CapitaLand Integrated Commercial Trust 3Q22 - UOB Kay Hian 2022-10-26: Disciplined & Patient Approach To Acquisitions

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CAPITALAND INTEGRATED COMM TR (SGX:C38U)

CapitaLand Integrated Commercial Trust 3Q22 - Disciplined & Patient Approach To Acquisitions

• Downtown malls swung to positive rental reversion of 3.8% in 3Q22. Occupancy for CapitaLand Integrated Commercial Trust’s Singapore office portfolio improved 3.1ppt q-o-q to 96.0%.
• Management will adopt a disciplined and patient approach towards acquisitions, cognisant of difficulties in raising funds through the equity market.
• CapitaLand Integrated Commercial Trust provides an attractive 2023 distribution yield of 6.7%. Upgrade to BUY. Target price: S$2.14.

CapitaLand Integrated Commercial Trust – 3Q22 Business Updates

• CapitaLand Integrated Commercial Trust (SGX:C38U) reported 3Q22 business update with gross revenue and NPI growing 13.7% and 12.7% y-o-y respectively, in line with our expectations.
• Reopening a boon for downtown malls. CapitaLand Integrated Commercial Trust’s retail portfolio recorded positive rental reversion of 0.6% in 9M22 (average incoming vs average outgoing) (1H22: -0.5%). We estimate that rental reversion was positive at 2.9% for suburban malls and 3.8% for downtown malls in 3Q22. Retail occupancy improved slightly by 0.3ppt q-o-q to 96.8%. Downtown malls experienced stronger growth in tenant sales of 36.5% y-o-y (suburban: +10.7% y-o-y) but suburban malls experienced stronger positive rental reversion of 1.8% (downtown malls: -0.3%) during 9M22. Management disclosed that tenant sales for suburban malls are already 5% above pre-pandemic levels, while that of downtown malls are on the verge of climbing above pre-pandemic levels.
• Office maintained positive momentum. CapitaLand Integrated Commercial Trust’s office portfolio registered positive rental reversion of 7.9% in 9M22. Average Singapore office rent was stable at S$10.52psf as of Sep 22. Office occupancy improved 2.2ppt q-o-q to 94.1% on a group-wide basis. Singapore office portfolio saw occupancy improve by 3.1ppt q-o-q to 96.0%. Occupancy at Capital Tower has improved by 13.6ppt q-o-q to 90.7% after CapitaLand Integrated Commercial Trust secured ByteDance to backfill 120,000sf of office space vacated by JPMorgan. Committed office leases will contribute to cash flow starting Jan 23 (after the fit-out period).
• Integrated developments: Providing resiliency and diversification. Committed occupancy for integrated developments was stable at 97.5% in 3Q22. CapitaLand Integrated Commercial Trust will benefit from higher occupancies at the two hotels at Raffles City Singapore and serviced residence at CapitaSpring. Room rates for Swissotel The Stamford and Fairmont Singapore are 2-3x higher than pre-pandemic levels, and CapitaLand Integrated Commercial Trust will benefit from an uplift in variable rents.
• Resilient balance sheet to weather external uncertainties. Aggregate leverage increased slightly by 0.6ppt q-o-q to 41.2% in 3Q22. Cost of debt saw a slight up-tick of 0.1ppt q-o-q to 2.5%. Average term to maturity eased by 0.3 years to 4.1 years. 80% of its borrowings are hedged to fixed interest rates. Management estimated that every 1% increase in interest rates will raise annual interest expense by S$20m and reduce DPU by 0.3 cents per year.
• Coping with higher cost of electricity. CapitaLand Integrated Commercial Trust will be increasing service charges to offset rising costs starting Jan 23.

Reopening positive for both retail and office properties.

• Safe distancing between individuals and the cap on group size of 10 persons for dining in at F&B establishments were lifted on 26 Apr 22. All employees have been allowed back to their workplaces since 26 Apr 22. Wearing of masks is no longer required indoors since 29 Aug 22. Masks are only mandatory at healthcare facilities and public transport.

Retailers operating at full capacity without restrictions.

• Retail sales excluding motor vehicles grew 16.2% y-o-y in Aug 22, the 5th consecutive month of double-digit growth. Leasing activities have picked up in 3Q22, driven primarily by F&B operators, and augmented by online fashion and athleisure retailers.
• According to CBRE, prime retail rents for suburban and Orchard Road have increased 1.8% and 0.7% y-o-y respectively to S$30.50psf/month and S$34.45psf/month in 3Q22. Landlords have gained confidence to raise rents due to improving shopper traffic and tenant sales.

Office recovery has strengthened and broadened.

• According to CBRE, office rents for Grade A core CBD increased 8.9% y-o-y and 2.7% q-o-q to S$11.60psf/month in 3Q22. This is the 6th consecutive quarter of sequential growth, and office rents have surpassed the pre-pandemic peak of S$11.55psf/month set in 4Q19. Net absorption was strong at 0.56m sf. Leasing activities were driven by technology companies, flexible workspace operators and non-bank financial institutions.
• New projects Guoco Midtown and Central Boulevard Towers attracted fresh pre-commitments.

Disciplined and prudent approach to acquisitions.

• As widely reported in the mass media, CapitaLand Integrated Commercial Trust is bidding to acquire the Mercatus Portfolio, which comprises three suburban malls - Nex, Thomson Plaza (strata title) and Jurong Point (strata title). Management did not comment on the outcome of bidding but emphasised that CapitaLand Integrated Commercial Trust will adopt a prudent and patient approach towards acquisitions.
• The cost of capital is elevated given the uncertain macroeconomic environment. CapitaLand Integrated Commercial Trust’s ability to acquire is currently hampered by difficulties in raising funds through the equity market.

CapitaLand Integrated Commercial Trust – Earnings forecast revision and recommendation

• We trimmed our 2022 DPU forecast for CapitaLand Integrated Commercial Trust by 3.5% as new office tenants will only contribute to cash flow starting Jan 23 (after the fit-out period). Our 2023 DPU is marginally reduced by 0.6% to 11.6 cents.
• Upgrade CapitaLand Integrated Commercial Trust to BUY. Our target price of S$2.14 is based on Dividend Discount Model (cost of equity: 7.25%, terminal growth: 2.0%).
• See
  • CapitaLand Integrated Commercial Trust's Share Price,
  • CapitaLand Integrated Commercial Trust's Target Price,
  • CapitaLand Integrated Commercial Trust's Analyst Reports,
  • CapitaLand Integrated Commercial Trust's Dividend History,
  • CapitaLand Integrated Commercial Trust's Announcements,
  • CapitaLand Integrated Commercial Trust's Latest News.
• Catalysts:
  • Steady recovery in shopper traffic and tenant sales due to easing of social distancing measures.
  • Asset enhancement and redevelopment of existing properties.
  • outlook for the office sector with limited supply and healthy pre-commitments within CBD.

Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-10-26

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