Retail and office REIT in CapitaLand Integrated Commercial Trust (SGX:C38U), or CICT for short, held its annual general meeting (AGM) for the financial year ended 31 December 2021 (i.e. FY2021) earlier this afternoon, which I’ve attended as a unitholder to learn about the latest updates from the management.

Due to the current safe management measures in place, this year’s meeting was held online one again, and in this meeting (which lasted about an hour), quite a number of questions were asked by fellow attendees (you can read about them, along with the management’s response, in the later part of this post.) Additionally, you’ll also read about a summary of the presentation by CEO Tony Tan where he shared about highlights of CICT’s FY2021 performance, updates about the REIT’s developments (acquisitions and asset enhancement initiatives), as well as outlook ahead, and finally, the results of 4 resolutions put to vote during the meeting.

Let’s begin:

Presentation by CEO Tony Tan

FY2021 Financial Performance Highlight:

• 2021 was both a challenging and eventful year for the REIT. Despite challenges posed by Covid-19, its gross revenue and net property income climbed to S$1,305.1m (FY2021: S$745.2m) and S$951.1m (FY2021: S$512.7m) respectively, contributed by an enlarged portfolio (following the REIT’s merger with CapitaLand Commercial Trust), 100.0% contribution from Raffles City Singapore, and lesser reliefs granted in the financial year under review.
• Accordingly, its distributable income was also up to S$674.7m (FY2021: S$369.4m), with its distribution per unit improving to 10.40 cents (FY2021: 8.69 cents.) Moving forward, Mr Tan said the REIT remains committed to maintaining a stable distribution and sustainable return to its unitholders.
• Further elaborating on the REIT’s total gross revenue of S$1,305.1m, Mr Tan said it came from a diversified revenue stream (32.2% from Singapore’s suburban retail malls, 26.0% from Singapore’s suburban retail malls, 25.4% from Singapore’s CBD offices, 6.4% from other Singapore offices, 5.7% from Singapore’s hotels and convention centre, and 4.3% from Germany’s offices), and this provided stability to its income.
• On the REIT’s overall portfolio occupancy profile, its occupancy rate is at 93.9% (with vacant spaces progressively filling up ahead), with a WALE of 3.2 years. In terms of tenant contribution, Mr Tan shared that no single tenant contributed more than 5.0% (towards the REIT’s total gross revenue), with the top 10 tenants contributing 21.1%.
• As far as the REIT’s capital management is concerned, its aggregate leverage as at 31 December 2021 was 37.2%, with 83%% of the borrowings on fixed interest rate, and average cost of debt at 2.3%. Mr Tan added that the REIT have already secured funding sources to refinance all its debt (of S$1,099m) due in FY2022. He assured unitholders that the REIT will continue to be prudent and proactive in maintaining cost and capital.

Key Development Highlights:

• CapitaSpring (a 51-storey integrated development) achieved TOP in November 2021, with occupancy at 93.0% (as at 9 February 2022.) Mr Tan added that a hawker centre just opened on 1 April 2022 with more than 50 stalls, and that it’s crowded at lunchtimes.
• Asset Enhancement Initiative (AEI) works in Lot One Shoppers’ Mall (with the cinema shifting direction and improvements in its frontage, and revamped library spreads), 21 Collyer Quay (with TOP obtained in October 2021, WeWork’s 7-year lease commenced in December 2021, rent payment expected in Q2 FY2022, and opening in Q3 FY2022), as well as in Six Battery Road (TOP obtained in February 2022; committed retail units to open progressively at Level 1 podium block, with upgrade works in the upper floors to continue ahead.)
• AEI works in Raffles City Singapore commenced in January 2022 (with completion in Q4 FY2022) to reconfigure around 111,000 sq ft of retail space to accommodate more specialty retail and large format stores, along with a new set of escalators to improve the vertical connectivity of the 3 levels.
• Divestment of its 50.0% interest in One George Street at a 3.17% exit yield, with the funds going into the proposed acquisition of 2 office properties (66 Goulburn Street and 100 Arthur Street, completed on 24 March) and one integrated development (a 50% interest at 101-103 Miller Street, which will be completed in the later part of Q2 FY2022) in Australia (which is also the REIT’s first foray into the country) at a Net Property Income (NPI) yield of 5.1%.
• Divestment of Jcube on 10 March 2022, with the funds recycled to the proposed acquisition of 70.0% interest in 79 Robinson Road at a NPI yield of 4.0%, with completion expected to be completed in Q2 FY2022 – Mr Tan explained that this is in-line with the REIT’s portfolio reconstitution strategy, and that the acquisition will allow the REIT to have a presence in the Tanjong Pagar area, which is undergoing rejuvenation currently.

ESG Highlights:

• All of CICT’s properties have green ratings, with half of them achieving the highest rating.
• Mr Tan also updated that a new Board Composition, Independence, and New Committee has been formed with 8 board members, and the REIT is advancing towards its 2030 targets. He added that the REIT remains committed to create an inclusive, safe and positive environment for their stakeholders.

Outlook Ahead:

• Mr Tan is of the opinion that the further relaxation of the safe management measures (with group sizes increased to 10, 75% of the employees able to return to their workplaces, resumption of activities and events at mall atriums, full reopening of all nightlight businesses in Singapore, and reopening of borders to all vaccinated travellers) will bode well for the REIT’s malls, especially the F&B outlets.

Responses to Questions by AGM Attendees:

Question: Beyond Singapore, are there any geographical locations which CICT is looking to expand into apart from Germany and Australia?

Response: CICT’s strategy is to invest predominantly in the Singapore market, with about 20% exposure out of it. In the near- to mid-term, Mr Tan said that the REIT will remain focused on the 3 markets, as there exists quite a fair bit of opportunities.

Question: What is the selection criteria when it comes to acquisitions?

Response: Mr Tan shared that among the criteria for selection include DPU accretion, growth potential in the market (if the property is located outside Singapore), rental sustainability, whether or not is the REIT riding on the right market cycle and if there is a clear path forward with the acquisition.

Apart from that, the REIT also need to consider how will the acquisition be funded – be it through proceeds from divestment, from the capital market, etc.

Question: Are there more divestment announcements coming up?

Response: Mr Tan said that divestments are always part of the REIT’s overall strategy. But he explained that prior to making any decisions, the REIT will have to first look at the asset in question and evaluate whether or not there are any further development potential (for the property in question), and also whether or not it makes any business sense to do so (be it re-development or divestment.)

Additionally, Mr Tan shared that the REIT will have to study how to recycle the capital returned.

Question: When will the rental reversion of downtown malls return to pre-Covid levels, given that suburban malls are recording a better performance currently?

Response: Right now, with Singapore going through a phased reopening, Mr Tan is of the opinion that downtown malls will benefit from the Singapore government’s latest announcement of the safe management measures (particularly with bigger group sizes, and more people allowed to return to their workplaces.) He added that in time to come, there may be a gradual shift in that the downtown malls will once again start to outperform the suburban malls.

As to the question on whether or not a better performance in its downtown malls will equate to better rental reversions, Mr Tan explained that the REIT will need to work with the tenants on this so as to achieve a “win-win” situation for both parties.

Question: With an expected recovery in the downtown malls with the reopening, how will suburban malls be affected.

Response: Mr Tan is of the opinion while some of the suburban malls may weaken slightly, but on the whole, they will continue to remain resilient. He cited the example of IMM – where its performance have continued to remain very strong through the years (in the years before, as well as throughout the entire period of the pandemic.)

Question: Are there more acquisition plans in the pipeline?

Response: Mr Tan responded that refreshing the REIT’s portfolio is always part of the REIT’s overall plan. He highlighted that thanks to their Sponsor, there is a pipeline of right of first refusal properties to be considered. He also shared that the REIT is also open to acquiring properties from third parties.

Question: Will “Working from Home” pose a challenge to CICT’s overall business?

Response: Mr Tan is positive on the rental demand of office properties in Singapore, due to the country standing out very positive in terms of political stability, and also its response to the recent Covid-19 pandemic.

He shared that while some companies have downsized their physical presence due to flexi-working, other companies quickly come in to rent the vacated space.

Question: What led to the potential doubling of energy rate in its upcoming contract?

Response: Mr Tan explained this was due to the REIT previously hedging its tariff expenses back when it was an absolute low, coupled with the current accelerated increase in tariffs, leading to such a scenario (of a potential doubling of rates.)

He added that the REIT will be looking at its energy consumption, and be agile in managing it – which is also part of their sustainability agenda.

Question: What is the average cost of debt, and to what extent will it increase with the upcoming interest rate hikes?

Response: Currently, the average cost of debt is at 2.3%, with 83% of their borrowings hedged at fixed rates. With the upcoming interest rate hikes, CFO Ms Wong Mei Lian is of the opinion that the REIT’s cost of debt will trend up slightly.

She also added that every 0.1% increase in interest rate would result in S$1.48m of estimated additional annual interest expenses.

Question: With Singapore being a small country, coupled with CICT’s strategy of having a 80.0% exposure in the country, will the REIT’s growth potential ahead be limited?

Response: Mr Tan said that no doubt Singapore is a small country, but it is progressively growing.

In terms of growth of the REIT, he pointed out that some of the properties have re-development potential, which can be considered (however, he noted that every re-development, such as that of CapitaSpring and Funan, takes between 5-7 years, and with that, there’s a potential loss in revenue during the period to take into account.)

Apart from re-development of existing properties, Mr Tan shared that there are also properties in Singapore from its Sponsor to which the REIT has right of first refusal to, which can be considered as well.

He also clarified that while the current exposure of properties out of Singapore is set at about 20%, but this can be tweaked based on opportunities available.

Question: Apart from AEI, what are the other ways the REIT have used to drive traffic to its malls.

Response: Mr Tan opinied that the recent announcement of safe management measures, along with the reopening of borders to all vaccinated travellers, will definitely see its malls’ human traffic improve.

Apart from that, the REIT also looks at driving traffic to its properties on a “cluster level.” He cited the example of Funan where, upon its re-opening (after its re-development), the increase in traffic can also be seen in Raffles City Mall, which is a stone throw away. He said another “cluster level” can also be seen in its Plaza Singapura, Bugis Junction, and Bugis+ malls.

Question: How is CICT embracing digitalisation to provide value to its shoppers and also drive sales to its malls?

Response: Mr Tan shared the CapitaStar app have evolved to adopt to differing shoppers’ needs. He also highlighted the introduction of eCapitaVoucher, which has lots of potential to drive more human traffic, and sales into its malls.

Question: What is the future plan of IMM, considering the property has a remaining leasehold of 27 years.

Response: Mr Tan shared that the REIT had enhancement plans for the mall back in 2020, but it had to be delayed due to the Covid-19 pandemic. That said, plans are currently in place once again, which will be implemented over the next 1-2 years.

He also added that there are plans to expand the mall’s outlet concept (where the REIT intends to tap on the advantage of the mall being the biggest outlet mall in Singapore) with details to be announced once they are being firmed up.

Results of Resolutions Put to Vote during the AGM

• Resolution #1, which is to receive and adopt the Trustee’s Report, the Manager’s Statement, the Audited Financial Statement of CICT for the financial year ended 31 December 2021 and the Auditor’s Report thereon, was passed with 99.87% of the votes for, and 0.13% of the votes against.
• Resolution #2, which is to re-appoint KPMG LLP as Auditors of CICT and authorise the Manager to fix the Auditor’s renumeration, was passed with 94.51% of the votes for, and 5.49% of the votes against.
• Resolution #3, which is to authorise the Manager to issue Units and to make or grant convertible instruments, was passed with 90.81% of the votes for, and 9.19% of the votes against.
• Resolution #4, which is to approve the renewal of the Unit Buy-Back Mandate, was passed with 99.98% of the votes for, and 0.02% of the votes against.

Disclaimer: At the time of writing, I am a unitholder of CapitaLand Integrated Commercial Trust.