• Keep BUY and SGD2.20 TP (19% upside), c.6% yield. CapitaLand Integrated Commercial Trust posted a resilient 1Q24 operational performance. Office double-digit rent reversions slightly surprised on the upside and management upped its rent reversion expectations for office and retail portfolio to high-single digits (from mid-single digits) on the back of healthy demand. Overall portfolio occupancy is expected to remain stable. Asset recycling is a likely catalyst with the REIT trading at below book (0.9x P/B).

• 1Q24 NPI rose 6.3% YoY, backed by 2.6% revenue growth, with the office segment showing the highest YoY NPI growth. NPI margin for the quarter rose c.2.5ppts to 74%, which management attributed to lower utility costs, cost savings from a new property management agreement, and other expenses. All in, financing cost rose 10bps QoQ to 3.5% and is expected to increase by another 20-30bps for the full year. CICT’s distribution reinvestment plan (2H23) saw a healthy take-up, with its sponsor lending support, resulting in 59.8m new units being issued – this should bring gearing to manageable levels (c.39%). Asset divestments are therefore likely to be more opportunistic, with management still looking to monetise some assets by the end of the year.

• European Central Bank (ECB) to anchor Gallileo post the ongoing comprehensive upgradation of the asset at an estimated capex of EUR180m. ECB has signed a 10-year lease and will occupy 93% of total NLA. Management guided healthy double-digit rent reversion for the new leases. Rental income from the asset is expected to progressively kick-in from 2H25 onwards. Overall, we see this deal as a positive one, which should result in a good valuation uplift for the asset during the year-end revaluation.

• Stronger Singapore portfolio rent reversions expected with management highlighting healthy demand for both the office and retail segments on the back of healthy economic recovery. Office rent reversions came in much stronger at +14% for the quarter, while occupancy dipped slightly due to the exit of a tenant at CapitaGreen, for which CICT is in active discussions. The retail portfolio saw a slight uptick in occupancy, with healthy 7% rent reversions across its suburban and downtown malls, supported by an increase in tenant sales and shopper traffic.

• No changes to estimates. CICT’s latest sustainability report shows steady incremental progress towards its 2030 sustainability masterplan goals. The REIT’s ESG score of 3.4 (out of 4.0) is above the country median score – we have applied a 6% ESG premium to reflect this.

Source: RHB Research - 22 Apr 2024