Analysts are keeping their outlook for CapitaLand Integrated Commercial Trust (CICT) C38U unchanged after the REIT reported higher gross revenue and net property income (NPI) for the 1QFY2023 ended March 31.
During the quarter, the REIT’s gross revenue rose by 14.4% y-o-y to $388.5 million while NPI rose by 11.3% y-o-y to $276.3 million. The increases were driven by the full quarter contributions from acquisitions that were completed in the 1HFY2022.
The research team at OCBC Investment Research (OIR) has kept its “buy” call as CICT’s business update stood in line with its expectations. The team has also upped its fair value estimate (or target price) to $2.21 from $2.17 previously.
“We see positive signs of recovery from the pandemic, and view CICT as a good proxy to the reopening theme,” the team writes.
In the team’s view, CICT’s results reflected a “solid” set of operating statistics but also saw weaker credit metrics such as its high aggregate leverage ratio of 40.9% (up 0.5 percentage points q-o-q) as at March 31.
However, the team also acknowledges that there are mitigating factors, such as having 77% of CICT’s borrowings hedged. Furthermore, the REIT’s average term to maturity of 4.2 years for its debt is among the longest among the Singapore-listed REITs.
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While CICT’s operating metrics remain firm, the team sees office rental growth as likely to moderate.
In the 1QFY2023, CICT’s overall portfolio occupancy rose 0.4 percentage points q-o-q to 96.2% with broad-based increases across its three business segments, retail, office and integrated development.
To the team, CICT’s Singapore office portfolio, which saw rental reversions at 4.2%, is likely to stay around current levels for the remainder of FY2023. For its overseas office assets, the team notes that CICT’s occupancy declined slightly in Germany (-0.5 percentage points q-o-q to 94.6%), but increased 1.2 percentage points q-o-q to 83.4% in Australia.
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On CICT’s credit metrics, the team notes that every 100 basis point (bps) increase in interest rates is estimated to impact the REIT’s pro forma distribution per unit (DPU) by 0.34 cents, or at 3.1% of its revised FY2023 DPU forecast.
The team has lowered its FY2032 and FY2024 DPU forecasts by 1.7% and 2.1% respectively due to higher borrowing costs assumptions.
Their higher fair value, however, is due to their lower risk-free rate assumption of 3.15% from 3.50% previously.
In environmental, social and governance (ESG), the OIR team notes that the REIT’s ESG rating was upgraded in July 2022.
“CICT scores well in the ‘Opportunities in Green Building’ category. Based on CICT’s disclosures, it is aligned with CapitaLand's commitment to net zero by 2050 and elevating carbon emissions reduction target to 1.5°C scenario,” the team writes.
Citi Research’s Brandon Lee has also kept his “buy” call on CICT with the REIT’s 1QFY2023 business updates illustrating “healthy operational performance across both its Singapore retail and office portfolios”. Lee has kept his target price unchanged at $2.20.
“[This is] evidenced by better q-o-q retail reversion of +6% and stronger office rent growth (vs. 4QFY2022 and [the] market),” Lee writes. “While new office leasing demand and tenant sales’ growth appeared to have slowed q-o-q, we believe this is expected in view of the slower macroeconomic landscape.”
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Like his peers at OIR, Lee points out that the “only blemish” in CICT’s quarterly report is its higher gearing of 40.9% as at end-March.
“[The higher gearing] would cap its ability to grow inorganically and place some form of equity overhang, unless non-core assets (which we think are its German offices, Citadines Raffles Place’s 45% stake and Bukit Panjang Plaza) are being divested, though the near-term urgency may not be there given healthy FY2023 DPU growth of 7%,” says Lee.
“CICT (-1%) has underperformed S-REITs (+3%) year-to-date, but we maintain ‘buy’ on strong FY2023 DPU growth and redevelopment potential,” he adds.
RHB Bank Singapore’s Vijay Natarajan is remaining “neutral” on CICT with an unchanged target price of $2.
The analyst notes the REIT’s “decent quarter” and improved operating metrics, but says that it may face pressure in the 2HFY2023 due to the weakening economic outlook.
“Interest cost pressures should persist, offsetting operational gains. Meanwhile, overall cost pressures have been contained. Weakness is expected from overseas assets. Gearing is on the high side, thereby limiting inorganic growth, but asset divestments at a good premium should be a positive share price catalyst,” he writes.
In ESG, Natarajan notes that CICT has the highest ESG score among the S-REITs at 3.3, three notches above the country median. As such, his target price includes a 6% ESG premium to his intrinsic value.
Units in CICT closed 1 cent higher or 0.48% up at $2.08 on May 5
