1H22: Growing In Scale And Resiliency
Rental reversion for retail turned positive at +0.5% and tenant sales at downtown malls increased 50% yoy in 2Q22, driven by the easing of COVID-19-related restrictions in April. Committed occupancy for offices gradually inched higher by 0.5ppt qoq to 91.9%. The potential acquisition of the Mercatus portfolio would strengthen CICT’s defensive posture but requires an equity fund-raising exercise. CICT provides 2022F distribution yield of 5.3%. Maintain HOLD. Target price: S$2.34.
RESULTS
• CapitaLand Integrated Commercial Trust (CICT) reported 1H22 DPU of 5.22 S cents, up 0.8% yoy and in line with our expectations.
• Broad-based recovery. Gross revenue and NPI grew 6.5% and 6.2% yoy respectively in 1H22, driven by the acquisitions of a 70% stake in CapitaSky (previously known as 79 Robinson Road) and three properties in Sydney, Australia. Committed portfolio occupancy inched marginally higher by 0.2ppt qoq to 93.8% in 2Q22.
• Retail: Gaining momentum with reopening in April. Committed occupancy for the retail portfolio improved marginally by 0.1ppt qoq to 96.5% in 2Q22. The retail portfolio suffered mild negative rental reversion of 0.5% in 1H22 (suburban: +1.2% and downtown: -1.9%) based on average incoming rents versus average outgoing rents. The easing of COVID-19- related restrictions generated a turnaround. Rental reversion moved into positive territory of +0.5% in 2Q22 (suburban: +1.4%, downtown: flat). Tenant sales psf also registered strong recovery, increasing 32% yoy in 2Q22 (suburban: +17% yoy, downtown: +50% yoy). Downtown malls benefitted from employees returning to work from their offices and pent-up consumer spending.
• Office: Benefitting from tight vacancy within core CBD. Committed occupancy for the office portfolio gained 0.5ppt qoq to 91.9% in 2Q22. CICT achieved positive rental reversion of 8.5%, average rent of S$10.53psf/month and retention ratio of 91.4% for its Singapore Office portfolio in 1H22. Occupancy at Raffles City Tower improved 3.3ppt qoq to 99.4%. It secured Rakuten Asia as a new tenant at CapitaGreen. CICT is in advanced negotiations to finalise a lease agreement with ByteDance to backfill 120,000sf of office space at Capital Tower vacated by JPMorgan. If successfully closed, the new tenant would bring occupancy at Capital Tower back to 94% (Jun 22: 77%).
• Integrated developments: Providing resiliency and diversification. Committed
occupancy for integrated developments eased 0.2ppt qoq to 97.4% in 2Q22. Occupancy at
Raffles City Singapore improved 2.0ppt qoq to 99.0%. New tenants at Raffles City
Singapore include Paris Baguette and Lululemon following asset enhancement. Occupancy
for newly-completed CapitaSpring improved 1.0ppt qoq to 99.5%. CICT will benefit from
higher occupancies at the two hotels at Raffles City Singapore and serviced residence at
CapitaSpring. RevPAR has surpassed S$300 and CICT will benefit from uplift in variable
rents.
• Resilient balance sheet to weather external uncertainties. Aggregate leverage increased
1.5ppt qoq to 40.6% in 2Q22 due to completion of the acquisition of 101-103 Miller Street
and Greenwood Plaza (50% stake) in Jun 22. Cost of debt edged higher by 0.1ppt qoq to
2.4%. Average term to maturity has extended by 0.5 years to 4.5 years. 81% of its
borrowings are hedged to fixed interest rates. It has completed refinancing for the S$75m
medium term note due in Jul 22.
STOCK IMPACT
• Triple-play on reopening in Singapore. Safe distancing between individuals is no longer
required, whether indoors or outdoors since 26 Apr 22. The cap on group size of 10 persons
for dining in at F&B establishments was lifted. All employees are allowed back to their
workplaces. The substantial easing will improve shopper traffic and tenant sales at CICT’s
downtown malls and increase physical occupancy at its office buildings.
• Acquisition of Mercatus Portfolio a possibility. As widely reported in the mass media,
CICT is bidding to acquire the Mercatus Portfolio, which comprises four suburban malls Nex,
AMK Hub, Thomson Plaza (strata title) and Jurong Point (strata title). The portfolio is said to
be worth S$4b. CICT will explore the best option to finance the acquisition, if successful,
including roping in an equity partner. In our opinion, an equity fundraising would be required
given the scale of the acquisition. The acquisition would strengthen the defensive posture of
CICT. We expect the properties to be enhanced post acquisition to optimise returns.
• AEI for Clarke Quay. CICT has embarked on an asset enhancement initiative (AEI) to
transform Clarke Quay from a nightlife attraction into a day-and-night destination. The
property would be repositioned to serve the residential population within the vicinity.
Facades of the warehouses would be restored to house new concepts in a conservative
heritage setting. Alfresco dining areas and community spaces would be refreshed. The
revamped property has cooler daytime temperature with an upgraded thermal comfort
infrastructure. Pre-commitment and leases in advance negotiation has reached 70% of NLA.
CICT will invest capex of S$62m and the AEI is scheduled for completion in 3Q23.
EARNINGS REVISION/RISK
• We maintain our exiting DPU forecast.
VALUATION/RECOMMENDATION
• Maintain HOLD. Our target price of S$2.34 is based on Dividend Discount Model (cost of equity: 7.0%, terminal growth: 2.0%).
SHARE PRICE CATALYST
• Uptrend in the office sector. Steady recovery in shopper traffic and tenant sales due to easing of social distancing measures.
• Asset enhancement and redevelopment of existing properties.
