Proxy for bottoming office rents, but DPU upside capped for now
We are sanguine on the office sector for 2014 and think that rents have bottomed out. While CCT would be a natural proxy, the marginal 13% of portfolio space due for renewal and expiry of income supports could cap DPU upside. Leasing CapitaGreen at good rates will be key for the re-rating of the stock, in our view.
We lift our longer-term rent assumptions (marginal rise in FY14-15 DPU of 0.1-0.3%), leading to a rise in our DDM-based target price (7.6% discount rate). Under our new rating structure, our recommendation changes from Neutral to Hold.
Leasing activities in 3Q13 augur well
In 3Q13, CCT concluded the long-term lease to CapitaLand-related business units at Capital Tower at an undisclosed rate; this will see the occupancy by its sponsor rise from 21k to c.140k by 2015. This essentially brings the total occupancy at Capital Tower to 100%. In addition, CCT signed new leases and renewals for c.347k sf (sq f) of space during the quarter. With these, all leases that were due for renewal in FY13 have been renewed. Management remains positive on the office sector and guided previously that it was seeing a distinct improvement in the achieved rates.
Low renewals in FY14 and expiry of income support
Further out, CCT has 13% and 30% of space (by monthly gross rental income) due for renewal in FY14 and FY15 respectively. The low proportion of space up for renewal coupled with the expiry of the income support at One George Street (OGS) could cap DPU upside from a potential rise in office rents. Distributing its remaining tax-exempt income (c.S$10.9m) from its associate, Quill Capia Trust, could be done to smoothen out its DPU for FY14.
CapitaGreen leasing key
We understand that the management is currently in discussions with an anchor tenant to take up c.30-50k sf of CapitaGreen. CCT’s target rents of S$12-14psf per month remain a challenge, in our view, even as the outlook for the sector becomes better. Any positive announcements on this front will serve as an important catalyst for the stock and general sentiment for the sector as a whole.
Publish date: 02/12/13