CapitaLand Integrated Commercial Trust - Phillip Securities 2021-08-02: Braving Headwinds

CAPITALAND INTEGRATED COMM TR (SGX:C38U)

CapitaLand Integrated Commercial Trust - Braving Headwinds

CapitaLand Integrated Commercial Trust (SGX:C38U)'s 1H21 DPU up 75% y-o-y to S$0.0518, in line at 50.8% of our FY21e forecast.
Phase 2 Heightened Alert dampened recovery but 1H21 tenant sales and 2Q21 office leasing enquiries still grew 5.3% y-o-y and 1.1x q-o-q.
Office and retail reversions still in the red. Retail occupancy remained high at 97.0%. Singapore office occupancy down 2.4ppts q-o-q to 92.4% with backfilling required.

Maintain ACCUMULATE and DDM-based (COE 6.27%) target price of S$2.54. FY21e DPU forecast cut by 8.3% after factoring in one month of rental rebates for retail tenants: 0.3 month in 1H21 and 0.7 month in 2H21. No impact on target price due to rounding.

CapitaLand Integrated Commercial Trust's tenant sales trended down in 1H21, under Phase 2 Heightened Alert. y-o-y however, sales were 5.3% higher. Suburban malls outperformed downtown malls, at 94.1% of pre-pandemic levels vs the latter's 75.7%. They averaged 86.3% on a blended basis. The biggest rebounds came from jewellery and watches, home furnishing and education. Sales in these trade sectors were up 46.6%, 27.5% and 25.6% y-o-y in 1H21.
CapitaLand Integrated Commercial Trust's omnichannel retail ecosystem comprises its loyalty programme CapitaStar and online retail and food platforms, eCapitaMall and Capita3Eats. Marketing and promotions on these platforms captured sales during the 4-week Phase 2 Heightened Alert. Gross merchandise value generated on eCapitaMall and Capita3Eats grew 2.5x and 2.8x y-o-y.

Retail occupancy remained high at 97.0%. CapitaLand Integrated Commercial Trust's holistic approach to tenant support included:
1. restructuring leases on lower base rent and higher turnover rent structures to share in tenants’ weaker trading;
2. establishing online platforms to provide them with omnichannel outreach;
3. marketing and promotions to spur sales; and
4. rental rebates.
Restructuring of leases aligns CapitaLand Integrated Commercial Trust with its tenants, allowing rents to vary with how well they trade. This helps to accelerate leasing decisions by the tenants who are concerned by the fluid situation. About 0.54mn sq ft was signed in 1H21. F&B and fashion accounted for 44.7% and 27.1% of the new openings in 2Q21.
CapitaLand Integrated Commercial Trust provided S$18.9mn of rebates to its retail tenants in 1H21, equivalent to 0.3 month of waiver for the May-June heightened alert period (1H20: S$76.5mn).

Occupancy at Asia Square Tower 2 fell from 95.5% to 84.7% due to non-renewal by Allianz in 2Q21. Several vacancies from relocations and downsizing by banks have yet to be backfilled. These included space vacated by Standard Chartered at Six Battery Road, Allianz at Asia Square Tower 2 and Capital Tower by JP Morgan which is relocating to CapitaSpring in 4Q21.
2Q leasing enquiries were hampered by Phase 2 Heightened Alert but were still up 1.1x q-o-q. Relocations, consolidation, expansion and new set-ups formed 55%, 21%, 18% and 6% of 2Q21's leasing enquiries.
About 0.48mn sq ft was signed in 1H21, largely by the non-bank financial service, IT, media, telecommunications and hospitality sectors, with more headway at CapitaSpring. About 61.8% of NLA had been committed as at end-July (1Q21: 50%), with another 15% in advanced negotiations.

Commerzbank, which occupies 98% of Gallileo, has exercised its option to pre-terminate its lease to consolidate its operations. This brings forward the lease’s expiry from 2029 to 2024. CapitaLand Integrated Commercial Trust has engaged a property consultant to assess its options for marketing and leasing the space.

Market rents have stabilised, inching up q-o-q from S$10.40 to $10.50, although still down 5.8% y-o-y. 2Q21 reversions were less negative q-o-q, with signing rents of S$10.25 broadly in line with market rents. Full-year revisions are likely to end in the red.
FY22 average passing rents of S$9.19 should provide rental upside while FY23’s higher passing rents of S$11.03 raise the likelihood of negative reversions. AEI at CapitaSpring, 21 Collyer Quay and Six Battery Road is on track for completion in 2021.

CapitaLand Integrated Commercial Trust has also restructured retail leases on lower base rent and higher turnover rent structures to share in its tenants’ weaker trading. First-year lower base rents will step up over lease terms to reflect a gradual recovery. Reversions on an incoming vs outgoing rent basis were -9.1%, comprising -4.6% from suburban and -15.5% from downtown properties. Factoring in the step-ups using average incoming vs average outgoing rents, reversions were -4.5%.
Based on CapitaLand Integrated Commercial Trust’s sensitivity analysis, tenant sales growth to 120% of pre-pandemic levels should bring gross rents back to pre-COVID rents. Sustained economic reopening and a return of tourists could spur sales closer to pre-pandemic levels.

CapitaLand Integrated Commercial Trust's FY21e DPU forecast dips 8.3% after factoring in one month of rental rebates for retail tenants – 0.3 month in 1H21 and 0.7 month in 2H21. No impact on our DDM-based target price.
Current CapitaLand Integrated Commercial Trust's share price implies 4.7%/5.5% FY21e/22e DPU yields.
See
Catalysts could include stronger-than-expected sales growth, AEI to unlock value and portfolio reconstitution.
Risks to our view include weaker-than-expected leasing demand, setbacks in vaccinations and new waves of the pandemic.

Natalie Ong Phillip Securities Research | https://www.stocksbnb.com/ 2021-08-02

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