On 21 October 2022, CapitaLand Integrated Commercial Trust (“CICT”) have announced their 2022 third quarter business updates. Overall the results are stable but as expected for a retail and commercial REIT, they are still trading at a discount compared to the other sectors as their yield has not recovered to pre-Covid levels.
Furthermore they are still in the race to bid for the Mercatus asset, and I have analyzed and detailed why the funding may be tough on the existing investors.
Website: General Announcement::Business Updates For The Third Quarter Ended 30 September 2022
Background
CICT is the first and largest real estate investment trust (“REIT”) listed on Singapore Exchange Securities Trading Limited (“SGX ST”) with a market capitalization of SGD13.5 billion as at 31 December 2021. It made its debut on SGX ST as CapitaLand Mall Trust (“CMT”) in July 2002 and was renamed CICT in November 2020 following the merger with CapitaLand Commercial Trust (“CCT”).
CICT owns and invests in quality income producing assets primarily used for commercial (including retail and/or office) purpose, located predominantly in Singapore. As the largest proxy for Singapore commercial real estate, CICT’s portfolio comprises 21 properties in Singapore, two in Frankfurt, Germany and three in Sydney, Australia with a total property value of SGD24.2 billion as at 31 December 2021.
CICT is managed by CapitaLand Integrated Commercial Trust Management Limited, a wholly owned subsidiary of CapitaLand Investment Limited (“CLI”), a leading global real estate investment manager with a strong Asia foothold.
Key Metrics
Distribution Per Unit (“DPU”)
Based on the announcement on 21 October 2022, DPU was not included in the business update for the third quarter of 2022.
For 2022Q2, this metric is Neutral as there is no substantial change to DPU.
Occupancy
Occupancy rate as at 30 September 2022 stands at 95.1%. This is Neutral as it is around my expected healthy occupancy rate of 95%, although it was an improvement from 93.8% as at 30 June 2022. Due to the nature of its tenants, it may be easy for occupancy to decrease in the short-term.
Gearing ratio
Gearing ratio stands at 41.2% as at 30 September 2022 . This to me is Unfavorable, as it is substantially high and close to the MAS limit of 50% when compared to other REITs. There may be difficulty for them to fund any new acquisitions using debt.
Interest coverage
The interest coverage stands at 3.9 times as at 30 September 2022. The metric is Unfavorable as the interest coverage is lower than my preference of 5.0 times and seems to be worsening. This is a concern as interest rates continue to rise as the world looks to tackle inflation, and the Federal Reserve has hiked interest rates to 4.0% recently and is looking to hike to at least 4.75% by end of 2022.
Website: Fed to lift rates by 50 basis points, but peak policy rate may be higher
As the interest rate may potentially increase further, CICT may be subjected to significant change in their cost of debt in the near future. In their presentation they have mentioned that 80% of their debt is also on fixed rates.
I have thus performed a sensitivity analysis using the information as at 30 September 2022:
Interest rate sensitivity analysis as below:
Do note the above is my estimation which may be different from management’s estimation. Nonetheless, if the interest rates were to increase by the basis points above, CICT may experience a fall in DPU accordingly.
Debt maturity profile
Weighted average term to maturity of their debt stands at 4.1 years as at 30 September 2022. This is Favorable and it allows them sufficient time to refinance their debts as they fall due.
Price to Book Ratio
Based on the announcement on 21 October 2022, net asset value (“NAV”) was not included in the business update for the third quarter of 2022.
Based on 30 June 2022 figures, the Price to Book (“P/B”) ratio currently stands at 0.98. This is computed using the closing share price of SGD2.02 on 2 December 2022 and the net asset value per share of SGD2.07 as at 30 June 2022.
The metric is Favorable as investors will not be paying a significant premium for a REIT with a strong sponsor.
Dividend yield
For CICT, it is worth noting that a total of SGD0.049 was given in 2021 as advanced distribution but pertains to 2022. Thus this amount should be adjusted and added together with the amount paid out of SGD0.056 in 2022 to reach a total dividend of SGD0.105 per share.
At 2 December 2022, therefore with a closing share price of SGD2.02 and dividend payout of SGD0.105 for the full calendar year 2022, this translates to a dividend yield of 5.19%. For my REIT’s benchmark, a general reasonable range would be around an average of 6.0% to 7.0% in the current environment. CICT’s dividend yield is below my benchmark.
Furthermore, interest rates have been continuously increasing the last few months. This have prompted for multiple safer assets to increase their bond and interest rates to more than 3%, causing the previous yields of CICT to become unfavorable.
Website: Reasonable Dividend Yield Changes
If using dividend yield of 6% as a benchmark for a more premium REIT, based on the dividend of SGD0.105 there is potential for CICT to see its share price drop by another 13.4% to SGD1.75. Investors will thus need to be mentally prepared that the share price might further fall if interest rates for safe assets in Singapore approaches to cross 4%.
The dividend yield is Unfavorable.
Other metrics
Tenant profile
CICT has a well diversified tenant profile with the top 10 tenants contributing to 20.3% of their total gross rent with no single tenant accounting for more than 5.1% during the period. providing income diversity to the portfolio.
Key things to note
New Acquisition
CICT is a potential bidder for the Mercatus asset. The portfolio looks to be around SGD2.5 billion after one more of the Singapore assets was removed from the proposed sale. This is a good opportunity for CICT to expand its portfolio. This could be done via debt or equity.
Website: Exclusive: Link REIT is frontrunner to buy Singapore shopping malls – sources
CICT has a total debt of SGD9.9 billion as at 30 September 2022 resulting in a gearing ratio of 41.2%. The acquisition, if CICT is the winner, is unlikely to be fully funded by debt. The current interest rates may suggest that it is too expensive to take on debt, especially since the metrics “Interest Coverage” and “Debt Maturity Profile” are rated as Unfavorable.
CICT’s current market capitalization is estimated around around SGD14.9 billion, thus this acquisition if funded by equity will be a significant portion as well, and shareholders should expect to see large dilutions and see share price downside.
Summary
Overall, the metrics indicate that it is neutral to invest in CICT. Despite the relatively stable results, it seems investors are not adequately compensated for the risk and that there is still uncertainty over the Mercatus asset. With interest rates expected to continue to increase, the appeal of CICT may take a turn for the worse and further downside may happen.
In the long term however, as the world continue to live with Covid-19, there is expectation that the results of CICT will improve over the next few years.
Disclaimer: Not financial advice. All data and information provided on this site is for informational purposes only.
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