Bumpy Recovery But Reopening Likely To Resume

CICT weathered a bumpy recovery as Phase 2 (Heightened Alert) was followed by a new wave of Delta variant infections. Downtown malls continued to incur negative rental reversions. For the office portfolio, AST2, CapitaGreen and Capital Tower are expected to see transitory vacancies. Nevertheless, CICT benefits from the reopening due to its diversified exposure to retail and office. 2022 distribution yield of 5.5% is attractive given its scale and diversification. Maintain BUY. Target price: S$2.40.

WHAT’S NEW

Retail: Heightened uncertainty affected rental reversion at downtown malls. The government has selectively tightened safe distancing measures for one month with effect from 27 Sep 21. Group size for dining in at F&B outlets was reduced from five to two fully vaccinated individuals. Retail sales excluding motor vehicles were flat yoy but eased 1.2% mom in Aug 21. Occupancy has held up well but the prevalence of employees working from home has affected downtown malls, which are expected to continue registering negative rental reversion in the mid-teens during 2H21.

Rental waiver not expected to be significant. SMEs who suffered a drop in average monthly revenue of at least 20% are able to claim rental waiver for two weeks of gross rent from their landlords. CapitaLand Integrated Commercial Trust (CICT) has already granted rental waivers of S$18.9m in 1H21. The balance of rental waiver to be incurred in 4Q21 is not expected to be significant.

Office: more challenging to secure new tenants. Physical occupancy of office space has improved from 21% in July to 37% in early September. However, physical occupancy has eased due to the surge in daily cases of COVID-19 infections since September. The limit on group size of two persons has affected site visits and viewings. Fitting out the offices is also taking longer due to the safe distancing measures and shortage of foreign workers. Thus, it is more difficult and time-consuming to secure new tenants.

Bouts of transitory vacancies. Occupancy at Asia Square Tower 2 (AST2) dropped 10.8ppt qoq to 84.7% in 2Q21 as Allianz relocated to 79 Robinson Road. CapitaGreen is expected to see transitory vacancy as it takes a longer time to secure replacement tenants and to complete fitting out. Occupancy at CapitaTower is expected to drop by 22ppt to 75% when JPMorgan Chase relocates to CapitaSpring in 4Q21.

CapitaSpring is well taken-up. CapitaSpring has secured JPMorgan Chase and Sumitomo Mitsui Banking Corporation as anchor tenants. Other tenants include Square Point, The Work Project, Saxo Markets and Red Hat. 635,000sf of office space at levels 21 to 49 has received TOP in Aug 21 and the rest of the buildings are expected to receive TOP by end-21. Management targets pre-commitment of 80-90% by end-21. Committed leases will start contributing progressively from 1H22.