CapitaLand Integrated Commercial Trust - OCBC Investment 2022-02-03: Continuing Its Portfolio Reconstitution

CAPITALAND INTEGRATED COMM TR (SGX:C38U)

CapitaLand Integrated Commercial Trust - Continuing Its Portfolio Reconstitution

CapitaLand Integrated Commercial Trust's 2H21 DPU -8.9% y-o-y but FY21 DPU rose 19.7%.
Suburban malls showed firm recovery.
Continued capital recycling activities.

CapitaLand Integrated Commercial Trust (CICT, SGX:C38U) reported 2H21 gross revenue of S$659.4m and NPI of S$478.9m, representing an increase of 54.5% and 61.6% y-o-y, respectively. DPU fell 8.9% y-o-y to 5.22 cents, but this was due to one-off distributions released in 2H20 from income previously retained and from RCS Trust. Excluding this, we estimate that 2H21 DPU would have grown 16.2% y-o-y instead.
For the full-year FY21, CapitaLand Integrated Commercial Trust’s NPI jumped 85.5% to S$951.1m, while DPU grew 19.7% to 10.40 cents and accounted for 100.2% of our forecast, in-line with expectations. The main growth driver was due to significantly reduced tenant waivers to eligible tenants, which amounted to S$27.3m in FY21, versus S$128.4m in FY20.

CapitaLand Integrated Commercial Trust’s retail portfolio continued to see a recovery in operating metrics. While rental reversions remained negative overall at -3.2% (based on incoming average rents versus outgoing average rents) in FY21, this was an improvement as compared to 9M21 (-3.8%), while its suburban malls recorded positive rental reversions of 0.2%. The drag was unsurprisingly due to CapitaLand Integrated Commercial Trust’s downtown malls (-7.7%).
Management expects to see further improvement on the rental reversions front in FY22. FY21 tenants’ sales psf was down 0.2% versus FY20, and has recovered to 87.8% of FY19 monthly average levels.
For CapitaLand Integrated Commercial Trust’s office portfolio, occupancy declined 1.1 percentage point to 91.5%, but average rents for its Singapore office assets have trended upwards. Vacancies in its office assets are also being backfilled, with optimism for positive rental reversions in FY22.

CapitaLand Integrated Commercial Trust’s aggregate leverage declined from 40.9% (as at 30 Sep 2021) to 37.2% due to an uplift in its portfolio valuation (all assets saw an increase with the exception of Raffles City Singapore, Gallileo and Clarke Quay) and divestment of its remaining stake in One George Street. However, this is likely to increase to closer to 40% after the completion of three proposed acquisitions in Australia and partially offset by the divestment of JCube (divestment consideration of S$340m was at a 21.9% premium to the average of two independent valuations).
While some investors have given feedback to management that they would have preferred CapitaLand Integrated Commercial Trust to remain Singapore focused, management alluded that being 100% focused on Singapore could stifle its growth potential in the long run. As such it has set a base in Germany (two assets) and has now penetrated into Australia, in particular the Sydney CBD office market.
Management believes the transformation of the Sydney CBD market will be “exciting” in the long run, and it has a 5–10-year horizon on its investments.
After trimming our DPU forecasts slightly, rolling forward our valuations and raising our cost of equity assumption marginally from 6.1% to 6.3% to take into account higher market volatility and increased exposure to overseas markets, our fair value estimate for CapitaLand Integrated Commercial Trust is lowered from S$2.51 to S$2.44.
See

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2022-02-03

SGX Stock Analyst Report BUY MAINTAIN BUY 2.44 DOWN 2.510