• Quality assets expected to pull in demand and keep occupancy high as recovery takes root, amid benign new supply.
• Enlarged portfolio reduces asset concentration risk and enables value creation through AEIs with minimal impact to DPUs, thereby providing stability to portfolio.
• We reinstate coverage post-merger with an ACCUMULATE rating and DDM-based (COE 6.27%) TP of S$2.50. Estimated 4.9% FY21e DPU yields to offer total prospective returns of 16.5%.
• Stock catalysts expected from further AEIs and portfolio reconstitution.

Background

The November 2020 merger of CapitaLand Mall Trust (CMT) and CapitaLand Commercial Trust (CCT SP, delisted) has given birth to Singapore’s largest commercial SREIT with a S$22.3bn portfolio. The new entity has been renamed CICT, from CMT. Its portfolio comprises 11 retail malls, eight offices and five integrated developments. With 96% of its assets located in Singapore, CICT is the largest proxy for Singapore’s commercial market.

Investment thesis

Retail profiting from global recovery and rising purchase triggers. Suburban malls outperformed central malls throughout FY20. Their tenant sales recovered to 101.3% of 4Q19 levels in 4Q20. This came on the back of bigger suburban daytime footfalls owing to hybrid work arrangements and the convenience of food delivery services. CICT’s balanced portfolio of central and suburban malls allows it to take full advantage of tenant stickiness from omnichannel and decentralisation trends. Its network of malls, digital ecosystem and loyalty programmes are expected to support tenants, potentially drawing international brands to the heartlands in their expansion.

Over at its downtown malls, even though tourist spending accounted for 30% of tenant sales, 4Q20 sales in these malls recovered to 83.7% of 4Q19 levels. Central malls are expected to benefit from a return of tourists in 2H21 as global immunisation gains traction, international borders reopen and mobility restrictions on corporate travellers ease. A return of more social events should also spur non-discretionary spending.

Singapore still an office magnet. CICT’s Singapore office presences comes in the form of six office assets and four integrated developments with office components. Its Grade-A assets are well located in the central area. Singapore continues to attract companies into setting up their regional offices here with its pro-business environment, accentuated by its effective handling of the pandemic. Given this, we expect more foreign demand for office space.

Manageable supply. Total retail supply from 2021 to 2023 is expected to average 0.3mn sq ft p.a., significantly lower than its 5-year historical average of 1.4mn sq ft. Average core CBD office supply from 2021 to 2025 of 0.7mn sq ft p.a. is also expected to fall below its 10-year historical average of 1.0mn sq ft. Office demand should [never use “will” unless they are facts, can get you into trouble if it doesn’t come to pass] be further supported by a relocation of tenants from AXA Tower and Fuji Xerox due to their redevelopment. The latter will take 1.2mn sq ft of office space offline between 2021 and 2022. CapitaSpring, in which CICT has a 45% stake, is expected to account for 91% of the new supply in 2021. TOP was received for this asset on 19 January 2021. It has committed occupancy of 38%, with another 22% under advanced lease negotiations.

 Scale and stability from enlarged portfolio. Several AEI projects will be completed in 2H21 and start contributing to earnings in FY21. A S$35mn AEI at Six Battery Road will be completed at end-2021 while WeWork will commence its 7-year lease at 21 Collyer Quay in 4Q21 after a S$45mn AEI. CapitaSpring is expected to be completed in 2H21.

CICT’s enlarged scale after merger should allow it to pursue value creation through AEIs and portfolio reconstitution while maintaining stable portfolio performances. Stability can help CICT secure competitive cost of funds, in our view. In March 2021, CICT issued a S$460mn bond with a 2.1% coupon to replace S$400mn worth of bonds with a blended coupon of 3.07% which matured in February 2021.

Outlook

Retail. Retail and office occupancy remained high at 98.0% and 94.9% respectively as at 31 December 2020. Portfolio WALE by GRI was three years. About 28.8% and 22% of retail and office leases will expire in FY21. FY20 retention rate for its retail portfolio was high at 84.5%, although rental reversions were -6.6%. 4Q20 tenants sales recovered to 94.5% of 4Q19 levels. This should return confidence to retail tenants and support rents and occupancy.

Office. Singapore office retention rate dropped to 63.3% from 82% in FY19. Actual reversions figures were not disclosed but were positive for the year. Reversions in FY21 could be a mixed bag as some passing rents are above 4Q20 market rents. Demand is likely to stem from the technology and financial-service ex-banks sectors for renewal, the relocation of displaced tenants and MNCs setting up regional headquarters in Singapore.

Acquisition potential. CICT is expected to remain a Singapore-focused commercial REIT, with no more than 10% exposure to overseas developed markets. Current exposure is 4%, from its two office assets in Germany. Future overseas acquisitions will likely be sealed in this market as it has established local capabilities.

With 83% of its borrowings on fixed rates, management estimates that a 100bp increase in interest rates will have a -0.2 cent or 1.8% impact on its DPUs. Gearing of 40.6% is higher than historical levels but still well under the 50% regulatory threshold.

Source: Phillip Capital Research - 19 Mar 2021