Achieved positive rental reversion with average monthly office rent increasing 5.3% qoq despite difficult operating environment. However, share price overshot potential improvement in outlook for office market. HOLD.

CapitaCommercial Trust (CCT) reported a distributable income of S$48.0m (+30.5% yoy) and DPU of 1.71 cents (-34.2% yoy) for 2Q09, in line with our expectations. Total DPU for 1H09 is 3.33 cents and will be paid on 28 Aug 09.

Generated positive reversion. CCT benefitted from positive rental reversion with average monthly office rent increasing 5.3% qoq to S$8.14psf in 2Q09. In May and Jun 09, renewals and new leases for 139,380sf net lettable area (NLA), or 4.1% of portfolio, were signed with tenants such as Cisco Systems, EIM (Asia) and the European Commission. Rental rates committed were at 45% above previous rental levels on a weighted average basis. Portfolio occupancy remained relatively unchanged at 96.2%.

Completed rights issue. The recent 1-for-1 rights issue was 135.4% subscribed, raising S$828.3m for CCT. Some S$664.0m of the proceeds raised have been utilised to repay borrowings, thus reducing CCT’s gearing from 43.1% to a more comfortable 31.0% as at Jul 09. All refinancing has been completed for 2009. The next major debt refinancing is S$520m commercial mortgage-backed securities (CMBS) under Raffles City Singapore due Sep 2011.

Revaluation results in lower NAV/share. CCT’s portfolio of investment properties was valued at S$6,029.6m based on the latest valuation as at 22 May 09. This is 10.1% lower compared with the valuation of S$6,710.6m as at 1 Dec 08. NAV/share was reduced to S$1.50 after taking into account the 1-for-1 rights issue and the latest valuation, lower than S$2.91 previously.

According to CB Richard Ellis, average prime and Grade A monthly rents declined 18.2% and 17.5% qoq to S$8.60psf and S$10.15psf respectively. Take-up is likely to remain in negative territory in 2H09 as there is usually a time lag between retrenchment exercises and the release of excess office space. However, the pace of rental decline has slowed due to improved sentiments and stabilisation in the economy.

More than half of leases expiring in 2009 have been renewed. About 92% of forecast gross rental income for 2009 is locked-in with committed leases. We continue to expect rents for Grade A office space to correct two-thirds from the peak to S$6psf due to supply coming on stream, especially in 2010. We have assumed portfolio occupancy tapering off from 94.9% currently to 88% by 3Q10. We keep our 2009 and 2010 DPU forecasts relativelyunchanged.

Maintain HOLD as our fair price is close to the current share price. Our fair price of S$0.90 (adjusted for the rights issue) is based on the dividend discount model (required rate of return: 7.7%, terminal growth: 2.5%).