• CapitaLand Integrated Commercial Trust weathered a bumpy recovery as Phase 2 (Heightened Alert) was followed by a new wave of Delta variant infections. Downtown malls continued to incur negative rental reversions. For the office portfolio, AST2, CapitaGreen and Capital Tower are expected to see transitory vacancies.
• Nevertheless, CapitaLand Integrated Commercial Trust benefits from the reopening due to its diversified exposure to retail and office. 2022 distribution yield of 5.5% is attractive given its scale and diversification. Maintain BUY.

Retail: Heightened Uncertainty Affected Rental Reversion at Downtown Malls

• The government has selectively tightened safe distancing measures for one month with effect from 27 Sep 21. Group size for dining in at F&B outlets was reduced from five to two fully vaccinated individuals. Retail sales excluding motor vehicles were flat y-o-y but eased 1.2% m-o-m in Aug 21. Occupancy has held up well but 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 2H21.
• Rental waiver not expected to be significant. 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. CapitaLand Integrated Commercial Trust (CICT, SGX:C38U) has already granted rental waivers of S$18.9m in 1H21. The balance of rental waiver to be incurred in 4Q21 is not expected to be significant.

Office: More Challenging to Secure New Tenants

• Physical occupancy of office space has improved from 21% in July to Beach Road and adjacent to Bugis MRT station has office NLA of 650,000sf and is scheduled to complete by 4Q22. The supply is expected to remain constrained in 2022 due to the potential delay for the completion of Guoco Midtown.

Various Options Within Sponsor Pipeline

• CapitaLand Integrated Commercial Trust’s sponsor pipeline comprises Cartier, Dior, Giorgio Armani and Louis Vuitton. The 50% stake in ION Orchard is currently valued at S$1,569.5m. We estimate cap rate at 4.5% and potential contributions to NPI at S$70.6m.

Recycling Capital by Divesting OGS

• The 50% stake in One George Street (OGS) is at Level 1 &2 and Mummy’s Market (motherhood products at Level3). CapitaLand Integrated Commercial Trust plans to reconfigure the three floors into smaller units.
• The JV between CapitaLand (CapitaLand Integrated Commercial Trust’s sponsor) and City Developments (SGX:C09) to redevelop Liang Court will rejuvenate the surrounding area around Clark Quay (CQ). CapitaLand Integrated Commercial Trust could enhance CQ by changing the trade mix to complement Liang Court. Management could reposition CQ to serve the residential population within the vicinity and introduce more tenants that operate during the day (a departure from the current orientation towards nightlife).

CapitaLand Integrated Commercial Trust (CICT) Is An Ideal Reopening Play

• The government has promised that reopening will resume once the more protracted negative rental reversion for downtown malls in 2H21 and transitory vacancies at AST2, CapitaGreen and Capital Tower in 2H21 and 1H22.
• Maintain BUY rating on CapitaLand Integrated Commercial Trust. Our target price of S$2.40 is based on DDM (cost of equity: 6.0%, terminal growth: 1.2%).
• Catalysts:
  • Gradual but steady recovery in shopper traffic and tenant sales at retail malls, accompanied by progressive easing of safe distancing measures.
  • Asset enhancements and redevelopment of existing properties.

Source: UOB Kay Hian Research - 14 Oct 2021