• 1Q21 was first full quarter of contribution from CCT. NPI of S$247.1mn in line, at 24.2% of our FY21e forecast.
• Recovery in tenant sales, shopper traffic, physical occupancy in offices and office leasing enquiries following economic reopening.
• Maintain ACCUMULATE. DDM-based (COE 6.27%) TP raised from S$2.50 to S$2.54. FY21e/22e DPUs increase by 1.3%/2.0% after factoring in lower cost of debt upon refinancing and restructuring of RCS hotel lease. Attractive FY21e DPU yield of 5.1% amid sector headwinds. Stock catalysts expected from further AEIs and portfolio reconstitution.

+ Positives

+ Recovery in NPI. NPI for both retail and office improved to -7% of 1Q20 levels. That for integrated development was still -15%. This compares to 4Q20’s NPI for the retail portfolio, which was -16.7% YoY. NPI was lifted by carpark income as more people visited malls, as well as some seasonality from the turnover rents, which are booked on lagging one-quarter basis and reflect the higher sales during the year-end festive season. The integrated portfolio was weighed down by Raffles City Singapore (RCS). RCS’s NPI was dragged down by the retail occupancy and hotel tenant. Despite occupancy being above 90%, room rates were depressed as two out of three hotel towers are on government contract which carry lower room rates, while the lack of tourist caps room rates for the leisure segment.

+ Downtown malls catching up; tenant sales grew 2.9% YoY. Downtown malls caught up with suburban malls. Their 1Q21 tenant sales improved to -1.2% YoY from -6.3% YoY in 4Q20. Tenant sales in suburban malls grew another 4.3% YoY, following a 1.3% YoY increase in 4Q20. Ten out of 15 trade categories booked YoY growth. Shopper traffic also improved to 75% of 1Q20 levels. Further improvements are expected as more workers flock back to work.

+ Average cost of debt fell QoQ from 2.8% to 2.4% (3Q20: 3.1%). This was due to the refinancing of two long-dated fixed-rate issuance in 1Q21.

– Negatives

– Portfolio occupancy dipped QoQ from 96.4% to 95.9%, weighed down by retail. Occupancy in CICT’s retail portfolio dipped 0.9ppt from 98.0% to 97.1%. RCS’s occupancy declined 5.6ppts to 90.9% after the exit of Robinsons. Clarke Quay’s occupancy also dropped 5.4ppts as nightlife and entertainment leasing still reeled from COVID-19 restrictions. CICT will be conducting feasibility studies to reposition these two assets. 1Q21 office reversions were a mixed bag. FY21 expiring rents of S$10.41 are close to market rents of S$10.40. CICT’s asking rents remain above market rates, although negative reversions are still possible.

– Negative retail rental reversions. No reversion numbers were released but we understand that retail reversions were -5% on average. Downtown reversions were in the negative low teens. Negative reversions were brought about by flexible leasing which involves lower first-year base rents and steeper step-ups in subsequent years. Such leases include a higher variable rent component, which is excluded from reversion calculations. Escalations are calibrated to increase towards pre-pandemic levels, however, this implies the retail portfolio faces a 2-3-year recovery timeline.

– Office tenants still sitting on the fence. Leasing enquiries for expansion and new space have increased by 1.7x since 4Q20. That said, tenants remain unsure and tentative on their future space requirements and configurations. They are swinging back and forth between expansion, downsizing or status quo. Most are also taking a longer time to finalise their stance on remote working and the amount of collaborative space to embed within their space, while weighing other options, including flex-space and relocation.

Outlook

Restructuring of hotel lease and accelerating

CICT restructured its lease with Accor in RCS to give its hotel tenants “some breathing room” on 1 January 2021. The lease term has been extended by five years from 2036 to 2041, with a rent review in January 2027. The fixed component of the rent has been lowered by 11-19% while the variable component has been raised. If the hotel sector recovers to 2019 levels, the rent from Accor could be higher than that collected in 2019. Accor. CICT and Accor previously negotiated a repayment plan Accor’s arrears. It has paid down some of its arrears in ahead of the instalment timeline, reducing CICT’s exposure.

Revisiting asset enhancement plans

With the recovery in its portfolio performance, management can now revisit its enhancement plans for RCS and Clarke Quay. It will explore types of trade for the Level 3 space vacated by Robinsons that can add vibrancy to the mall and complement existing tenants. Plans to reposition Clarke Quay include bringing in tenants that can trade both day and night as opposed to the current predominantly night trade; improving its layout; rebalancing its trade mix to complement the new neighbouring Liang Court; and improving temperature regulation of the asset.

Manageable supply. Retail supply coming onstream 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 be further supported by a relocation of tenants from AXA Tower, Fuji Xerox and Central Mall for their redevelopment. The redevelopment 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. Committed occupancy increased QoQ from 38% to 55%, with another 15% under advanced lease negotiations.

Source: Phillip Capital Research - 30 Apr 2021