CapitaLand Integrated Commercial Trust: A Comprehensive Analysis

Date: 5 November 2024

Broker: OCBC Investment Research

Introduction

CapitaLand Integrated Commercial Trust (CICT) stands as the largest S-REIT by market capitalisation and assets in Singapore. With a strong backing from CapitaLand Investment Limited, CICT has significantly expanded its scale following its merger with CapitaLand Commercial Trust in October 2020. This merger has positioned CICT as a prominent player offering diverse exposure to suburban and downtown retail markets, and core CBD office sectors in Singapore. Additionally, CICT has smaller exposures to markets in Germany and Australia.

3Q24 Financial Performance

In 3Q24, CICT reported a 5.4% year-on-year (YoY) increase in net property income (NPI), reaching SGD 289.8 million. The gross revenue for the same period saw a modest rise of 1.7% YoY to SGD 397.9 million. This growth translated to an expansion in NPI margin by 2.6 percentage points (ppt) YoY, achieving 72.8%. However, no distribution per unit (DPU) data was provided as it is disclosed on a semi-annual basis. For the first nine months of 2024 (9M24), CICT’s gross revenue and NPI grew by 2.0% and 5.4% YoY, respectively, reaching SGD 1,189.8 million and SGD 872.1 million.

Rental Reversions and Occupancy

CICT exhibited healthy rental reversions of 9.2% for its retail portfolio and 11.7% for its office portfolio. However, overall portfolio committed occupancy slightly declined by 0.4 ppt quarter-on-quarter (QoQ) to 96.4%. Retail rental reversions for 9M24 matched the 9.3% recorded in 1H24, with suburban and downtown malls showing rental reversions of 9.0% and 9.4%, respectively. Tenant sales on a per square foot (psf) basis saw a marginal decline of 0.2% YoY, attributed to a 1.4% increase in suburban malls offset by a 1.0% decline in downtown malls. Shopper traffic on a retail portfolio level grew by 3.7% YoY, contributed by both suburban and downtown malls.

Office Portfolio Performance

CICT’s Singapore office portfolio maintained rental reversions of 11.7% for 9M24, softer than the 15.0% recorded in 1H24, indicating a material moderation in 3Q24. Management anticipates high-single-digit rental reversions for both retail and office portfolios in FY24, with expectations of easing to low-single-digit levels in FY25. The overall portfolio occupancy drop was largely due to weaknesses at the Main Airport Center asset in Frankfurt, Germany.

Debt and Leverage

CICT’s aggregate leverage ratio slightly dipped from 39.8% (as of 30 June 2024) to 39.4%, with 76% of its debt hedged. The average term to maturity remains relatively long at 3.8 years, with an average cost of debt inching up by 10 basis points (bps) QoQ to 3.6%. Management expects the cost of debt to stay at the high-3% level for FY24 and FY25. The upcoming year-end asset valuation may see some cap rate expansion for Australian properties, but the overall portfolio valuation is expected to remain stable. The FY24 and FY25 DPU forecasts have been trimmed by 0.6% and 1.8%, respectively, due to higher finance costs and the acquisition of ION Orchard.

ESG Initiatives

CICT’s ESG rating was upgraded in July 2022, scoring well in the “Opportunities in Green Building” category. Aligned with CapitaLand’s commitment to net zero by 2050 and a carbon emissions reduction target to a 1.5°C scenario, CICT focuses on three key areas: building portfolio resilience and resource efficiency, enabling thriving and future-adaptive communities, and accelerating sustainability innovation and collaboration. The trust has board-level oversight of ethics standards, detailed anti-corruption and whistleblower protection policies, an independent majority board, and a fully independent audit committee for management oversight.

Investment Catalysts and Risks

Potential catalysts for CICT include divestment of assets at prices significantly above valuation, DPU accretive acquisitions, and better-than-expected momentum in footfall and tenant sales for its malls. However, risks include a slowdown in macroeconomic conditions that could dampen consumer and business sentiment, a rising interest rate environment raising borrowing costs, and a slower-than-expected recovery in portfolio rental reversions.

Valuation Analysis

Several other companies in the S-REIT sector provide valuable benchmarks for CICT:

CapitaLand Integrated Commercial Trust (CMLT.SI)

• Price/Earnings: 18.5 (FY24E), 17.7 (FY25E)
• Price/Book: 1.0 (FY24E), 1.0 (FY25E)
• EV/EBITDA: 23.3 (FY24E), 22.4 (FY25E)
• Dividend Yield (%): 5.3 (FY24E), 5.5 (FY25E)
• ROE (%): 5.1 (FY24E), 5.5 (FY25E)

Frasers Centrepoint Trust (FCRT.SI)

• Price/Earnings: 19.5 (FY24E), 18.5 (FY25E)
• Price/Book: 1.0 (FY24E), 1.0 (FY25E)
• EV/EBITDA: 24.4 (FY24E), 24.0 (FY25E)
• Dividend Yield (%): 5.5 (FY24E), 5.7 (FY25E)
• ROE (%): 4.9 (FY24E), 5.2 (FY25E)

Mapletree Pan Asia Commercial Trust (MACT.SI)

• Price/Earnings: 16.4 (FY24E), 15.4 (FY25E)
• Price/Book: 0.3 (FY24E), 0.3 (FY25E)
• EV/EBITDA: 19.9 (FY24E), 19.8 (FY25E)
• Dividend Yield (%): 6.3 (FY24E), 6.6 (FY25E)
• ROE (%): 4.4 (FY24E), 5.0 (FY25E)

Starhill Global Real Estate Investment Trust (STHL.SI)

• Price/Earnings: 12.2 (FY24E), 12.4 (FY25E)
• Price/Book: 0.7 (FY24E), 0.7 (FY25E)
• EV/EBITDA: 16.2 (FY24E), 15.9 (FY25E)
• Dividend Yield (%): 7.5 (FY24E), 7.6 (FY25E)
• ROE (%): 5.7 (FY24E), 5.8 (FY25E)

Paragon REIT (SPHR.SI)

• Price/Earnings: 18.6 (FY24E), 18.9 (FY25E)
• Price/Book: 1.0 (FY24E), 1.0 (FY25E)
• EV/EBITDA: 18.3 (FY24E), 17.8 (FY25E)
• Dividend Yield (%): 4.8 (FY24E), 5.2 (FY25E)
• ROE (%): 5.1 (FY24E), 5.1 (FY25E)

Company Overview

As of 31 December 2023, CICT is the first and largest REIT listed on the Singapore Exchange Securities Trading Limited (SGX-ST), with a market capitalisation of SGD 13.7 billion. Initially debuting as CapitaLand Mall Trust in July 2002, it was renamed CICT in November 2020 post-merger with CapitaLand Commercial Trust. CICT’s portfolio includes 21 properties in Singapore, two properties in Frankfurt, Germany, and three properties in Sydney, Australia, with a total property value of SGD 24.5 billion.

CICT is managed by CapitaLand Integrated Commercial Trust Management Limited, a wholly-owned subsidiary of CapitaLand Investment Limited, a leading global real estate investment manager with a strong presence in Asia.

Portfolio Committed Occupancy and Distribution Per Unit

The portfolio committed occupancy for FY23 stands at 96.4%, showing a slight decline from previous years. The distribution per unit (DPU) has shown resilience, with a gradual increase over the years, reaching 10.75 S cents in FY23.

Aggregate Leverage Ratio and NPI Breakdown

CICT’s aggregate leverage ratio for FY23 is 39.9%, with a breakdown of NPI as follows:

• Retail: 35.5%
• Office: 35.0%
• Integrated Developments: 29.4%

Financial Performance

CICT’s income statement for the past few years highlights its robust financial health:

• Revenue increased from SGD 786.7 million in FY2019 to SGD 1,559.9 million in FY2023.
• Gross profit rose from SGD 505.0 million in FY2019 to SGD 1,017.6 million in FY2023.
• Operating income improved from SGD 490.9 million in FY2019 to SGD 1,065.3 million in FY2023.
• Net income available to common shareholders grew from SGD 696.9 million in FY2019 to SGD 862.6 million in FY2023.

Profitability and Credit Ratios

CICT’s profitability ratios reflect its strong performance:

• Return on Common Equity: 6.10% (FY2023)
• Return on Assets: 3.52% (FY2023)
• Operating Margin: 46.14% (FY2023)
• Pretax Margin: 56.37% (FY2023)

Credit ratios also indicate a stable financial position:

• Total Debt/EBIT: 9.16 (FY2023)
• Net Debt/EBIT: 9.02 (FY2023)
• EBIT to Interest Expense: 3.01 (FY2023)
• Net Debt/Equity: 0.68 (FY2023)

Conclusion

CapitaLand Integrated Commercial Trust (CICT) continues to demonstrate strong financial performance, robust rental reversions, and strategic management. With a diverse portfolio, healthy occupancy rates, and a solid ESG commitment, CICT remains a compelling investment opportunity in the S-REIT sector. Investors should, however, remain cognizant of potential risks, including macroeconomic slowdowns and rising interest rates, while considering the promising growth catalysts that CICT offers.