rate, beta of 1.1 and a risk-free rate of 3%. CCT currently trades at 0.3x P/B, which implies the market is valuing its office portfolio at about $793 psf.

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