The Positives

• Healthier margins at AST2, CCT’s largest contributing asset. Huge ramp-up in occupancy levels for AST2 in 1Q19 (90.5% when acquired in 4Q17 to 98.1% in 3Q18) is delivering the topline improvement. NPI margins at this property have also seen a sizeable uptick. NPI Margin stood at 77.5% for 1Q19 compared to 76.7% in 1Q18. AST2 accounts for 27% of net property income.

The Negatives

• Slight dip in occupancy, mainly due to Six Battery Road. Occupancy at Six Battery Road took a hit, from 100% in 4Q18 to 97.6% in 1Q19, due to non-renewal of a single tenant. Upgrading works are also underway for this asset.

Outlook

Outlook remains positive for CCT, with expiring rents on the downtrend for the rest of 2019 and 2020. Macro catalysts include the CBD Incentive Scheme introduced in the URA’s Draft Master Plan 2019, which offers higher plot ratios for older buildings for certain areas within the CBD. Office landlords such as CCT could benefit from the potential tightening of an already-tight Grade A CBD supply.

Downgrade to NEUTRAL with TP of S$1.93.

We downgrade our rating to NEUTRAL due to the recent positive price movement, which has exceeded our target price level. The broad-based run-up in REIT prices year to date can mainly be attributed to the dovish stance communicated by the Federal Reserve as well as the lifting of the sunset clause on tax incentives for S-REITs. Our target price remains unchanged at S$1.93, which translates to a distribution yield of 4.8% and a P/NAV of 1.05x.