CapitaLand Integrated Commercial Trust (CICT) is a good proxy to the reopening theme, with both its retail and office assets expected to see a boom this year. With that, analysts are generally keeping a positive stance on the trust, despite the current environment of rising interest rates.
This also comes on the back of CICT announcing its latest FY2022 ended December results, which saw DPU for the year end period come in 1.7% higher y-o-y at 10.58 cents, while the 2HFY2022 period saw DPU gain 2.7% y-o-y to 5.36 cents.
During the 2HFY2022, gross revenue rose by 14.4% y-o-y to $754.1 million mainly due to the contributions from the acquisitions of 66 Goulburn Street, 100 Arthur Street, 50.0% interest in 101-103 Miller Street and Greenwood Plaza in Sydney, Australia. The contribution from the acquisition of CapitaSky in Singapore, as well as higher occupancy, rental rates, as well as higher rental on gross turnover also led to the higher gross revenue. Net property income (NPI) for the 2HFY2022 grew by 13.1% y-o-y to $541.7 million.
For the FY2022, gross revenue grew by 10.5% y-o-y to $1.44 billion while NPI grew by 9.7% y-o-y to $1.04 billion.
The way Citi Research analyst Brandon Lee sees it, the recent results painted the ongoing recover in Singapore’s overall retail sector, as evidenced by CICT’s fourth straight quarter of positive rent reversion, tenants’ sales remaining above pre-Covid and improved occupancy.
While office appears to be slowing down in terms of rent reversions and leasing demand, Lee expects FY2023 reversions to still remain positive given competitive rents of $11.10 psf/month compared to spot of $11.70 pst.
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Overall, CICT has underperformed Singapore REITs (S-REITs), and despite the slight earnings miss, Lee is keeping his “buy” call on CICT and $2.35 target price, in view of decent DPU growth driven by increased income from CapitaSpring and two asset enhancement initiatives (AEIs) in Singapore, continued recovery in the Singapore retail sector and potential redevelopment opportunities.
For CGS-CIMB Research which has also reiterated its “add” call and $2.35 target price, analysts Lock Mun yee and Natalie Ong are upbeat on the trust’s rental reversion gathering upward momentum.
CICT’s rental reversions continued to improve with FY2022 retail rental reversion at +1.2% while office reversion was stronger at +7.6%, spread over 2.5 million sqft of new and renewed retail and office leases signed in FY2022. In terms of operating metrics, retail tenant sales were 22.5% higher y-o-y, led by a 38.1% improvement from downtown malls. Suburban malls achieved 11.5% y-o-y higher tenant sales. CICT continues to see demand from new F&B and fashion offerings.
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Office committed occupancy is at 94.4% at end-FY2022. Leasing enquiries came mainly from financial services, technology, media and telecom (TMT) and energy and commodities sectors. CICT has 17%/22.7% of office and retail leases to be renewed over FY2023-FY2024. The ongoing asset enhancement at Clarke Quay is on track to complete by 3Q2023. CICT has added two new operators to its list of committed tenants at the property.
Meanwhile, gearing dripped slightly to 40.4% with average cost of debt at 2.7%. Management guided that average funding cost could potentially trend up towards the 3% mark in FY2023. CICT has about 12% and 17% of its total debt to be refinanced in FY2023-FY2024.
Management indicated that a 1% rise in its interest cost could impact its DPU by 0.28 cents. With a higher cost of capital, CICT would look to complete ongoing AEIs at Raffles City Singapore as well as at Clarke Quay to boost return to unitholders. It will also continue to be more selective in terms of inorganic growth opportunities.
Similarly, DBS Group Research is keeping its “buy” call on CICT with a higher target price of $2.40 from $2.20 previously. The way analysts Rachel Tan and Derek Tan see it, CICT is the largest integrated commercial S-REIT that rides on the upcycle of the office and retail markets in Singapore. Hence, with its Singapore assets contributing over 90% of its revenue, CICT rides on the stability and resilience of the Singapore economy.
The analysts also like CICT as it is one of the few S-REITs with both organic and inorganic growth opportunities. “CICT is one of the few S-REITs that could still deliver a two-year DPU CAGR of about 4%, despite the cloudy macroeconomic conditions. Aside from organic growth, CICT is one of the few S-REITs with an opportunity to acquire newly completed prime Singapore commercial assets, potentially from its sponsor pipeline,” they say.
Furthermore, China tourists returning to Singapore could mean another boost to growth that could drive the company’s share price performance.
While most research houses are upbeat and bullish on CICT, RHB Group Research has downgraded its call on CICT to “neutral” from “buy” with an unchanged target price of $2.00, as results came in below expectations. While portfolio operating metrics improved in 4QFY2022 and FY2022, growth was comparatively lower compared that of peers.
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“The positive momentum is expected to be maintained in 1HFY2023 before slowing down in 2HFY2023 – but operational gains will be offset by higher interest and inflationary pressures. Valuations are fair – CICT is trading at its book value and offers 5% dividend yields,” says analyst Vijay Natarajan.
Natarajan is also expecting acquisitions to be challenging for CICT as its net gearing is on the high side at 40.4% but there is a possibility of the trust paring down its stake in some office assets or selling smaller malls and increasing its stake in some newer assets.
For OCBC Investment Research, it has kept its “hold” recommendation on CICT with a fair value estimate of $2.17. The research team likes that CICT is the largest S-REIT by market capitalisation and assets in Singapore. It also has a strong sponsor in CapitaLand Investment, and its scale has been significantly enlarged following the completion of the merger with CapitaLand Commercial Trust in October 2020.
“CICT now offers investors diverse exposure to the suburban and downtown retail market and core CBD office sector in Singapore, coupled with a small exposure to Germany, and has recently penetrated the Australian commercial market. We see positive signs of recovery from the pandemic, and view CICT as a good proxy to the reopening theme,” says the research team.
However, its aggregate leverage ratio of 40.4% is slightly on the high side. But the research team has highlighted mitigating factors, such as having 81% of its borrowings hedged and CICT’s average term to maturity for its debt is among the longest in the S-REITs sector.
As at 4.30pm, units in CICT are trading at $2.11.
Photo: CapitaLand Integrated Commercial Trust
