CapitaLand Integrated Commercial Trust - UOB Kay Hian 2021-07-29: 2H21 Good Things Come To Those Who Wait For Re-Opening

CAPITALAND INTEGRATED COMM TR (SGX:C38U) | SGinvestors.io CAPITALAND INTEGRATED COMM TR (SGX:C38U)

CapitaLand Integrated Commercial Trust - 2H21 Good Things Come To Those Who Wait For Re-opening

  • We saw a turnaround on the office front for CapitaLand Integrated Commercial Trust with pre-commitment at CapitaSpring improving to 61.8%, although Commerzbank exercised its option for early termination at Gallileo. Phase 2 (Heightened Alert) and rental waivers incurred are temporary setbacks.
  • CapitaLand Integrated Commercial Trust provides a diversified play on the re-opening of the domestic economy and will benefit as the recovery broadens to downtown malls and offices. 2022 distribution yield is attractive at 5.9%.
  • Maintain BUY. Target: S$2.50.



CapitaLand Integrated Commercial Trust (CICT)'s 1H21 Business Update

  • CapitaLand Integrated Commercial Trust (SGX:C38U) reported 1H21 DPU of S$0.0518, up 75% y-o-y. The results reflected full contribution from the merger of CapitaLand Mall Trust (CMT) and CapitaLand Commercial Trust (CCT), which was completed on 21 Oct 20. 1H20 was a low base with taxable income of S$46.4m retained.
  • Suburban malls are more resilient. Retail occupancy was stable at 97% in 2Q21. CapitaLand Integrated Commercial Trust signed new leases and renewals of 0.54m sf of retail space in 1H21. Retention rate was healthy at 82.5%. Management estimated negative rental reversion at 9.1% based on rents in the first year vs outgoing final rents (suburban malls: -4.6%, downtown malls: -15.5%). Shopper traffic is 39% below pre-COVID-19 levels. Tenant sales are 14% below pre-COVID-19 levels (suburban malls: 6% below, downtown malls: 24% below).
  • Sharing the pain by supporting tenants. CapitaLand Integrated Commercial Trust has granted rental waiver of S$18.9m in 1H21. It provided 0.5 months of fixed rents as rental waivers for 90% of retail leases at downtown malls. Rents were waived for tenants at Westgate when the mall was closed for two weeks (23 May to 6 Jun). Management expects rental waiver of S$20m-30m to be incurred in 2H21 due to Phase 2 (Heightened Alert).
  • Office occupancy resilient but office rents slipped. Office occupancy dipped 1.9ppt q-o-q to 93% in 2Q21. Occupancy at Asia Square Tower 2 dropped 10.8ppt q-o-q to 84.7% as Allianz relocated to ASB Tower. Physical occupancy of office premises has dropped from 51% in April to 21% in July (January: 43%). CapitaLand Integrated Commercial Trust signed new leases and renewals of 0.48m sf of office space and incurred a low single-digit negative rental reversion in 1H21. Average rents for Singapore office portfolio eased 0.3% q-o-q to S$10.25.
  • Commerzbank exercises option to exit from Gallileo. Commerzbank is rationalising its office footprint across various cities in Germany. The existing lease with Commerzbank is due to expire in Jan 29. However, Commerzbank has exercised its option to terminate the existing lease by Jan 24 and has given the required 24-month notice. Gallileo is a 38-storey Grade-A office building and a 4-storey heritage building located in the Banking District of Frankfurt's CBD. Commerzbank AG contributed 98.3% of Gallileo’s gross rental income in Dec 20. CapitaLand Integrated Commercial Trust has a lead time of two years to backfill Gallileo.
  • Refinancing to reduce cost of debt while stretching out term to maturity. Average cost of debt has improved 0.7ppt y-o-y to 2.4% post issuance of 7-year fixed rate notes of S$460m at 2.1% and 12-year fixed rate notes of HK$713m at 2.53% (swapped to S$125m at 2.15%) to refinance existing borrowings. Average term to maturity was extended by 0.2 years y-o-y to 4.3 years. Aggregate leverage remains healthy at 40.5%, well within the regulatory limit of 50%.


STOCK IMPACT

  • Recovery broadens as Singapore economy will further re-open in 4Q21. Singapore will transit to a new normal of living with endemic COVID-19 amidst the rising vaccination rates. The government has set a new target to have 75% of the population fully vaccinated by October. Achieving the important milestone could pave the way for social distancing measures to be substantially eased in 4Q21.
  • CapitaSpring currently 61.8% pre-committed. The 51-storey CapitaSpring at Raffles Place is on track for completion in 4Q21. 61.8% of NLA of 647,000sf is pre-committed (previous: 50%) as of Jul 21. Key tenants are JP Morgan, Square Point, The Work Project and Saxo Markets. Another 15% of NLA is under advanced lease negotiations. Committed leases will start contributing progressively from 1H22. Management targets pre-commitment of 80-90% by end-21.
  • AEIs on track for completion in 2H21. The new through-block link at Six Battery Road has a banking hall on one side and new retail offerings on the other. Standard Chartered Bank opened the new retail banking hall on 22 Jun 21. 40% of the space undergoing AEI is already pre-leased. CapitaLand Integrated Commercial Trust has handed over the office space at 21 Collyer Quay to WeWork. The 7-year lease commences in late-21.


EARNINGS REVISION/RISK


VALUATION/RECOMMENDATION



SHARE PRICE CATALYST

  • Gradual but steady recovery in shopper traffic and tenant sales, accompanied by progressive easing of social distancing measures.
  • Asset enhancement and redevelopment of existing properties.





Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-07-29
SGX Stock Analyst Report BUY MAINTAIN BUY 2.50 UP 2.420



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