Analysts have mostly kept their estimates on CapitaLand Integrated Commercial Trust C38U (CICT) after the REIT’s 3QFY2024 ended Sept 30 results stood in line or above their expectations.
On Nov 5, CICT reported 3QFY2024 gross revenue of $397.9 million, 1.7% higher y-o-y, while net property income (NPI) grew by 5.4% y-o-y to $289.9 million, attributed to lower operating expenses. The REIT’s NPI for the 9MFY2024 also grew by 5.4% y-o-y to $872.1 million.
DBS Group Research, OCBC Investment Research (OIR) and RHB Bank Singapore have all maintained their “buy” calls on CICT. Citi Research has remained “neutral” while Morningstar is generally positive with a “four star” rating.
At the same time, DBS and RHB have kept their target price of $2.30 each. The OIR team has increased its fair value estimate to $2.41 from $2.32 previously, while Citi and Morningstar have maintained their target prices at $2.20 and $2.32 respectively.
CICT’s 9MFY2024 NPI stood at 77% of Citi’s FY2024 estimates, 78% of DBS’s estimates and 79.8% of OIR’s full-year forecasts. RHB analyst Vijay Natarajan notes that CICT’s 3Q20204 financials were “slightly ahead on better margins”, while Morningstar analyst Xavier Lee notes that this was “in line with our expectations”.
All of the REIT’s segments saw higher NPI growth on a y-o-y basis led by its retail, office and integrated segments. Citi analyst Brandon Lee and the OIR team note that the higher NPI translates to an expansion in its NPI margin by 2.6 percentage points (ppt) y-o-y to 72.8%.
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Portfolio occupancy and rental reversions
During the quarter, CICT’s overall portfolio occupancy fell by 0.4 ppts q-o-q to 96.4%, mainly driven by higher vacancies at Main Airport Centre (MAC) in Frankfurt, which experienced a 6.7 ppt decline in occupancy rate to around 82.7% on tenant non-renewal.
According to RHB’s Natarajan, CICT recognises MAC as a “challenging market” but expects occupancy to stabilise.
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Within Singapore, DBS notes that IMM has achieved 100% pre-commitment rate for IMM asset enhancement initiative (AEM) while there are no anchor renewals within office leases until 2HFY2025.
CICT’s 9MFY2024 rental reversions stood at 9.2%, almost unchanged from the 9.3% reported in 1HFY2024.
DBS notes that “reversions for retail and office continues to trend in the strong positive territory with overall retail +9.2% on a year-to-date basis (downtown: +9.4%; suburban: +9.0%) and office at 11.7%.”
According to OIR, Singapore’s office rental reversions were “softer “compared to the 15% increase in 1HFY2024, suggesting a “material moderation” in 3Q2024.
On the other hand, 9MFY2024 tenant sales on a per sq ft basis fell by 0.2% y-o-y, as the 1.4% increase for suburban malls was offset by a decline of 1% for suburban malls.
DBS attributes this to the strong outbound travel by locals, which was not offset by stronger traffic flows from tourists.
However, OIR adds that “tenants’ sales on an absolute SGD basis increased for its downtown malls as there was a ramp up in operations at some of its assets such as Clarke Quay.”
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RHB’s Natarajan notes that “retail and office rent reversions are healthy, and are expected to remain positive, while occupancy should also stay firm.”
Citi’s Lee believes that a large part of office expiries are in 2HFY2025 estimated, and while IOI Central Boulevard Towers is not dropping rent, there is about 300,000 sq ft – 400,000 sq ft of secondary stock due next year, which may exert competition on rent.
Citi’s Lee is of the opinion that overall portfolio valuation should be “ok” for FY2024 estimates but notes downside pressure in Australia.
Looking ahead, CICT’s management expects rental reversions to come in around the high-single digit range for its retail and office portfolios in FY2024 but expects this to ease to low-single digit levels for both business segments in FY2025.
Morningstar’s Lee notes that while the trust may experience some negative rental reversions in FY2025 due to its high expiring rents, he is of the opinion that interest rate cuts through the end of 2024 and first half of 2025 will support business expansion and boost leasing demand.
Gearing
As at Sept 30, CICT’s aggregate leverage dipped from 39.8% to 39.4%, with 76% of debt hedged and a relatively long average term to maturity of 3.8 years.
CICT’s average cost of debt grew 10 basis points (bps) q-o-q to 3.6% and CICT expects both its FY2024 and FY2025 cost of debt to come in around the high 3% level.
“For [the] upcoming year-end asset valuation, management expects some cap rate expansion for its Australian properties, but overall portfolio valuation should remain fairly stable,” OIR adds.
DBS notes that “in the quarter, CICT completed all refinancing of remaining loan expiries for the year, including the issuance of a $200 million fixed-rate green loan at 3.3% coupon rate (due 2035).”
RHB’s Natarajan notes that divestments are “likely in the near term”, with the Citadines Raffles Place deal currently in advanced stages.
Furthermore, DBS states that sentiment in commercial and retail property investments is trending upwards with increased buyer interest.
This could move things along in terms of divestments for CICT (21 Collyer Quay and Bukit Panjang Plaza) supported by dovish interest rate expectations heading into 2025, DBS adds.
RHB’s Natarajan expects divestment proceeds to be channelled into redevelopments such as Gallileo and potential acquisitions from the sponsor pipeline.
CICT mentioned asset monetisation could arise in the form of redevelopment with potential capital partners, DBS foresees “low hanging fruits” within the retail portfolio as the likely targets, including assets that have not gone through significant AEI and capital expenditure (capex) since Covid.
ION Orchard
On Sept 3, CICT’s manager proposed to acquire a 50% stake from ION Orchard’s sponsor for $1.85 billion. The acquisition was completed at the end of October with overwhelming approval from unitholders.
The deal was partially funded by a private placement issue of 172 million units at $2.04/unit and preferential offering of 377 million units at $2.007/unit, representing $1.1 billion in equity with the balance funded by debt.
According to RHB’s Natarajan, “based on this funding, and assuming the 70% entire management fee is paid in units as compared to 50% currently, CICT expects the deal to be marginally accretive.”
“It is now working on obtaining potential tax transparency for ION Orchard’s income, which could enhance accretion (additional 1%), but we believe this may take some time (1-2 years),” Natarajan adds.
Citi’s Lee recognises that ION Orchard’s AEI will probably proceed over two years.
“CICT views portfolio reconstitution in totality and has to be net positive to income, while it can also bring in capital partners for potential redevelopments. CICT is seeing slightly more buying interest now, but it is not as strong as in the past and investors are taking longer to make decisions,” he adds.
Management fees payable in units
DBS notes that “units in fees will likely be a lever of support to distributions in the coming years, but dependent on ION orchard’s first year income contribution to the portfolio.”
“For now, management will prefer to keep percentage fees in units below the 70% level that was shared previously,” DBS adds.
Citi’s Lee notes that “there are certain levers CICT can pull, including distribution income from its 7.8% stake in CapitaLand China Trust AU8U and 9.8% stake in Sentral REIT, whereby we note a combined $12.7 million/$10.6 million were received in FY2023/2022 but retained for general corporate and working capital purposes.”
While CICT’s distribution reinvestment plan (DRP) is a capital management tool, Citi’s Lee notes that it is not a default position.
After considering the higher finance costs and acquisition of ION Orchard, the OIR team has reduced its FY2024 and FY2025 distribution per unit (DPU) forecasts by 0.6% and 1.8% respectively. OIR also lowered its risk-free assumption by 25 bps to 2.5%.
Morningstar’s Lee raises his 2025 to 2026 borrowing cost assumptions on CICT’s management guidance, leading to a 3.5% to 5% cut in FY2025 to FY2028 DPU estimates.
“Based on the current price, we think the trust is undervalued and trades at an attractive FY2025 dividend yield of 5.6%,” he says.
As at 2.51pm, units in CICT are trading 2 cents lower or 0.99% down at $2.
