UOB Kay Hian analyst Jonathan Koh has kept his “buy” call on CapitaLand Integrated Commercial Trust C38U (CICT) while raising his target price by 7 cents to $2.29 from $2.22 following the REIT’s continued enhancement of its retail malls.
In his July 16 report, the analyst notes CICT’s latest commencement of asset enhancement initiatives (AEI) at Level 1 of IMM Building.
The retail space which stands at 126,600 sq ft is set to strengthen the mall’s outlet offerings, with its newest additions of a Fila Kids Outlet and Anta Kids Outlet in 1Q2024.
Additionally, the repositioning of IMM aims to right-size the supermarket’s footprint, refresh common areas and upgrade mall amenities.
“Committed occupancy for Phase 1 and 2 of the AEI, including leases under advanced negotiations, is high at 75%,” says Koh.
The initiative will be carried out over four phases and is set for completion in 2025.
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The completion of the AEI will mark IMM as the largest outlet mall in Singapore with 110 outlet stores.
Koh adds that management targets to achieve a return on investment (ROI) of 8% for the capital expenditure valued at $48 million.
As of now, the office market remains “resilient” with vacancy for Grade A Core central business district (CBD) tightening by 0.2 percentage points (ppt) y-o-y to 3.6% in 1Q2024.
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In 2Q2024, IOI Central Boulevard, which came into market in 1Q2024, received its temporary occupation permit and is currently 50% pre-committed.
The analyst also notes that shadow spaces have been significantly reduced from 0.7 million square feet to 0.2 million square feet, which eases the REIT’s competition faced with office landlords.
“CICT’s Grade A office properties are well located and continue to command premium rents,” writes Koh.
The analyst expects the REIT’s occupancy levels to remain stable at 95%, with the exception of minor fluctuations resulting from transitory vacancy.
Management expects positive rental reversion to be sustainable at high single-digit in 2H2024, which currently stands at 14.1% as of 1Q2024.
Meanwhile, Koh notes CICT’s efforts in raising funds through its medium-term notes programme, which accounts for 46% of its total borrowings.
Currently, the REIT has an A- rating according to Standard & Poor’s and A3 by Moody’s.
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As of July, CICT has issued $300 million of fixed rate notes at 3.75% which carry a tenure of 10 years and are set to mature in July 2034.
The analyst deems the REIT’s 3.75% coupon rate as “attractive”, a reflection of CICT’s strong credit standing.
Following the slight increase of average cost of debt by 0.1 ppt q-o-q to 3.5% in 1Q2024, Koh adds that cost of debt is likely to peak at 3% in 4Q2024, as per management’s forecasts.
That said, 76% of the REIT’s borrowings are on fixed interest rates.
He adds: “We expect the positive impact from the lower interest rates to be offset by negative impact from refinancing, which will lead to a stable cost of debt in 2025.”
Aggregate leverage for the REIT remains stable at 40.0% as of March.
Overall, Koh has maintained his existing distribution per unit (DPU) estimates.
His current increased target price is based on the dividend discount model, factoring in the cost of equity at 6.75% and terminal growth of 2.2%. The analyst has since lowered cost of equity from 7.0% to 6.75% due to CICT’s ability to raise debt financing at low cost.
Share price catalysts identified by the analyst include steady recovery in shopper traffic and tenant sales at CICT’s downtown malls and asset enhancement and redevelopment of existing properties.
As of July 16, shares in CICT closed at 2 cents lower or 0.73% down at $2.74.
