Larger REIT Set for Growth

• CapitaLand Integrated Commercial Trust (SGX:C38U)’s 4Q20 revenue and NPI rose 36.0% y-o-y and 36.4% y-o-y, after the CCT-CMT merger exercise while FY20 distribution per unit fell 27.4% y-o-y, marginally below ours’ and street’s estimates.
• CapitaLand Integrated Commercial Trust has emerged as Singapore’s largest REIT and among Asia’s largest with a S$22.3b AUM across 24 retail, office and integrated development assets. Valuations are undemanding vs history and peers at 4.7% FY21 dividend yield and 1.1x FY21E P/B.
• Maintain BUY on CapitaLand Integrated Commercial Trust. We see near-term catalyst from distribution recovery in 2021 and medium-term earnings upside as it leverages added development capacities into value-accretive AEIs and redevelopment opportunities.

Retail Negative Reversions to Moderate

• CapitaLand Integrated Commercial Trust's retail occupancy stayed at 98.0% at end-Dec 2020, with rental reversion at -6.6%, versus -4.4% at 3Q20, while FY20 reversions ranged from -2.5% (for IMM) to -22.2% (Raffles City). Footfall continued to improve in 4Q20 to 67.9% of pre-COVID levels while tenant sales rose to 94.5% (101.3% for suburban, 83.7% for downtown malls). This was driven by home furnishing (+27.8% y-o-y), jewellery & watches (+12.9% y-o-y) and books & stationary (+10.8% y-o-y).
• We expect negative reversions to moderate with easing in social-distancing measures, and as retail recovery gains traction. The rent-relief cycle seen in 3Q20 has peaked, with tenant expansion in 2021-22.

Office NPI Supported by AEIs, CapitaSpring

• CapitaLand Integrated Commercial Trust's office occupancy dipped q-o-q to 94.9% from 95.2% and this fell in SG from 95.5% to 95.1%. Grade A office rents fell 4% q-o-q to S$10.40 psfpm, in line with our estimates. In 4Q20, 167k sf was leased with new demand primarily from financial services (86%).
• We see higher vacancies in 2021 but NPI growth will be supported by the commencement of its WeWork lease at 21 Collyer Quay in 4Q21, rising occupancy at 6 Battery Road and improving earnings from CapitaSpring from 2022. The latter’s pre-commitment has risen q-o-q to 38.0% from 34.9% and should climb to 60% upon completion.

Upside From Higher Development Headroom

• CapitaLand Integrated Commercial Trust's portfolio values, supported by stable cap rates were unchanged h-o-h. We expect CapitaLand Integrated Commercial Trust to scale up on its enlarged asset base, supported by low 40.6% gearing and S$1.4-3.8b debt headroom (45-50% limit).
• CapitaLand Integrated Commercial Trust's sponsor offers a S$5.2b acquisition pipeline but we think management will likely prioritise its value-accretive AEIs and redevelopment plans with the higher S$5.8b development headroom and view its less resilient downtown malls - Raffles City, Clarke Quay and Plaza Singapura as key candidates.

Source: Maybank Kim Eng Research - 21 Jan 2021