UOB Kay Hian’s Jonathan Koh has remained optimistic about CapitaLand Integrated Commercial Trust (CICT) despite a “bumpy reopening” for the REIT.
Koh, in an Oct 14 report, kept his “buy” rating but lowered his target price from $2.50 to $2.40.
He notes that CICT weathered a bumpy recovery as Phase 2 (Heightened Alert) was followed by a new wave of Delta variant infections, while downtown malls continued to incur negative rental reversions.
For the office portfolio, Asia Square Tower 2, CapitaGreen and Capital Tower are expected to see transitory vacancies, but CICT benefits from the reopening due to its diversified exposure to retail and office, and its 2022 distribution yield of 5.5% is attractive given its scale and diversification.
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For its retail portfolio, Koh observes that the heightened uncertainty affected rental reversion at downtown malls.
This is partly due to the government selectively tightening safe distancing measures for one month with effect from Sep 27, reducing group size for dining in at F&B outlets from five to two fully vaccinated individuals.
While occupancy has held up well, the prevalence of employees working from home has affected downtown malls, which are expected to continue registering negative rental reversion in the mid-teens during 2HFY2021.
Furthermore, with the news that SMEs who suffered a drop in average monthly revenue of at least 20% are able to claim rental waiver for two weeks of gross rent from their landlords, Koh does not expect the rental waiver granted to be significant.
He notes that CICT has already granted rental waivers of $18.9 million in 1HFY2021, and says that the balance of rental waiver to be incurred in 4QFY2021 is “not expected to be significant.”
For its office portfolio, Koh is of the view that it is more challenging to secure new tenants. While physical occupancy of office space has improved from 21% in July to 37% in early September, it has since eased due to the surge in daily Covid-19 cases.
In addition, the limit on group size of two persons has affected site visits and viewings, and fitting out the offices is also taking longer due to the safe distancing measures and shortage of foreign workers.
This is seen as occupancy in Asia Square Tower 2 (AST2) dropped 10.8% q-o-q to 84.7% in 2QFY2021 as Allianz relocated to 79 Robinson Road. CapitaGreen is expected to see transitory vacancy as it takes a longer time to secure replacement tenants and to complete fitting out, while occupancy at CapitaTower is expected to drop by 22% to 75% when JPMorgan Chase relocates to CapitaSpring in 4QFY2021.
Meanwhile, the upcoming CapitaSpring is already “taken up”, having secured JPMorgan Chase and Sumitomo Mitsui Banking Corporation as anchor tenants. Other tenants include Square Point, The Work Project, Saxo Markets and Red Hat.
635,000 sq ft of office space has received TOP in August, and the rest of the buildings are expected to receive TOP by end-2021. Koh says that management targets pre-commitment of 80-90% by end-2021, and committed leases will start contributing progressively from 1HFY2022.
Separately, Koh sees that ION Orchard could be a prime target for acquisition, saying the 50% stake in ION Orchard is currently valued at S$1.57 billion. “We estimate cap rate at 4.5% and potential contributions to Net Property Income (NPI) at $70.6 million.”
The REIT could also recycle capital by divesting its 50% stake in One George Street (OGS), with Koh viewing it as a “potential candidate for divestment”.
CICT has previously divested a 50% stake in OGS at $591.6 million or $2,654 per sq ft in 2017. The remaining 50% stake is currently valued at $572 million or $2,566 per sq ft with a cap rate at 3.5%.
Koh highlights, “word on the grapevine indicates that CICT intends to divest the property at $2,900 per sq ft, representing an attractive price tag of $646.2 million and cap rate of 3.1%.”
He also highlighted asset enhancement initiatives (AEIs) for Raffles City and Clarke Quay, saying the three floors of retail space at RCS formerly occupied by Robinsons are currently leased to BHG Singapore and Mummy’s Market. CICT plans to reconfigure the three floors into smaller units.
As for Clarke Quay, Koh is of the opinion that the JV between CapitaLand (CICT’s sponsor) and City Developments to redevelop Liang Court will rejuvenate the surrounding area around Clark Quay.
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He says CICT could enhance Clarke by changing the trade mix to complement Liang Court, and serve the residential population within the vicinity. It could also introduce more tenants that operate during the day, a departure from the current orientation towards nightlife.
Koh concludes by saying that CICT is an ideal reopening play, and that it CICT benefits from reopening due to its diversified exposure to retail and office. A share price catalyst can be the recovery in shopper traffic and tenant sales at retail malls, accompanied by progressive easing of safe distancing measures, as well as asset enhancements and redevelopment of existing properties.
As of 4.42 pm, shares of CICT were trading at $2.12, with a FY2021 price to book ratio of 1.1 and dividend yield of 5%.
