+ Divestment proceeds used to top up the rental shortfall from divestments this year: A S$3.3mn top up to DPU from divestment gains was made during 3Q17. This, along with stronger performance from CapitaGreen (S$15.9mn higher revenue YoY for 3Q17) made up for the rental shortfalls from divestments in One George St (19 June 2017), Wilkie Edge (11 Sept 2017) and Golden Shoe Car Park (12 July 2017). We estimate the impact of loss of income in 3Q17 from these divestments to be around S$15.1mn.
+ Recovery of office rents to mitigate the impact of potential negative reversions in 2018. After 9 consecutive quarters of QoQ fall in Grade A office rentals, average rents rebounded 1.7% to S$9.1/sqft/mth. This would help mitigate the magnitude of negative rental reversions in FY18.
– Portfolio renewals still experiencing negative rental reversions: Although rental reversions were still negative in 3Q17, new/renewal leases signed were negligible. Rental reversions would most likely persist in 2018. Renewals in 2018 would most likely be signed close to the peak in 2015 (typical office contract is 3y). Average rents have fallen c.20% from the peak in 2Q15 to current.
Rebound in office rents will reduce the pressure of expected negative reversions in FY18. Nevertheless, DPU outlook is stable. As at 30 Sept 2017, CCT has cumulative unutilized tax-exempt income of S$35.7mn which could be used for future distributions. Management has also expressed commitment to utilise divestment proceeds to make up for loss of income from divestments. We forecast a 3% increase in DPU in FY18e, which includes the recent acquisition of Asia Square 2.
Maintain ACCUMULATE with unchanged target price of S$1.80
We maintain our ACCUMULATE rating on CCT, with target price translating to FY18e yield of 5.0% and P/NAV of 1.0.
Figures 1 and 2: CCT trades at slightly below post-GFC average dividend yields and above average Price/NAV
Figure 3: Peer comparison table