On 28 April 2023, CapitaLand Integrated Commercial Trust (“CICT”) have announced their 2023 first quarter business update. It may be worth noting that there is a reduction of borrowings on fixed rate, although overall gearing have increased. This may not be a bad thing as the interest rates are currently at the expected peak and may decrease over the next few years. By not locking up their borrowings at the current high fixed interest rates, CICT may be able to lower the financing costs should interest rate decrease. Time will tell if it pays off.
Notwithstanding the above, the overall results are stable. 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.
Website: General Announcement::Business Updates For The First Quarter Ended 31 March 2023
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”)
| Metrics | Current | Previous |
|---|---|---|
| Distribution Per Unit | No Info | +1.73% |
Based on the announcement on 28 April 2023, DPU was not included in the business update for the first quarter of 2023. There is a mention however that the net property income have increased by 11.3% year on year.
For 2022Q4, this metric is Neutral as there is no substantial change to DPU.
Occupancy
| Metrics | Current | Previous |
|---|---|---|
| Occupancy | 96.2% | 95.8% |
Occupancy rate as at 31 March 2023 stands at 96.2%. This is Favorable as it has improved and is above my expected healthy occupancy rate of 95%.
Gearing ratio
| Metrics | Current | Previous |
|---|---|---|
| Gearing Ratio | 40.9% | 40.4% |
Gearing ratio stands at 40.9% as at 31 March 2023. This to me is Unfavorable, as it is substantially high and close to the MAS limit of 50% when compared to other REITs.
Interest coverage
| Metrics | Current | Previous |
|---|---|---|
| Interest Coverage | 3.4x | 3.7x |
The interest coverage stands at 3.4 times as at 31 March 2023. 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 3 May 2023 has hiked the interest rates to a range between 5.00% and 5.25%, the highest level in 15 years and are likely to keep it at these levels over the next few years.
Website: US Fed raises interest rates again, signals potential pause in tightening cycle
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 77% of their debt is also on fixed rates.
I have thus performed a sensitivity analysis using the information as at 31 March 2023:
| Description | Amount (SGD’000) |
|---|---|
| Total Debt | $9,700,000 |
| Debt Not Hedged (%) | 23.0% |
| Debt at Floating Rate Exposed | $2,231,000 |
| Distributable Income FY2022 | $702,400 |
Interest rate sensitivity analysis as below:
| Change in Interest Rates | Decrease in Distributable Income (SGD’000) | Change as % of FY2022 Distribution |
|---|---|---|
| + 50 bps | -$11,155 | -1.6% |
| + 100 bps | -$22,310 | -3.2% |
| + 150 bps | -$33,465 | -4.8% |
| + 200 bps | -$44,620 | -6.4% |
| + 250 bps | -$55,775 | -7.9% |
| + 300 bps | -$66,930 | -9.5% |
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
| Metrics | Current | Previous |
|---|---|---|
| Debt Maturity Profile | 4.2 years | 3.9 years |
Weighted average term to maturity of their debt stands at 4.2 years as at 31 March 2023. This is Favorable and it allows them sufficient time to refinance their debts as they fall due.
Price to Book Ratio
| Metrics | Current | Previous |
|---|---|---|
| Price to Book Ratio | 0.93 | 0.92 |
Based on the announcement on 28 April 2023, net asset value (“NAV”) was not included in the business update for the first quarter of 2023.
The Price to Book (“P/B”) ratio currently stands at 0.93. This is computed using the closing share price of SGD1.97 on 14 June 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
| Year | Yield | Total |
|---|---|---|
| 2023 | 2.72% | SGD 0.054 |
| 2022 | 2.84% | SGD 0.056 |
| 2021 | 5.97% | SGD 0.118 |
| 2020 | 3.10% | SGD 0.061 |
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 14 June 2023, therefore with a closing share price of SGD1.97 and dividend payout of SGD0.105 for the full calendar year 2022, this translates to a dividend yield of 5.33%. 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 2023Q2
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 18.0% to SGD1.62.
| Yield | Share Price | Downside |
|---|---|---|
| Current (5.33%) | 1.97 | – |
| 5.50% | 1.91 | -3.1% |
| 6.50% | 1.62 | -18.0% |
| 7.50% | 1.40 | -28.9% |
| 8.50% | 1.24 | -37.3% |
It is worth noting that interest for long-term safe assets have stabilized and is on a downtrend. The July 2023 Singapore Savings Bond being issued with a 10-year average interest rate of 2.82%. There is a chance for interest rates may not increase significantly moving forward, and the required dividend yield of investor may be lower than current.
Website: SBJUL23 GX23070H 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 20.3% of their total gross rent with no single tenant accounting for more than 5.5% during the period, providing income diversity to the portfolio.
Summary
| Metrics | Financials | Rating |
|---|---|---|
| Distribution Per Unit | +1.73% | Neutral |
| Occupancy | 96.2% | Favorable |
| Gearing Ratio | 40.9% | Unfavorable |
| Interest Coverage | 3.4x | Unfavorable |
| Debt Maturity Profile | 4.2 years | Favorable |
| Price to Book Ratio | 0.93 | Favorable |
| Overall | | Neutral |
Overall, the metrics indicate that it is neutral to invest in CICT. CICT’s leverage and debt profile seem to have worsened slightly this quarter, and likely to continue on a downtrend over the next few quarters.
However, with interest rates continue to stabilize and CICT reporting strong net property income, this may also be an indicator that the current conditions are already the worst possible. CICT may see their fundamentals improve in the future.
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 Full Year Result
