CapitaLand Integrated Commercial Trust - Phillip Securities 2022-02-04: Portfolio Reconstitution Amidst Recovery


CapitaLand Integrated Commercial Trust - Portfolio Reconstitution Amidst Recovery

  • CapitaLand Integrated Commercial Trust (SGX:C38U)'s FY21 DPU of S$0.1040 (+19.7% y-o-y) was in line, forming 102% of our forecast.
  • Operating metrics continue to improve; tenants’ sales lifted by broader recovery amongst trade sectors while negative retail reversions continue to narrow.
  • Portfolio occupancy declined by 2.5ppts y-o-y due to timing of lease expiries at Capital Tower and Six Battery Road and trading impacted Clarke Quay.
  • Maintain ACCUMULATE, DDM-based (COE 6.41%) target price for CapitaLand Integrated Commercial Trust lowered from S$2.54 to S$2.39.

The Positives

Recovery in tenant sales and narrowing negative reversions support improving tenant sentiment.

  • Full-year retail reversions narrowed to -7.3% (1H21: -9.1 %). Suburban and downtown reversions were -2.4% and -13.8% respectively. Tenant retention remains stable at 82% (FY20 84.5%). Broader recovery amongst trade categories was observed from the 12.2% y-o-y growth in total tenants' sales, with nine out of 15 trade categories showing y-o-y growth. However, FY21 tenant sales psf was still below pre-pandemic levels, at 87.8% of FY19's monthly average.
  • Rental support has also eased – FY21 rental waivers came in at S$27mil, slightly more than half a month of rent, compared to the S$128.4mil in rebates disbursed in FY20.

Valuation uplift of 3.5 % or S$752.8mil y-o-y

  • Retail assets saw a modest 3% valuation uplift on the back of recovering performance while cap rates remain unchanged. Office and integrated development assets accounted for 45% and 52% of the revaluation gains, owing to cap rate compressions for office assets and CapitaSpring achieving TOP in Nov 21.
  • Clarke Quay and Raffles City took a S$52mil and S$107mil write-down due to CAPEX provisions for upcoming AEI works.
  • Valuation for Gallileo fell by 13.2% of S$76mil as valuers factored in the exercise of lease break option by Commerzbank, which will bring forward the lease expiring from 2029 to 2024.

Portfolio reconstitution and entry into new market.

  • CapitaLand Integrated Commercial Trust divested its 50% stake in OGS for S$640.7mil at an exit yield of 3.17%, 9.1% above valuation price on 30 Sep 21. It also entered a new market, Australia, making a A$1.1bn investment in two Grade A office buildings and 50% interest in integrated development, 101-103 Miller Street and Greenwood Plaza. These three Australian acquisitions carry an average NPI yield of 5.1% and a pro-forma DPU accretion of 2.8%.
  • Post-acquisition, Australia represents ~5% of AUM. Capital recycling continued into FY22 - CapitaLand Integrated Commercial Trust announced the sale of JCube for S$340.0m at NPI yield of ~4%, 21.9% above FY21 valuation, realising net gains of S$56.7mil.

The Negative

Portfolio occupancy of 93.9% was 2.5ppts lower y-o-y as both retail and office register lower occupancy.

  • Retail occupancy of 96.8% was 1.2ppts lower y-o-y. Do wntown malls saw occupancy decline between 1.1-4.0%, with the exception of Bugis Junction which saw 0.4ppts improvement, while suburban malls have recovered to pre-pandemic occupancy. Occupancy at Clarke Quay fell 16.1ppts y-o-y to 73.5% as entertainment and nightlife tenants continue to be impacted by restrictions. The asset will undergo AEI once the necessary regulatory approvals have been obtained.
  • Office occupancy of 91.5% (- 3.6ppts y-o-y) lags CBD core average occupancy of 93.3% due to lower occupancy at Capital Tower (76.8%) and Six Battery Road (79.7%). The management is in advance negotiations with a major tenant for the space vacated by JP Morgan at Capital Tower. If successfully signed, occupancy at Capital Tower will increase from 79.7% to 90%.
  • The completion of AEI at Six Battery Road has been delayed from end-2021 to 1Q22. Occupancy at Six Battery Road increased from 79.7% to 90% post-FY21 upon securing a tenant in Jan22.
  • Strong leasing interest at CapitaSpring brough committed occupancy to 91.5% (3Q21: 83.1%), with another 5% of NLA in advanced stages of negotiation.


  • Further relaxation of dine-in group size and return to office should help tenants' sales, especially at downtown malls. As measures ease and office capacity is lifted to 50% in Jan 22, CapitaLand Integrated Commercial Trust's management noted that footfall at downtown malls has improved, albeit at the expense of suburban malls. As recovery continues, we could see more writebacks for retail assets, which are still 1.6-3.5% below 2019 valuations.
  • We understand from the CapitaLand Integrated Commercial Trust's management that FY22 portfolio reconstitution efforts will be focused on Singapore. ION Orchard is a low-hanging fruit, in our view, given that the mall is a matured asset that has been operating since 2009. 79 Robinson Road, JEWEL and CapitaSpring ate relatively new assets that have not reached stabilisation but are potential pipeline assets in the mid-term.

Maintain ACCUMULATE, DDM-based target price lowered from S$2.54 to S$2.39

Natalie Ong Phillip Securities Research | https://www.stocksbnb.com/ 2022-02-04