RHB Group Research analyst Vijay Natarajan has downgraded his recommendation on Capitaland Integrated Commercial Trust (CICT) to “neutral” from “buy” after the Singapore government, on March 24, announced that it will significantly relax its Covid-19 measures.
The relaxed measures will begin this week.
While CICT’s Singapore office and retail portfolio looks to benefit from the relaxed measures, Natarajan sees the REIT nearing its fair value.
As at March 28, the counter is up 15% since January and is trading at 1.1x P/BV with a yield of around 5%.
“The positives are mostly priced in,” the analyst says.
Natarajan’s report on March 28 also comes following the REIT’s acquisition of 79 Robinson Road on March 25.
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On March 25, CICT, together with CapitaLand Open End Real Estate Fund (COREF), acquired the building for a total of $1.26 billion or $2,423 psf.
CICT will acquire 70% in its stake in 79 Robinson Road, while COREF will acquire the remaining 30% balance stake.
The building was acquired from a special purpose vehicle (SPV) held by sponsor CapitaLand Investment (CLI) who owns a 65% stake in the SPV. The remaining 35% in the SPV is held by Mitsui & Co., Ltd. and Tokyo Tatemono Co., Ltd.
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79 Robinson Road is a redevelopment of the former CPF building. The redevelopment was completed in March 2020 with 45 years left on its lease tenure.
To Natarajan, the agreed value of $1.26 billion translates to an initial net property income (NPI) yield of 4%.
According to the analyst, CICT’s acquisition of 79 Robinson Road was “largely anticipated”, although the pricing is slightly on the higher end.
“The acquisition price is 15% higher than Capitaland Investment Ltd’s carrying value of $1.1 billion (as at end-December 2021) and 42% higher than nearby OUE Downtown office’s $1,704 psf (as at end December 2021) which has a similar land lease tenure,” writes Natarajan.
“On the positive side, the asset comes with brand new high specifications and a Building and Construction (BCA) Green Mark Platinum certification (highest green rating). Additionally, there is room for occupancy upside from the current 92.9% with the office sector experiencing a continued positive demand,” the analyst adds.
In addition, 79 Robinson Road comes with a long weighted average lease to expiry (WALE) of 5.8 years and rent step-ups for the majority of leases. The top three tenants which account for around 48% of income are Allianz, Equinix Asia Pacific, and The Boston Consulting Group.
The acquisition of 79 Robinson Road is accretive to CICT’s distribution per unit (DPU) by 2.9% on a pro-forma basis.
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The REIT’s gearing post-acquisition is expected to come in at 41%, with the sum funded by a mix of the divestment proceeds of JCube and debt.
According to Natarajan, this indicates that subsequent acquisitions are likely to come with an equity fund raising.
“Management hinted that its next potential acquisition would be in Singapore and is also based on investor feedback for more Singapore exposure,” says the analyst.
“We believe a likely candidate could be a remaining stake in recently completed CapitaSpring (currently CICT owns a 45% stake). Post-acquisition, Singapore accounts for 92% of its portfolio value with Australia and Germany accounting for 4% each,” he adds.
Factoring in the acquisitions, Natarajan has upped his DPU estimates by 2% - 3% for the FY2022 to FY2024.
"CICT scores high on the environmental, social and government (ESG) front (3.3 out of 4.0), which is derived based on our proprietary in-house methodology and is reflective of its committed efforts to reduce carbon footprint and a good governance. As the score is three notches above country median, we have applied a 6% ESG premium,” he writes.
Despite the recommendation downgrade, Natarajan has upped his target price estimate to $2.35 from $2.20.
Other analysts keep “buy” call
UOB Kay Hian analyst Jonathan Koh has kept his “buy” call on CICT with a higher target price of $2.50 from $2.45 as he sees the acquisition of 79 Robinson Road as a positive development.
He has also raised his DPU forecast for the FY2023 by 2% after factoring in the acquisition, which will up CICT’s assets under management (AUM) by 3.9%.
In his report on March 28, Koh is upbeat on the building’s NPI yield of 4%, which is attractive for Grade A office properties in prime locations.
Furthermore, the property is well located, enjoying close proximity to three MRT stations: Tanjong Pagar on the East West line, as well as the upcoming Prince Edward and Shenton Way stations on the Circle line and Thomson-East Coast line respectively. The building will also enjoy direct underground access to Tanjong Pagar MRT in future.
The building’s diversified blue chip tenant base is yet another positive, with its occupancy at 92.9% as at end December 2021.
Should the REIT prefer to up its stake in the building in future, it has pre-emptive right of first refusal (ROFR) to acquire the remaining 30% stake from COREF.
Following the acquisition, CICT could also acquire future properties in partnership with COREF.
COREF is a regional open-end fund providing long-term strategic exposure to a diversified portfolio of institutional grade income-producing assets in developed markets within the Asia Pacific region. It targets to raise US$1 billion ($1.36 billion) to US$1.5 billion after a three-year build-out period.
Like Natarajan, Koh has also noted that the easing of Covid-19 restrictions will benefit the REIT.
“Groups of up to 10 fully vaccinated persons will be allowed to dine in at food and beverage (F&B) establishments, including hawker centres and coffee shops, compared with the existing limit of five. The current restriction on the sale and consumption of alcohol after 10.30pm will also be lifted. F&B is the largest contributor and accounted for 19.9% of CICT’s gross rental income on a group-wide basis in 2021,” he writes.
To Koh, catalysts to CICT’s share price includes a steady recovery in shopper traffic and tenant sales with progressive easing of social distancing measures, as well as the asset enhancement and redevelopment of the REIT’s existing properties.
Citi Research analyst Brandon Lee has kept “buy” on CICT with a target price of $2.35.
To him, the acquisition came as no surprise, although the stake stood lower than his expectations.
“We thought (and had expected) CICT could easily have digested 100% of 79 Robinson Road given its sizeable balance sheet, and post-acquisition gearing of 42.1% (assuming incremental 30% stake is fully funded by debt) is still manageable,” the analyst writes in his March 26 report.
“Partial equity could also be explored, especially given decent valuation (1.08x P/B) following strong share price performance year-to-date (y-t-d) (+9%), which could still result in [around] 1% DPU accretion on our estimates,” he adds.
“While we think this could stem from gearing concerns, we thought 42% is manageable and a partial equity raising (especially given recent strong share price performance) could help allay leverage concerns,” he continues.
The way Lee sees it, 79 Robinson Road will be sheltered from the upcoming office supply in the central business district (CBD) in 2022 and 2023 given expiries of 0/1.1/1.7/5% in 2022/2023/2024/2025.
“While this also means CICT will not benefit fully from the ongoing office rental upcycle except for the remaining 7.1% vacancy, this is mitigated by rental step-ups for majority of leases. Post-acquisition, we estimate Singapore office will contribute a higher 34/45% (+2/2 percentage points) to CLI’s AUM/NPI,” he says.
“Divesting JCube at below 4% and redeploying proceeds into higher-yielding 79 Robinson Road is a sound portfolio reconstitution strategy,” he adds.
To the analyst, he is also surprised by the 15% increase in the building’s valuation from Dec 31, 2021, to March 1, 2022, although he attributes the valuation to figures from different valuers.
In his report, Lee has identified a sharp decline in economic activity that could result in a reduced demand for retail and office space, as well as a sharp rise in interest rates, as CICT’s key downside risks.
On the other hand, a faster-than-expected recovery in tenants’ sales and shopper traffic after the re-opening, plus higher-than-expected retail rental rates following the asset enhancement initiatives have been identified as re-rating catalysts to CICT’s unit price.
Higher-than-expected office rental rates and stronger-than-expected economic growth are also upside factors identified.
CGS-CIMB Research analysts Lock Mun Yee and Eing Kar Mei have kept their "add" recommendation with an unchanged target price of $2.57 on the back of the acquisition of 79 Robinson Road.
They have also increased their DPU estimates for the FY2022 to FY2024 by 0.03% to 1.44% to factor in the accretive acquisition.
"We believe CICT is well placed to benefit from a macro recovery, given its diversified and stable earnings profile," the analysts write in their March 25 report.
"Re-rating catalysts are more clarity on asset enhancement/redevelopment plans [whereas] downside risks include slower-than-expected portfolio value creation and slower rental recovery outlook," they add.
DBS Group Research analysts Rachel Tan and Derek Tan called the acquisition a "home run" as they kept their "buy" call and target price of $2.50 on CICT.
"With occupancy currently at 92.9% and average rents based on our ballpark estimate of $10.50 psf, we believe CICT could benefit from further upside as the remaining vacancies are leased. Management estimates the asset could yield [around] 4.5% on a normalised state with rent escalation and improvement in occupancy," the analysts write in their March 28 report.
The analysts also see future joint acquisitions with COREF in terms of opportunities that may come up within the Asia Pacific (APAC) region.
CapitaSpring, however, may not be on that list given CICT's call option to acquire its remaining stake in the property.
"The co-investment of CICT and COREF highlights the diverse source of capital that is available for CapitaLand Investment Limited (CLI) to tap to grow its overall funds under management (FUM)," the analysts say. "While there will be questions surrounding overlaps in investment strategies of both CICT and COREF going forward, we see this co-investment as an opportunity to tap on their respective cost of capital to take on significant sized deals without the constraints that CICT may have on its higher cost of equity, which may lower accretion (if CICT taps on the equity market to partly fund this acquisition)."
Looking ahead, CLI has over $10 billion in assets on its balance sheet for recycling, of which $3 billion will be targeted for divestment in 2022.
"Despite its recent foray into Australia, CICT’s management believes there are still potential opportunities in Singapore. Aside from 79 Robinson Road, CICT’s sponsor asset pipeline in Singapore comprises CapitaSpring, ION Orchard and potentially more with ongoing mergers and acquisitions (M&As)," note the DBS analysts.
Maybank Securities analyst Chua Su Tye has kept "buy" on CICT with the same target price of $2.55, as he sees the REIT "buying into an upcycle".
"We are positive on the deal, against a strong office rental upcycle, with contribution from this segment set to rise to 41% (from 38%) of CICT’s enlarged $24.2 billion AUM. We see improving fundamentals, with further acquisition upside, backed by its sponsor’s Singapore pipeline," he writes in his March 27 report.
"Valuations are compelling at 5.2% FY2022 dividend yield and 1.1x P/B vs history and peers," he adds.
The way he sees it, the newly-acquired property is a "quality asset" with resilient tenancies. Its valuation is also "undemanding" at its NPI yield of 4%.
"Management is eyeing a higher 4.5% NPI yield for the asset in the medium term, vs the implied 4% NPI yield from the transaction, by increasing occupancy, and from rental step-ups (at low to mid-single digit p.a.) for the majority of its leases," says Chua.
"We estimate passing rents of $11.50 psf pm reflecting its high-specs offering within the sub-market. The property and Capital Tower, should help CICT anchor a place in the Tanjong Pagar office precinct. We forecast Grade A office rents to rise 7% YoY by end-2022, or 12% over the next two years, with upside from tight supply," he adds.
Following the acquisition, Chua expects CICT's gearing to increase to 41% from 37% previously, with $4.5 billion in debt headroom at a limit of 50%.
"We think management is likely eyeing a larger acquisition in Singapore from its sponsor, which could potentially be timed with an equity fund raising (EFR)," says the analyst.
"Assuming a 60-40 debt-equity funding to acquire Ion for $1.65 billion (50% interest) as of end December 2021 and at a 4.5% cap rate, this could add 1-2% to our FY2022 DPU estimate," he adds.
As at 12.46pm, units in CICT are trading flat at $2.23, or an FY2022 P/B of 1.06x and dividend yield of 5.1%, according to RHB’s estimates.
