Introduction
CapitaLand Integrated Commercial Trust (CICT) has reported a stable performance for the third quarter of 2024, reflecting resilient operating trends and strategic management decisions. This comprehensive analysis delves into the detailed performance metrics, strategic outlook, and key factors influencing CICT’s portfolio. We will explore the financial health, operational efficiencies, and future plans of CICT, providing a thorough understanding of its current and future positioning.
Resilient Performance Overview
CICT reported a net property income (NPI) of SGD289.8 million for the third quarter, marking a 0.4% increase quarter-on-quarter (QoQ) and a 5.4% rise year-on-year (YoY). The revenue for the same period amounted to SGD397.9 million, reflecting a 1.1% QoQ and 1.7% YoY growth. The portfolio occupancy slipped by 40 basis points to 96.4%, primarily due to lower occupancy rates in Germany. Singapore’s retail sector remained stable, while office occupancy, excluding Germany, showed slight improvement.
Detailed Financial Metrics
Revenue and Income
The revenue for the third quarter stood at SGD397.9 million, driven by organic growth and effective cost management strategies. The NPI reached SGD289.8 million, supported by stable retail rent reversions and improved office occupancy rates outside Germany. The year-to-date (YTD) retail rent reversion was stable at 9.2%, with suburban and downtown malls achieving similar levels of reversion. However, YTD portfolio tenant sales growth per square foot dipped slightly into negative territory, at -0.2% YoY, influenced by outbound travel and school holidays.
Occupancy Rates and Rent Reversions
The overall portfolio occupancy rate declined to 96.4%. Retail occupancy remained robust at 99%, while office occupancy dropped to 94.6%. Singapore offices showed a marginal improvement to 97.4%, whereas German offices experienced a significant decline to 82.7%. The office rent reversion moderated to 11.7% from 15% in the first half of the year, primarily due to leases reverting at positive mid-single digits in the third quarter.
Debt and Financing Costs
CICT’s gearing ratio stood at 39.4%, with the cost of debt slightly increasing to 3.6%. The management has guided for a steady borrowing cost in the high threes for FY25, considering the EUR and AUD-denominated debt in the debt stack. Debt coverage remained stable at 3.5 times.
Strategic Focus and Outlook
CICT’s management has outlined a strategic focus on stable distribution and portfolio reconstitution. The portfolio reversions are expected to moderate to low single digits, with efforts to backfill office spaces in Singapore and Germany supporting the top line. The management aims to minimize the use of fee in units to achieve distribution growth, focusing on operational improvements, particularly in ION Orchard.
Singapore Office and Overseas Office Outlook
The outlook for Singapore offices indicates a moderation in rent reversion to positive low single digits. The demand from tech companies is stabilizing, with typical leasing demand coming from financial institutions and TMT tenants. The medium-term supply is contained, and the hybrid work pattern is not significantly impacting leasing volumes. Overseas offices will see backfilling of space in properties like Gallileo and Main Airport Center (MAC) in Germany, with medium-term plans for asset enhancements in MAC.
Singapore Retail Dynamics
The retail sector in Singapore is experiencing sluggish sales despite a growing population and economy. High cost bases and a strong currency are motivating consumers to shop overseas. Tourist arrivals are increasing, but spending patterns have changed. The management is focused on capturing a higher share of the consumer wallet through repositioning malls and adjusting the trade and tenant mix. Rent reversion for FY25 is guided at positive low single digits, with cautious adjustments to rents considering elevated cost inputs for retailers.
Portfolio Reconstitution and Investment Market
CICT intends to maintain a Singapore-centric portfolio while opportunistically recycling overseas assets. The management sees integrated developments as a resilient asset class in Singapore, leveraging growing population, transport connectivity, and hybrid work patterns. The investment markets are currently slow, with divestments taking time due to selective core real estate investors and larger ticket sizes.
Debt Cost and NPI Margins
The management is conservatively guiding for FY25 debt costs to be in the high threes. Lower utility tariffs, changes in property management and marketing contracts, and outsourcing of mechanical and electrical equipment are aiding better cost management. Singapore asset values are expected to remain stable, while German assets may see mixed valuations due to varying occupancy rates.
ION Orchard Acquisition
The acquisition of a 50% interest in ION Orchard is viewed as strategic, strengthening CICT’s downtown offerings. The management plans to rejuvenate Orchard Road and achieve accretion through operational improvements, minimizing the use of fee in units. The tax transparency of the acquisition is a work in progress, with a timeline of about a year.
Result Highlights and Operating Trends
For the third quarter of 2024, retail revenue increased by 1.5% QoQ and 3.2% YoY, office revenue slightly declined by 0.4% QoQ and 1.6% YoY, while integrated developments saw a 2.4% QoQ and 3.5% YoY increase. The net property income for retail, office, and integrated developments reflected stable to positive growth, with overall NPI margins showing improvement across segments.
Estimate Changes and Valuation
CICT’s FY24 revenue is estimated to remain stable at SGD1,557 million, with slight adjustments in FY25 and FY26 due to slower rent reversions and longer occupancy downtimes. The distributable income and DPU are expected to grow modestly. The valuation is based on a 3-stage Dividend Discount Model (DDM) with a cost of equity of 7.0%, resulting in a target price of SGD2.30. The recommendation remains a BUY, supported by CICT’s resilient income profile and A-rated credit.
Risks to Consider
Potential risks include slower-than-expected growth in tourist arrivals, a rise in unemployment levels, non-renewal of office leases, higher interest rates, and dilutive mergers and acquisitions (M&As).
Conclusion
CapitaLand Integrated Commercial Trust continues to demonstrate resilience in its portfolio, driven by strategic management and effective cost controls. While the outlook for certain segments shows moderation, the overall performance remains stable with positive growth prospects. Investors can find comfort in CICT’s strategic focus on stable distribution, portfolio reconstitution, and a Singapore-centric approach.
