Company Reports

We retain our SGD 2.32 per unit fair value estimate following CapitaLand Integrated Commercial Trust’s in-line first-quarter 2024 business update. Based on the current price, we think the trust is undervalued and continue to like it for its portfolio of high-quality office and retail properties in Singapore.

Narrow-moat CapitaLand Integrated Commercial Trust’s second-half 2023 net property income improved 4% year on year, driven by higher contributions from its office assets and organic rental growth across its properties. Overall, the results were in line with our expectations, and we retain our SGD 2.32 fair value estimate after rolling our model and updating our assumptions. We think the trust is currently undervalued and continue to like it for its diversified portfolio of high-quality office and retail assets. The trust lowered its gearing to 39.9% at the end of 2023 after staying above 40% for the last few quarters. CICT intends to bring the gearing down further to save on interest expenses. We think the trust’s pipeline of asset-enhancement initiatives, or AEIs, at the IMM and Gallileo buildings may push its gearing back above 40% in the near term. We believe this could be offset by potential asset divestment.

CapitaLand Integrated Commercial Trust owns a portfolio of income-producing office and retail assets that are predominantly in Singapore; assets in Germany and Australia make up less than 10% of its portfolio.

We retained our fair value estimate of SGD 2.32 per unit for CapitaLand Integrated Commercial Trust, or CICT, after the in-line third-quarter 2023 business update. The trust's cumulative nine months' revenue and net property income grew 9.8% and 6.8% year on year, respectively, to SGD 1,166 million and SGD 827 million. This made up 75% and 74% of our full-year estimates, respectively. The slight miss on net property income is due to cost inflation pressure on its operating expense, and management expects net property income margin to improve as it focuses on cost management in the coming months. Following the recent selloff of CICT's units, we think the trust is currently undervalued and trades at an attractive 2024 dividend yield of 6.5%.

Sabana REIT’s unitholders have voted to remove ESR Group as its manager and internalize the REIT management function. This move is unprecedented in Singapore, but we think it has positive implications for the industry. This event occurred because activist investor Quarz Capital led the push. As ESR Group holds around 21% of Sabana REIT compared with Quarz Capital’s 14%, ESR Group only held a slight advantage going into the vote. Ultimately, we think ESR Group lost the vote because of concerns about potential conflicts of interest—ESR Group is the sponsor of more than one industrial REIT in Singapore—and the perception that Sabana REIT has underperformed its peers due to poor management by ESR Group.

CapitaLand Integrated Commercial Trust first-half 2023 results were largely in line with our expectations. Gross revenue and net property income improved 12.7% and 10.1% year on year to SGD 775 million and SGD 552 million, respectively, making up 50% and 49% of our full-year estimates. However, distribution per unit grew only 1.5% year on year to SGD 0.053 as a result of higher-than-expected borrowing costs. We adjusted our near-term cost of debt assumptions, raising it slightly for 2023, but we assume that interest rates will pivot from 2024. Our fair value estimate of SGD 2.32 remains unchanged. We think the trust is undervalued at the current price, trading at a 2023 dividend yield of 5.3%. We continue to like it for its portfolio of high-quality office and retail assets that have proved to be resilient through economic cycles.

CapitaLand Integrated Commercial Trust owns a portfolio of income-producing office and retail assets that are predominantly in Singapore; assets in Germany and Australia make up less than 10% of its portfolio.

Narrow-moat CapitaLand Integrated Commercial Trust’s first-quarter business update was largely in line with our expectations. Gross revenue and net property income improved 14.4% and 11.3% year on year to SGD 388.5 million and SGD 276.3 million, respectively, making up 25% and 24.7% of our full-year estimate. With no major surprises in first-quarter 2023 numbers, we retain our fair value estimate of SGD 2.32. We think that the trust is undervalued at the current price and continue to like it for its portfolio of high-quality office and retail assets that have proven to be resilient through economic cycles.

CapitaLand Integrated Commercial Trust owns a portfolio of income-producing office and retail assets that are predominantly in Singapore; assets in Germany and Australia make up less than 10% of its portfolio.

CapitaLand Integrated Commercial Trust’s, or CICT’s, second-half 2022 revenue and net property income improved 14.4% and 13.1% year on year to SGD 754.1 million and SGD 541.7 million, respectively, in line with our expectations. However, second-half distribution per unit, or DPU, fell below our expectations, growing only 2.7% year on year to SGD 0.0536 due to higher borrowing cost, an enlarged unit base, and upfront lease incentives given to tenants. Nevertheless, we see the DPU miss as a transitory, short-term pain that the trust must go through to reconstitute its portfolio, and we encourage investors to focus on the trust's strong fundamentals. We retain our fair value estimate of SGD 2.32 and continue to like the trust for its portfolio of high-quality office and retail assets that have proven to be resilient through economic cycles. Based on the current price, we think the trust is slightly undervalued.

CapitaLand Integrated Commercial Trust owns a portfolio of income-producing office and retail assets that are predominantly in Singapore; assets in Germany and Australia make up less than 10% of its portfolio.

Narrow-moat CapitaLand Integrated Commercial Trust’s, or CICT’s, third-quarter 2022 business updates were largely in line with our expectation. After a below-expectation Singapore office leasing performance in the previous quarter, CICT finally capitalized on the tightening supply of Singapore central business district, or CBD, office space to post a strong uptick in committed office occupancy rate to 96.0% this quarter from 92.9% in the previous quarter. Two of the underperforming office assets highlighted in our previous earnings note—Capital Tower and Six Battery Road—improved strongly to achieve committed occupancies of 90.7% and 91.2%, respectively, this quarter, from 77.1% and 87.4% in the previous quarter. This reaffirms our view that the weak leasing performance in the previous quarter was transitory in nature. We fine-tuned some of our acquisition, lease up, debt and exit cap rate assumptions and trimmed our fair value estimate slightly to SGD 2.32 from SGD 2.42. Following the market selloff over rising interest rate concerns, we think that a buying opportunity has emerged for long-term investors who are willing to look past the current rate hike cycle. CICT remains our preferred pick for its portfolio of high-quality office and retail assets that have proven resilient through economic cycles. Based on the current price, CICT trades at a 2023 distribution yield of 6.5%, which we believe is an attractive spread to the current Singapore 10-year government bond yield of 3.6%.

CapitaLand Integrated Commercial Trust's first-half results were largely in line with our expectations. Gross revenue and net property income improved 6.5% and 6.2% year on year to SGD 687.6 million and SGD 501.6 million, respectively, making up 49.5% and 50% of our full-year estimate. However, distribution per unit only grew 0.8% year on year to SGD 0.0522 due to an enlarged unit base and timing difference between committed and actual occupancies for Asia Square Tower 2, Six Battery Road, and CapitaSpring. Despite the improving office outlook, leasing momentum seems to be slower for some of its office assets, namely Capital Tower and Six Battery Road, with occupancy rates that are still struggling at 77.1% and 87.4%, respectively. This is slightly disappointing, especially when compared with peers like Suntec City Office Towers, which was near full occupancy as of June despite the upcoming Guoco Midtown office competing for tenants at its doorstep. Nevertheless, we think these problems are transitory in nature and will be resolved, albeit over a longer-than-expected period. We remain optimistic on the improving Singapore office market and think that the lower occupancies for Capital Tower and Six Battery Road represent a good opportunity for the trust to secure a good rental rate for its vacant spaces.

CapitaLand Integrated Commercial Trust owns a portfolio of income-producing office and retail assets that are predominantly in Singapore; assets in Germany and Australia make up less than 10% of its portfolio.

CapitaLand Integrated Commercial Trust, or CICT's, first-quarter 2022 results were largely positive, in line with our expectations. The best performance can be found in its office portfolio that is riding on the Singapore office recovery--it posted a positive 9.3% rental reversion on the back of improving occupancy rates to 92.3% this quarter from 90.4% last quarter. Notably, the leasing risk for CapitaSpring has been lowered, with occupancy rates reaching 98.5%. We see these as positive signals to further upgrade our office rental growth assumptions to reflect the strong recovery in the Singapore office market that is supported by the limited new office supply.

CapitaLand Integrated Commercial Trust, or CICT, owns a portfolio of income producing office and retail assets that are predominantly in Singapore, with assets in Germany and Australia making up less than 10% of its portfolio.

Narrow-moat CapitaLand Integrated Commercial Trust, or CICT, is acquiring a Singapore Grade A office building, 79 Robinson Road or 79RR, with CapitaLand Open End Real Estate Fund, or COREF. Post transaction, CICT will hold a 70% interest in the office building, while COREF will hold the remaining 30%. The agreed property value of the asset is SGD 1.26 billion and comes with an initial net property income, or NPI, yield of 4%. This deal is part of CICT’s value creation strategy through reconstituting its portfolio with the recycling of capital received from the sale of struggling retail asset, JCube, into a high-quality Grade A office asset with better growth potential. We retain our fair value estimate of SGD 2.54 and do not expect a huge change in distribution per unit, or DPU, as we have already assumed that the divestment proceeds of JCube will be redeployed into future acquisitions. We think that the units are attractive at the current price and continue to like CICT for its diversified portfolio of high-quality assets and tenant register. As Singapore emerges from the pandemic into a new normal, we believe the trust can ride on the improving office and retail outlook to deliver good DPU growth that can offset the negative pricing pressure from the upcoming interest rate hikes.

CapitaLand Integrated Commercial Trust was established following the merger of CapitaLand Mall Trust and CapitaLand Commercial Trust in October 2020. The trust has a diversified portfolio of 24 properties, which includes offices (mainly in the central business district), retail malls, and integrated development. Most of the properties are in Singapore except for two offices in Frankfurt, Germany; the acquisition of two offices in Sydney is pending. Due to its diversified nature across different asset classes, we expect the trust to be more resilient through market cycles.

We lower our fair value estimate for CapitaLand Integrated Commercial Trust, or CICT, to SGD 2.54 per unit from SGD 2.66, after rolling over our estimates and updating our model assumptions to factor in a higher near-term cost of debt from future interest rate hikes. Our narrow moat and stable moat trend ratings are unchanged. Following the gradual lifting of COVID-19 restrictions in Singapore, we see favorable growth prospects for CICT. For 2022, we expect its suburban and office properties to deliver strong growth on the back of the improved outlook for its sector and with the addition of its Australian office properties. This would be followed by the recovery in its downtown retail properties and hotel asset in 2023 with the recovery of tourism once travel restrictions are further lifted.

Narrow-moat CapitaLand Integrated Commercial Trust, or CICT, continues to tweak its portfolio by divesting its suburban retail asset JCube to a related entity that is wholly owned by CapitaLand Group Pte. Ltd for SGD 340 million. The net proceeds, after accounting for divestment related fees, are expected be SGD 334.7 million and management expects to recognize a divestment gain of SGD 56.7 million. The selling price was arrived at through a bidding process and represents a 21.9% premium from the valuers' average fiscal 2021 year-end valuation of SGD 279 million. We think the premium achieved in this transaction is unsurprising as we have previously highlighted our observation that CICT’s assets appear to be carried at a higher net property income, or NPI, yield than the valuation capitalization rate disclosed (that is, the assets are undervalued in its books). The exit yield of 4% also corresponds to the same 75 basis-point yield compression on its fiscal 2020 year-end NPI yield that we had applied on CICT’s retail assets in arriving at our terminal value estimation.