• FY17 NPI and DPU within our estimates.
• Portfolio occupancy stable as tenant retention rate improves.
• Divestment proceeds and tax-exempt income used to top up rental shortfall from divestments.
• Momentum in office rent recovery accelerates in 4Q17.
• Downgrade to Neutral with unchanged TP of S$1.80, after 16% run-up in share price.

The positives

+ Portfolio occupancy stable as tenant retention rate improves. Portfolio occupancy stands at 97.3%, up slightly from 97.1% in Dec-16. However, as a sign of improved leasing conditions on the ground, tenant retention ratio improved from 62% in FY16 to 78% in FY17. Occupancy for Asia Square Tower 2 improved to 90.5%, up almost 2pps from the date of acquisition in November 2017.

+ Divestment proceeds and tax-exempt income used to top up rental shortfall from divestments of One George Street and Wilkie Edge: A total of S$12.4mn of tax-exempt income and divestment gains was used to top-up for the loss of distributable income from divestments. The Group has a cumulative retained net tax-exempt income of c.S$27mn as of end FY17.

+ Momentum in office rent recovery accelerates in 4Q17. Grade A spot rents continued its recovery momentum, growing 3.3% qoq in 4Q17. This comes after the bottoming of rents in 3Q17 following 9 consecutive quarters of decline.

The negatives

– Portfolio renewals still experiencing negative rental reversions: With Grade A office spot rents 18% below its peak in 1Q15, leases renewed in FY17, predominantly for One George St and Six Battery Road experienced negative reversions. Full impact of negative reversions in FY17 will only flow through in 2018.

Outlook

With average rent of leases expiring at S$11.09psf, lower than the average market rent of S$9.40psf, negative rental reversions are expected to continue into 2018. Nevertheless, DPU outlook is stable. As at FY17, CCT has cumulative unutilized tax-exempt income of S$27mn which could be used for future distributions. We forecast a 0.9% increase in DPU in FY18e, which includes the recent acquisition of Asia Square 2.

Downgrade to NEUTRAL with unchanged target price of S$1.80

We downgrade our rating on CCT to NEUTRAL, with unchanged target price of S$1.80, after the 16% appreciation in share price since our 3Q17 results report. Our target price translating to FY18e yield of 4.9% and P/NAV of 1.0.

  Figures 1 and 2: CCT trades at >1s.d more expensive valuations vs post GFC average

Figure 3: Peer comparison table