CapitaLand Integrated Commercial Trust: Business Update In Line; Downtown Retail Leading Recovery

Narrow-moat CapitaLand Integrated Commercial Trust’s C38U 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.

The trust’s retail portfolio had a strong showing for the quarter, with occupancy rates ticking up 0.2 percentage points from the previous quarter to 98.5%. We are also seeing better rental reversions, with its downtown malls leading the way with a positive 7.2%, while its suburban mall achieved a positive 5.3%. Management remains positive on the retail outlook given the ongoing recovery in tourism driving shopper traffic and tenant sales growth, and has guided for mid-single-digit positive rental reversion for 2023.

Meanwhile, the trust’s Singapore office occupancy rate continue to improve 0.5 percentage points quarter on quarter to 96.7%, driven by improving occupancy rates at Capital Tower, Six Battery Road and Asia Square Tower 2. However, weakness remains at its Australian portfolio with an occupancy rate of 83.4%, with 100 Arthur Street’s occupancy rate creeping up slightly to 72.4% this quarter from 68.8% in the previous quarter. We expect the weak near-term office leasing sentiment in Australia to persist through 2023 given the elevated market vacancy rates, but think that the Australia portfolio could be an organic growth driver for the trust from 2024 when the excess supply is absorbed.