• 2H21 DPU -8.9% YoY but FY21 DPU rose 19.7%
• Suburban malls showed firm recovery
• Continued capital recycling activities
2H21 and FY21 results met our expectations – CapitaLand Integrated Commercial Trust (CICT) reported 2H21 gross revenue of SGD659.4m and NPI of SGD478.9m, representing an increase of 54.5% and 61.6% YoY, respectively. DPU fell 8.9% YoY to 5.22 S 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% YoY instead. For the full-year FY21, CICT’s NPI jumped 85.5% to SGD951.1m, while DPU grew 19.7% to 10.40 S 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 SGD27.3m in FY21, versus SGD128.4m in FY20.
Continued recovery in operating metrics – CICT’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 CICT’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 CICT’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.
Portfolio reconstitution via capital recycling – CICT’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 SGD340m 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 CICT 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 is lowered from SGD2.51 to SGD2.44.
ESG Updates
CICT’s ESG rating was downgraded by ESG Research 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, 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)