• Completed divestment of remaining 50% interest in One George Street property
• Maiden entry into Australia with proposed acquisitions of two office properties in Sydney
• Will continue to explore redevelopment and inorganic growth opportunities

Capital recycling in motion; penetration into Australian office market

CapitaLand Integrated Commercial Trust (CICT) has been active on the capital recycling front, having successfully completed the divestment of its remaining 50% interest in the One George Street (OGS) property on 9 Dec 2021. Net proceeds from this divestment came in at SGD344.8m. On a psf basis, this transaction was concluded at a sale consideration of SGD2,875 psf, which was ~9% above the independent valuation of SGD2,636 psf. Management subsequently announced the proposed acquisition of two Grade A office buildings in Sydney. Upon completion (expected in 1Q22), this would mark CICT’s maiden entry into the Australian market. The first property is 66 Goulburn Street, a 24-storey Grade A office building with ancillary retail space and ~95 years remaining on its land lease tenure. Committed occupancy stood at 95.3%, and the agreed property value of AUD300m translates to an implied NPI yield of 5.4% (based on 1H21 annualised NPI including tenant incentives borne by the vendor). The second property is 100 Arthur Street, a freehold 23-storey Grade A office building with ancillary retail space. Current committed occupancy is only at 62.3% due to the departure of two anchor tenants. However, this is mitigated by a rental guarantee of AUD7m offered by the vendor. Including this, the implied NPI yield would be 5.1% based on an agreed property value of AUD372m (3.2% without rental guarantee).

Neutral towards proposed acquisitions

We are neutral towards the proposed acquisitions in Australia, given uncertainties over the Omicron variant, which could delay the return to the workplace by employees. That said, the proposed acquisitions offer annual rental step-ups of 3-4%, which would provide income visibility and some hedge against inflation. We also commend management’s ability to ‘sell high and buy low’, given that the OGS divestment was done at a tight exit yield of 3.2%, while the proposed Australian acquisitions are at implied NPI yields above 5% (notwithstanding the rental guarantee at 100 Arthur Street). To partially fund the acquisitions, CICT closed a private placement exercise to raise SGD250m in gross proceeds (127.6m new units issued at SGD1.96 per new unit). We expect management to continue its lookout for other potential acquisitions and also redevelopment opportunities within its portfolio. After fine-tuning our assumptions, our fair value trickles down from SGD2.53 to SGD2.51.

ESG Updates

CICT’s ESG rating was downgraded in Mar 2021. However, CICT’s rating is still the highest among our S-REITs coverage. The downgrade was driven by corporate governance practices which are weaker than its global peers. Although CICT has a majority independent board, there are two directors serving on multiple boards, which might affect his/her effectiveness in performing fiduciary duties. Furthermore, CICT’s disclosures on its executive pay structure lag its regional peers. On a positive note, there it did not find evidence of CICT initiating any layoffs post the merger between CapitaLand Mall Trust and CapitaLand Commercial Trust. CICT also scores well in the categories of ‘Opportunities in Green Building’ and ‘Health & Safety’, with its portfolio featuring a relatively high proportion of green-certified buildings relative to peers and also having health and safety programmes which are in-line with peers. BUY. (Research Team)