1H22 Results Analysis: Going from strength to strength
- 1H22 DPU +1% y-o-y to 5.22 Scts, in line.
- Key Positives: i) strong office reversions and improved retail reversions; ii) vacancies largely backfilled, iii) Clarke Quay AEI will start in 3Q22 to 3Q23 after Raffles City Singapore AEI tapers off.
- Key Negatives: i) tenant sales showed strong improvement but is a little lower compared to peers; ii) Australia assets saw muted occupancy; iii)
- Maintain BUY; TP of S$2.70. Expect more income contribution to come through from 2H2022 onwards.
Key Highlights / Observations
1H22 results were stable; expect more income contributions from 2H22 onwards with the commencement of rent payments from new buildings / backfilled space and tenants start to operate at Raffles City Singapore.
- 1H22 DPU +1% y-o-y to 5.22 Scts, in line.
- Gearing inched up q-o-q to 40.6% from 39.1% post the completion of all the acquisitions. CICT has refinanced the MTN due in Jul22, hence, there will not be any refinancing needs in 2022.
- Average cost of debt inched up 10bps q-o-q to 2.4%. Post refinancing, cost of debt could potentially rise to high 2%.
- We expect 2H22 to be stronger as more rent payments start to commence from office and tenants start to operate at Raffles City Singapore. The actual occupancy as at June 2022 for Asia Square Tower 2 and CapitaSpring stood at 84.4% and 66.5% and would likely head up to its committed occupancy of 98.3% and 99.5% respectively by 4Q2022. The commencement of rent payments for Six Battery Road could be a little slower as AEI is still ongoing. Six Battery Road’s actual occupancy stood at 72% vs committed occupancy of 87.4%
Singapore office assets remained strong and continue to deliver strong positive reversions; Downtown malls has rebounded stronger in 1H22 but a little behind its peers that have recorded above pre-COVID levels.
- Portfolio occupancy inched up marginally by 0.2ppt q-o-q to 93.8% vs 93.6% in 1Q22, mainly from the office sector (+0.5ppt q-o-q). Retail occupancy is relatively stable at 96.5%, Excluding Clarke Quay, which has been affected by the pandemic, occupancy would be 98.4%.
- Newly acquired Australian assets saw a mixed occupancy movement. 66 Goulburn St saw occupancy dropped below 90% to 86% post acquisition but we note 100 Arthur Street’s occupancy improved to 68.8% vs 62.3%, but has sufficient income support that could last for the next 18 months. Management is preparing the assets for catch the higher leasing period in 2H22 that could hopefully drive occupancies up further.
- Vacancies in Singapore assets are largely backfilled; occupancies like to climb up close to 90% by year end. i) About 12% of NLA at Capital Tower is pending full acceptance and another 1.5% under advanced negotiation. Assuming the completion of these leases, occupancy should improve to c.91% from current 77%; ii) Raffles City Singapore: the space undergoing AEI has been 50% backfilled, tenants will start to move in from 3Q2023 with most of them to be operational by year-end before the peak of holiday season; iii) AEI at Six Battery Road is still ongoing but management is confident that occupancy would picked up further to close to 90% by year-end from current 87.4%.
- Strong 1H22 office reversions at 8.5%. though moderated marginally compared to 1Q22 at 9.3%. Management believes that the Singapore office sector remains strong and supply remains supportive of rent growth but caution that rent growth may moderate if potential recession were to kick in.
- Retail reversions have improved q-o-q at -3.2% vs -4.1% in 1Q22. Excluding reversions at Raffles City Singapore which is undergoing AEI and tenant remixing, average rent reversions would be +1.1%. The negative retail rental reversions have narrowed further to -3.2% vs -4.1% in 1Q22. Suburban malls is still at minimal negative reversions at -0.3% vs -0.2% in 1Q22 while Downtown malls saw reversions improved to -5.5% vs -7.1% in 1Q22.
- Strong 2Q22 tenant sales led by improvement at downtown malls. 1H22 tenant sales jumped 15.9% y-o-y vs +0.6% y-o-y in 1Q22. Compared to pre-COVID levels, suburban tenant sales is 5% above but downtown is still 5% below. Overall, we estimate that tenant sales is close to pre-COVID levels.
- CICT revealed the Clarke Quay AEI with an estimated S$62m of cost on mid-single digit ROI. AEI will take place from 3Q2022 and expected to complete by 3Q2023. We believe this is quite timely as the AEI of Raffles City Singapore will be completing with most of the tenants will be operational by year-end before the peak period.
- May look to pass through some higher utility costs via service charges on new leases. CICT incurred S$7.2m (4.4% y-o-y) higher utility costs in 1H2022. Management expect the cost could increase a little more c.5% y-o-y in 2H2022. Management are actively managing energy efficiency efforts at their properties and may explore to pass through some of these costs via higher service charges especially on new leases.
- Acquisitions – CICT continue to explore acquisition / divestment opportunities and may consider various structures for potential acquisitions that might look interesting. According to news report, CICT could be interested in the Mercatus retail portfolio that is up for sale.