CapitaLand Integrated Commercial Trust - OCBC Investment 2024-04-22: Stable Operational Performance

• CapitaLand Integrated Commercial Trust (SGX:C38U) provided its business update for 1Q24. Gross revenue rose 2.6% y-o-y to S$398.6m, while NPI increased by a stronger magnitude of 6.3% to S$293.7m due to an expansion in its NPI margin by 2.6 ppt y-o-y to 73.7% as a result of lower operating expenses.
• Growth was broad based, with all three core segments recording higher gross revenue and NPI on a y-o-y basis.

Committed occupancy

• CapitaLand Integrated Commercial Trust’s overall portfolio committed occupancy inched down 0.3 ppt q-o-q to 97.0%. Breaking this down, its retail and integrated development segments achieved higher committed occupancy of 98.7% (+0.2 ppt q-o-q) and 98.9% (+0.4 ppt q-o-q), respectively, but was offset by higher frictional vacancies at its office portfolio (committed occupancy fell 0.9 ppt q-o-q to 95.8%).

Secured 10-year lease with ECB

• One important update was a lease agreement secured with the European Central Bank (ECB) for close to 93% of its Gallileo property’s net lettable area in Frankfurt, Germany for a period of 10 years.
• As the asset will be undergoing an asset enhancement initiative that will cost ~EUR180m, the lease will only commence from 2H25.

Stronger rental reversions expected

• Looking next at rental reversions, this came in at +7.2% for retail (fairly similar for both suburban and downtown malls) and +14.1% for office. Management said that leasing demand came in stronger than expected for its office portfolio and is hopeful of sustaining this momentum, although it also cautioned about uncertainties over the macroeconomic environment.
• Overall, management expects high-single digit rental reversions for both its retail and office portfolios in FY24, versus mid-single digit previously.
• Tenant sales per square foot for its retail assets rose 2.1% y-o-y in 1Q24, with suburban malls (+3.1% y-o-y) increasing faster than its downtown malls (+1.7% y-o-y). The reverse was true for shopper traffic, with stronger growth from downtown malls over suburban malls, with the overall figure higher by 3.6% y-o-y.

Aggregate leverage ratio inched up to 40.0%; new asset enhancement initiatives (AEIs) earmarked

• CapitaLand Integrated Commercial Trust’s aggregate leverage inched up 0.1 ppt q-o-q to 40.0%, with 76% of its debt hedged. Its average term to maturity remains relatively long at 3.8 years, while average cost of debt inched up another 10 basis points (bps) q-o-q to 3.5%, and could stay around current levels in a higher for longer interest rate environment.

DPU foreast & target price

• We trim our FY24 and FY25 distribution per unit (DPU) forecasts for CapitaLand Integrated Commercial Trust by 0.3% and 1.1%, respectively, as we factor in weaker AUD assumptions and also the lease with ECB.
• We also lift our risk-free rate assumption from 2.75% to 3.00% and our fair value estimate for CapitaLand Integrated Commercial Trust dips from S$2.18 to S$2.14.

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2024-04-22 SGinvestors.io

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