CapitaLand Integrated Commercial Trust (SGX: C38U): 2022 Full Year Result

On 1 February 2023, CapitaLand Integrated Commercial Trust (“CICT”) have announced their 2022 full year results. Overall the results are stable, though their gearing is still high and, not unexpected as similar to other retail and commercial REIT, they are still trading at a discount compared to the other sectors since their yield has not recovered to pre-Covid levels.

That may have resulted in them being unable to take up the Mercatus assets using debt nor equity financing. This however in the short-term is a good thing, as the interest rates may possibly continue to rise despite the recent bank issues in the US since the Federal Reserve key concern is to tame inflation. There may be potential for share price to fall if the macro-economic condition worsens.

Website: Financial Statements And Related Announcement::Full Yearly Results

Photo source: https://fifthperson.com/cmt-cct-merger-pros-cons/


Background

CICT is the first and largest real estate investment trust (“REIT”) listed on Singapore Exchange Securities Trading Limited (“SGX ST”). 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.

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”)

MetricsCurrentPrevious
Distribution Per Unit+1.73%No Info

DPU have increased by 1.73% to SGD0.1058 per share from SGD0.1040 per share in the previous financial year. This metric is Neutral as there is no substantial change to DPU. Overall it is considered to be relatively stable.

Occupancy

MetricsCurrentPrevious
Occupancy95.8%95.1%

Occupancy rate as at 31 December 2022 stands at 95.8%. This is Favorable as although it is around my expected healthy occupancy rate of 95%, there have been improvements throughout the year. Due to the nature of its tenants, it may be easy for occupancy to decrease in the short-term.

Gearing ratio

MetricsCurrentPrevious
Gearing Ratio40.4%41.2%

Gearing ratio stands at 40.4% as at 31 December 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, which might explain why they did not manage to purchase the Mercatus assets.

Interest coverage

MetricsCurrentPrevious
Interest Coverage3.7x3.9x

The interest coverage stands at 3.7 times as at 31 December 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. The Federal Reserve on 1 February 2023 has hiked interest rates to a range between 4.5% and 4.75%, and gave little indication it is nearing the end of this hiking cycle.

Website: Fed raises rates a quarter point, expects ‘ongoing’ increases

Website: Fed Officials Warn They May Need to Lift Rates to a Higher Peak

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 81% of their debt is also on fixed rates.

I have thus performed a sensitivity analysis using the information as at 31 December 2022:

DescriptionAmount (SGD’000)
Total Debt$9,600,000
Debt Not Hedged (%)19.0%
Debt at Floating Rate Exposed$1,824,000
Distributable Income FY2022$702,400

Interest rate sensitivity analysis as below:

Change in Interest RatesDecrease in Distributable Income (SGD’000)Change as % of FY2022 Distribution
+ 50 bps-$9,120-1.3%
+ 100 bps-$18,240-2.6%
+ 150 bps-$27,360-3.9%
+ 200 bps-$36,480-5.2%
+ 250 bps-$45,600-6.5%
+ 300 bps-$54,720-7.8%

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.

It is worth noting that with the recent issues in the banking industry, it is possible that the interest rates may not see any significant increase in order to prevent a financial crisis. This is however just speculation at this point of time.

Debt maturity profile

MetricsCurrentPrevious
Debt Maturity Profile3.9 years4.1 years

Weighted average term to maturity of their debt stands at 3.9 years as at 31 December 2022. This is Favorable and it allows them sufficient time to refinance their debts as they fall due.

Price to Book Ratio

MetricsCurrentPrevious
Price to Book Ratio0.92No Info

The Price to Book (“P/B”) ratio currently stands at 0.92. This is computed using the closing share price of SGD1.94 on 17 March 2023 and the net asset value per share of SGD2.12 as at 31 December 2022. The metric is Favorable as investors will not be paying a significant premium for a REIT with a strong sponsor.


Dividend yield

YearYieldTotal
20232.76%SGD 0.054
20222.88%SGD 0.056
20216.07%SGD 0.118
20203.14%SGD 0.061
Extracted from Dividends.sg

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. The current dividend trend seems to suggest the payout will be the same for 2023.

At 17 March 2023, therefore with a closing share price of SGD1.94 and dividend payout of SGD0.105 for the full calendar year 2022, this translates to a dividend yield of 5.41%. For my benchmark, a general reasonable range would be around an average of 5.5% to 6.5% in the current environment. CICT’s dividend yield is slightly below my benchmark.

Website: Reasonable Dividend Yield 2023Q1

If using dividend yield of 5.5% as a benchmark for a more premium REIT, based on the dividend of SGD0.105 there is minimal potential impact for CICT to see its share price drop. If investors require a higher return of 6.5%, then it is possible for the share price to fall by 16.7% to SGD1.62.

YieldShare PriceDownside
Current (5.41%)1.94
5.50%1.91-1.6%
6.50%1.62-16.7%
7.50%1.40-27.8%
8.50%1.24-36.3%

It is worth noting that interest for long-term safe assets have stabilized and is on a small uptrend. The April 2023 Singapore Savings Bond being issued with a 10-year average interest rate of 3.15%, which while it is lower than most of the previous few months, is higher than the March 2023 bond. There is a chance for interest rates to further increase, and the required dividend yield of investor may be higher than current.

Website: SBAPR23 GX23040S Bond Details

The dividend yield is Neutral.


Other metrics

Tenant profile

CICT has a well diversified tenant profile with the top 10 tenants contributing to 19.8% of their total gross rent with no single tenant accounting for more than 4.9% during the period, providing income diversity to the portfolio.


Summary

MetricsFinancialsRating
Distribution Per Unit+1.73%Neutral
Occupancy95.8%Favorable
Gearing Ratio40.4%Unfavorable
Interest Coverage3.7xUnfavorable
Debt Maturity Profile3.9 yearsFavorable
Price to Book Ratio0.92Favorable
OverallNeutral

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. Should the interest rates continue to increase in an attempt to counter inflation, 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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Website: CapitaLand Integrated Commercial Trust (SGX: C38U): 2022 Third Quarter Business Update


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