• CapitaLand Integrated Commercial Trust's rental reversion for retail turned positive at +0.5% and tenant sales at downtown malls increased 50% y-o-y in 2Q22, driven by the easing of COVID-19-related restrictions in April. Committed occupancy for offices gradually inched higher by 0.5ppt q-o-q to 91.9%.
• The potential acquisition of the Mercatus portfolio would strengthen CapitaLand Integrated Commercial Trust’s defensive posture but requires an equity fund-raising exercise.
• CapitaLand Integrated Commercial Trust provides 2022F distribution yield of 5.3%. Maintain HOLD.

CICT's 1H22 Results

• CapitaLand Integrated Commercial Trust (CICT, SGX:C38U) reported 1H22 DPU of 5.22 cents, up 0.8% y-o-y and in line with our expectations.
• Broad-based recovery. Gross revenue and NPI grew 6.5% and 6.2% y-o-y respectively in 1H22, driven by the acquisitions of a 70% stake in CapitaSky (previously known as 79 Robinson Road) and three properties in Sydney, Australia. Committed portfolio occupancy inched marginally higher by 0.2ppt q-o-q to 93.8% in 2Q22.
• Retail: Gaining momentum with reopening in April. Committed occupancy for the retail portfolio improved marginally by 0.1ppt q-o-q to 96.5% in 2Q22. The retail portfolio suffered mild negative rental reversion of 0.5% in 1H22 (suburban: +1.2% and downtown: -1.9%) based on average incoming rents versus average outgoing rents. The easing of COVID-19- related restrictions generated a turnaround. Rental reversion moved into positive territory of +0.5% in 2Q22 (suburban: +1.4%, downtown: flat). Tenant sales psf also registered strong recovery, increasing 32% y-o-y in 2Q22 (suburban: +17% y-o-y, downtown: +50% y-o-y). Downtown malls benefitted from employees returning to work from their offices and pent-up consumer spending.
• Office: Benefitting from tight vacancy within core CBD. Committed occupancy for the office portfolio gained 0.5ppt q-o-q to 91.9% in 2Q22. CapitaLand Integrated Commercial Trust achieved positive rental reversion of 8.5%, average rent of S$10.53psf/month and retention ratio of 91.4% for its Singapore Office portfolio in 1H22. Occupancy at Raffles City Tower improved 3.3ppt q-o-q to 99.4%. It secured Rakuten Asia as a new tenant at CapitaGreen. CapitaLand Integrated Commercial Trust is in advanced negotiations to finalise a lease agreement with ByteDance to backfill 120,000sf of office space at Capital Tower vacated by JP Morgan. If successfully closed, the new tenant would bring occupancy at Capital Tower back to 94% (Jun 22: 77%).
• Integrated developments: Providing resiliency and diversification. Committed occupancy for integrated developments eased 0.2ppt q-o-q to 97.4% in 2Q22. Occupancy at Raffles City Singapore improved 2.0ppt q-o-q to 99.0%. New tenants at Raffles City Singapore include Paris Baguette and Lululemon following asset enhancement. Occupancy for newly-completed CapitaSpring improved 1.0ppt q-o-q to 99.5%. CapitaLand Integrated Commercial Trust will benefit from higher occupancies at the two hotels at Raffles City Singapore and serviced residence at CapitaSpring. RevPAR has surpassed S$300 and CapitaLand Integrated Commercial Trust will benefit from uplift in variable rents.

Resilient Balance Sheet to Weather External Uncertainties

• CapitaLand Integrated Commercial Trust's aggregate leverage increased 1.5ppt q-o-q to 40.6% in 2Q22 due to completion of the acquisition of 101-103 Miller Street and Greenwood Plaza (50% stake) in Jun 22.
• Cost of debt edged higher by 0.1ppt q-o-q to 2.4%.
• Average term to maturity has extended by 0.5 years to 4.5 years.
• 81% of its borrowings are hedged to fixed interest rates. It has completed refinancing for the S$75m medium term note due in Jul 22.

Triple-play on Reopening in Singapore

• Safe distancing between individuals is no longer required, whether indoors or outdoors since 26 Apr 22. The cap on group size of 10 persons for dining in at F&B establishments was lifted. All employees are allowed back to their workplaces. The substantial easing will improve shopper traffic and tenant sales at CapitaLand Integrated Commercial Trust’s downtown malls and increase physical occupancy at its office buildings.

Acquisition of Mercatus Portfolio a Possibility

• As widely reported in the mass media, CapitaLand Integrated Commercial Trust is bidding to acquire the Mercatus Portfolio, which comprises four suburban malls Nex, AMK Hub, Thomson Plaza (strata title) and Jurong Point (strata title). The portfolio is said to be worth S$4b. CapitaLand Integrated Commercial Trust will explore the best option to finance the acquisition, if successful, including roping in an equity partner.
• In our opinion, an equity fundraising would be required given the scale of the acquisition. The acquisition would strengthen the defensive posture of CapitaLand Integrated Commercial Trust. We expect the properties to be enhanced post acquisition to optimise returns.

AEI for Clarke Quay

• CapitaLand Integrated Commercial Trust has embarked on an asset enhancement initiative (AEI) to transform Clarke Quay from a nightlife attraction into a day-and-night destination. The property would be repositioned to serve the residential population within the vicinity. Facades of the warehouses would be restored to house new concepts in a conservative heritage setting. Alfresco dining areas and community spaces would be refreshed. The revamped property has cooler daytime temperature with an upgraded thermal comfort infrastructure. Pre-commitment and leases in advance negotiation has reached 70% of NLA.

• CapitaLand Integrated Commercial Trust will invest capex of S$62m and the AEI is scheduled for completion in 3Q23.

CapitaLand Integrated Commercial Trust - Earnings Forecast and Recommendation

• We maintain our exiting DPU forecast for CapitaLand Integrated Commercial Trust. Maintain HOLD with unchanged target price based on Dividend Discount Model (cost of equity: 7.0%, terminal growth: 2.0%).

• Catalysts:
  • Uptrend in the office sector. Steady recovery in shopper traffic and tenant sales due to easing of social distancing measures.
  • Asset enhancement and redevelopment of existing properties.

Source: UOB Kay Hian Research - 29 Jul 2022