CapitaLand Integrated Commercial Trust 4Q20 - UOB Kay Hian 2021-01-22: Deleverage First Before Further Acquisitions

CAPITALAND INTEGRATED COMM TR (SGX:C38U)

CapitaLand Integrated Commercial Trust 4Q20 - Deleverage First Before Further Acquisitions

CapitaLand Integrated Commercial Trust's DPU declined 15.4% y-o-y to 2.63 cents in 4Q20 with the merger completed on 21 Oct 20 (more than two months of contributions). We expect downtown malls to continue posing a drag on financial performance in 2021.
CapitaLand Integrated Commercial Trust plans to lower aggregate leverage to below 40%, which entails divestment of existing properties. Future redevelopment projects could also cause disruptions.
CapitaLand Integrated Commercial Trust is fairly valued with 2021F distribution yield at 5.1%. Maintain HOLD. Target price: S$2.32.
Entry price: S$2.12.

CapitaLand Integrated Commercial Trust (SGX:C38U) reported distributable income of S$145.4m for 4Q20, up 26.4% y-o-y due to completion of merger with CapitaLand Commercial Trust (CCT) on 21 Oct 20. DPU of 2.63 cents comprises clean-up DPU of 0.89 cents for period 1-20 Oct 20 and DPU of 1.74 cents for period 21 Oct 20 to 31 Dec 20. Distributions will change to semi-annual basis in 2021.
CapitaLand Integrated Commercial Trust has released the remaining S$1m from taxable distributable income of S$69.6m retained in 1Q20 (2Q20: released S$23.2m, 3Q20: released S$45.4m). Raffles City Singapore (RCS) released the balance S$6.25m of taxable income previously retained.

We estimate that negative rental reversion was maintained at about 13% in 4Q20. Rental reversion was -6.6% on a full year basis. Larger double-digit declines were seen at downtown properties, such as Raffles City Singapore (-22.2%), The Atrium (-11.1%) and Clarke Quay (-10.8%). Occupancy was flat q-o-q at 98% in 4Q20. We estimate retention rate at about 79% in 2H20 (vs 1H20: 90%).
Shopper traffic and tenants’ sales have gradually recovered to 67.9% (3Q20: 60%) and 94.5% (3Q20: 89%) respectively of levels in 4Q19. Suburban malls are more resilient with shopper traffic and tenants’ sales at 69.7% (downtown: 65.7%) and 101.3% (downtown: 83.7%) of levels in 4Q19.

Occupancy for Singapore offices was stable at 95.1% as of $10.27psf pm. Retention rate was weak at FY20 due to the exit of Standard Chartered Bank from Six Battery Road.

CapitaLand Integrated Commercial Trust's aggregate leverage has increased to 40.6% ((CapitaLand Mall Trust (CMT) 3Q20: 34.4%) primarily due to additional bank borrowings to finance the cash consideration of S$1,000.2m for the acquisition of CapitaLand Commercial Trust.
CapitaLand Integrated Commercial Trust's portfolio valuation was stable at S$22.3b (change in fair value was small at negative S$114m for 3Q20). Valuation for integrated development assets dropped S$77.1m or 1.2% primarily due to Raffles City Singapore, particularly its hotel component. NAV per share was S$2.00 post-merger.

New community cases of COVID-19 infections have increased to 2.6 on a 7-day moving average basis after staying nearly zero for three months. Imported cases are also on the rise and have reached 27.7. The rise in new cases started 1-2 weeks after the year-end festivities. New clusters of community transmissions have been identified. The multi-ministry task force warned that the government might introduce new measures ahead of the festive Chinese New Year period. The government intends to accelerate the COVID-19 vaccination programme.

BHG Singapore will be taking over two floors of retail space at Raffles City Singapore formerly occupied by Robinsons. A new concept stall called One Assembly, which will showcase beauty, fashion and home products, will open by the end of January. It also has two spa cabins for shoppers to relax and pamper themselves. In addition, the concept stall will be selling products available on eCapitaMall, CapitaLand’s online shopping website. Consumers will have options to pay using eCapitaVouchers and via cashless payments. The concept stall will explore new ways for collaboration and is said to be a short-term prop-up. The third floor vacated by Robinsons remains vacant.

In Singapore, 43% of the office community has returned for the second week in January. Leasing enquiries have picked up and demand is trickling back. Restrictions on workers returning to work at their offices could be further eased.
In Germany, the current lockdown was extended till 31 Jan 21 due to the increase in new cases of COVID-19 infections. Uncertainties have increased and tenants are unsure of their office space requirements.

CapitaLand Integrated Commercial Trust announced that 75% of construction for 51-storey CapitaSpring at Raffles Place is completed (superstructure completed) and on track for TOP in 2H21. 38% of NLA of 647,000sf is pre-committed. Key tenants are JP Morgan, Square Point, The Work Project and Saxo Markets.
Another 22% of NLA is under advanced lease negotiations. In total, the integrated development is expected to achieve 60% commitment by completion. 10% of office NLA is set aside for flexible workspace.

CapitaLand Integrated Commercial Trust intends to reduce aggregate leverage to below 40% to position itself to seize opportunities when they arise. It will reconstitute its portfolio by an appropriate divestment of properties that have reached their optimal life cycle.

Asset enhancement for Six Battery Road is expected to complete by end-21. For 21 Collyer Quay, the seven-year lease to WeWork is scheduled to commence in 4Q21. CapitaLand Integrated Commercial Trust will explore redevelopments of selected existing properties in the medium to long term (2022 and beyond). Management will time the redevelopment projects to minimise disruptions to maintain stability of cash flow and DPU.

Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-01-22

SGX Stock Analyst Report HOLD MAINTAIN HOLD 2.32 UP 2.250