Higher passing rent offset by lower occupancy. CCT’s average office portfolio rent crept up by 2.5% YoY to SGD7.83 psf as of 1Q13, making it the third consecutive quarter of growth. However, overall performance was offset by a lower portfolio occupancy rate, which was dragged down by Capital Tower as Cisco moved out. We expect further weakness in 2H13, as the yield protection at One George Street expires. We maintain our contrarian SELL based on CCT’s unattractive valuations and limited upside.

Flattish QoQ earnings. CCT’s 1Q13 DPU of 1.96 cts/unit (+3%YoY; - 4% QoQ) was in line with expectations, as the portfolio’s net property income remained flat QoQ at SGD74.9m. The uplift in average rent came mainly on the back of leases signed up or renewed amounting to 409,900 sq ft of space. However, new leases made up only 12% of that space, suggesting that demand from new tenants remained sluggish amid the subdued business environment.

Is the market overly optimistic? In addition to the 9.7% vacancy rate at Capital Tower, management has to contend with softening the impact of reduced income at One George Street once the yield protection expires in July 2013. We suspect the market is over-optimistic on CCT’s ability to secure more positive rental reversion to offset the loss of yield protection and vacancy risks, especially when the average rent of leases expiring in FY14 is at SGD9.59 psf. In fact, we forecast CCT’s DPU to decline by -2.3% and -2.4% in FY13 and FY14 respectively, before picking up in FY15 with the contribution of CapitaGreen.

Few options for growth. Other than waiting for the completion of CapitaGreen, we believe there are not many office assets available on the market that will be immediately yield-accretive without the need for yield support. With little room for organic and inorganic growth, nearterm DPU upside appears very limited.

Retail REITs offer better value. At FY13F-14F DPU yields of 4.7% and 4.6% respectively, we do not believe yields are attractive vis-à-vis retail REITs which offer growth potential via AEIs and gently positive rental reversion. Maintain SELL on CCT with an unchanged target price of SGD1.43.

Source: Maybank Kim Eng Research - 22 Apr 2013