Broker's Digest: CapitaLand Integrated Commercial Trust and Manulife US REIT

Analysts from PhillipCapital and UOB Kay Hian are positive about CapitaLand Integrated Commercial Trust’s (CICT) prospects after the REIT posted its business update for the 1QFY2022 ended March.

PhillipCapital analyst Natalie Ong has upgraded her call to “buy” with a higher target price of $2.46 from $2.39.

CICT’s 1QFY2022 revenue and net property income (NPI) at a respective $339.7 million and $248.3 million, stood in line with the analyst’s estimates at 23.7% of her full-year forecasts.

Ong also remains positive on the REIT’s narrowing negative reversions and office reversions at a positive 9.3%.

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On the other hand, the higher electricity costs in the FY2022 are a concern. “Electricity accounts for c.5% of [CICT’s] operating expenses (opex). The impact of rolling onto new electricity contracts at tariffs that are 90% higher y-o-y, will be felt in 1QFY2022 as well as in FY2023 when the fixed contracts expire,” Ong writes in her May 9 report.

Looking ahead, the analyst sees the acquisition of 66 Goldburn Street and 100 Arthur Street in Australia as well as the 70% stake in CapitaSky to feature more prominently from 2QFY2022 onwards. The above acquisitions were completed in March and April respectively.

With these, Ong has raised her DPU estimates for the FY2023 to FY2026 by 3.1% to 3.3% on the back of the 70% acquisition of CapitaSky.

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“CICT is positioned to benefit from the economic reopening given its exposure to downtown malls and returning office leasing demand,” Ong says.

“Catalysts for CICT include asset enhancement initiatives (AEIs), potential development and acquisitions,” she adds.

UOB Kay Hian analyst Jonathan Koh has kept “buy” on CICT with a slightly lower target price of $2.46 from $2.50 previously.

Koh has also trimmed his DPU estimates for FY2023 and FY2024 to factor in the higher cost of electricity.

“CICT has already experienced a 90% increase in [the] cost of electricity during 1QFY2022. Management expects [the] cost of electricity to increase by another 10% in subsequent quarters,” he writes in his May 9 report.

To Koh, the REIT’s suburban mails remained resilient as its retail occupancy stood stable at 96.6% during the 1QFY2022.

The REIT’s transitory vacancies are also being progressively backfilled, which is another positive in Koh’s view.

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To him, the REIT represents a “triple-play” on Singapore’s reopening, especially with the lifting of the Covid-19 measures.

Catalysts to the REIT’s unit price include the recovery in shopper traffic and tenant sales at retail malls. An improvement in physical occupancy at office buildings with the easing of social distancing measures is also another catalyst to the re-rating of CICT’s unit price.

The AEIs as well as the redevelopment of CICT’s existing properties, which the REIT is currently doing for Raffles Shopping Centre and the former Liang Court, is also another catalyst, according to Koh.

DBS notes that ART’s gearing remains healthy at 37.8% with low cost of debt of 1.6%. Its average cost of debt will potentially see an increase of 10–15 basis points in the upcoming refinancing exercise. DBS estimates that every 10 basis points increase in interest rate will trim 0.5% off DPU. — Felicia Tan

Manulife US REIT
Price target:
CGS-CIMB “add” 86 US cents
DBS Group Research “buy” 88 US cents

Tech, healthcare acquisitions likely as Manulife US REIT explores growth

Analysts remain positive about Manulife US REIT (MUST) following a dip in its portfolio occupancy in 1QFY2022 ended March as the REIT explores inorganic growth opportunities this year.

MUST achieved a lower portfolio occupancy q-o-q at 91.6% at end 1QFY2022, compared to 92.3% at end 4QFY2021, due to lower occupancy at Figueroa, Peachtree, Exchange, Centerpointe and Capitol properties but partly offset by improved take-up at Michelson.

Physical occupancy at MUST’s buildings averaged 32%–34% for April and May, up from 25.3% in 1QFY2022. Portfolio weighted average lease expiry stood at five years as at end 1QFY2022.

Balance sheet metrics remained stable q-o-q with gearing at 42.8% and interest cover of 3.4x.

In a May 9 note, CGS-CIMB Research analyst Lock Mun Yee is maintaining “add” on MUST with a lower target price of 86 US cents ($1.20), down from 89 US cents previously. The new target price represents a 43.3% upside.

“We keep our FY2022–2024 DPU estimates unchanged post update. However, we tweak down our target price due to a slightly higher cost of equity assumption of 7.84%, up from 7.58% previously. At a projected FY2022 dividend yield of 9.6%, much of the slower near-term growth has been priced in, in our view,” writes Lock.

In terms of capital management, MUST’s weighted all-in cost of funds stands at 2.86% as at end 1QFY2022. MUST has obtained refinancing commitment for US$207 million of debt maturing in FY2022.

With 86.5% of its debt in fixed-rate loans, MUST indicated that for every 1% increase in funding cost, its DPU would decrease by 0.075 US cents.

“While its near-term focus is on improving leasing and portfolio occupancy, management will continue to explore inorganic growth opportunities and increase its exposure in growth cities or tenants in growth sectors, including exploring portfolio optimisation strategies to enable capital recycling for growth,” says Lock.

Meanwhile, UOB Kay Hian Research analysts Llelleythan Tan and Jonathan Koh have kept “buy” on MUST with an unchanged target price of 80 US cents, lower than that of CGS-CIMB.

With a debt headroom of about US$360 million at 50% gearing, Tan and Koh reckon MUST may add on acquisitions from emerging industries, such as tech and healthcare, as their next focus.

“Improving tenant sentiment was seen as new leases formed 54.0% of leases signed in 1QFY2022. MUST executed about 68,000 sq ft of leases in 1QFY2022, with strong positive rental reversion of +3.9%,” write Tan and Koh in a May 10 note.

Weighted average lease expiry (WALE) remained steady at 5.0 years, slightly down from 5.1 years in 4QFY2021 as 49.4% of leases by net lettable area (NLA) are expiring in 2027 and beyond.

Total expiring leases for 2022 by NLA softened to 6.2% from 8.0% in 4QFY2021.

Two of MUST’s top 10 tenants by gross rental income (GRI) have a lease expiring in 2023, with one tenant intending to vacate by December 2023. However, these leases have rents 9.9% below market rates, indicating possible positive rental reversion.

They add: “Management has already started searching for possible tenants to take up the space after 2023, mitigating any loss in rental income.”

In a May 10 note, DBS Group Research analyst Rachel Tan maintains “buy” on MUST with a target price of 88 US cents.

“MUST is now placed on a better playing field post index inclusion in the FTSE EPRA Nareit Developed Asia Index where it will likely herald a virtuous cycle of greater investor visibility. Following this, we have already seen higher trading liquidity and yield compression for MUST. Given a strong execution and acquisition track record, we believe MUST will continue to command a premium to its peers,” writes Tan. — Jovi Ho