• Upgraded to A- by S&P
• 40% gearing -> S$1.3b debt headroom
• Likely to buy remaining 60% of CapGreen ahead

Long-term corporate credit rating upgraded to A- (stable)

Earlier this week, Standard and Poor‟s Rating Service (S&P) announced that it had upgraded CCT‟s long-term corporate credit rating from „BBB+‟ to „A-„ with a stable outlook. The rating agency had reassessed CCT‟s appetite for expansion and believes that the trust would likely “remain disciplined in using debt to fund new investments.” In addition, the trust‟s risk profile has been reinforced by its stable business performance, consistent cash flows, high occupancies and an expanded asset portfolio with CapitaGreen‟s anticipated completion by end-2014. We note that CCT currently enjoys one of the highest credit ratings in the SREITs sector – only below that assigned to CapitaMall Trust (A2) by Moody‟s.

Significant debt headroom of S$1.3b to 40% gearing

CCT‟s gearing stood at a healthy 28.8% as at end 2Q14 – down 1.2 ppt QoQ from 30.0% as at end 1Q14 – which is the lowest amongst its peer group of office S-REITs (average gearing of 36.0%). Recall that MAS regulations stipulate S-REITs without a credit rating are required to cap their gearing below 35% while those with a rating are allowed to go as high as 60%. CCT has significant capital headroom for acquisitions ahead; by our estimates, the trust has a debt headroom of S$1.3b before it hits a 40% gearing level.

Likely to exercise call option on remaining 60% of CapGreen

Looking ahead to FY15, we believe that management will likely exercise its call option to purchase the remaining 60% of CapitaGreen that it does not already own (50% owned by CapitaLand and 10% by Mitsubishi Asia). Assuming a valuation of S$2.5k to S$2.8k psf NLA for CapitaGreen, this will cost S$1.0b – S$1.2b which CCT can wholly fund using debt and yet land under a 40% gearing ratio post-transaction. Maintain HOLD with unchanged fair value estimate of S$1.67.

Source: OCBC Research - 27 Aug 2014