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-- 120.630 What's next for CapitaLand Integrated Commercial Trust?
I will always remember the day when I analysed my first S-REIT, after previously only knowing the M-REIT universe.
It was then I applied the same mantra to finding great REITs to invest - growth of NAV and DPU PER UNIT.
That translates into 2 key moving parts - not only the core operations need to be great, but acquisitions need to be executed with masterstrokes.
And with $CapLand IntCom T (C38U.SG)$ being one of the slightly stronger REITs as of now, and also the one with the highest market cap, I thought it would be worthwhile to find out more on its resilience and future growth prospects. Granted that CICT just underwent a merger between CMT and CCT during the pandemic period, and have just acquired Orchard Ion, I am however forward looking into what is next.
Knowing that CICT works within the CapitaLand ecosystem, I am skeptical of its growth plans.
But before I become crude on it, I think it’s fair to take a look at its latest results.
The continuous proof of the Singapore property resilience
CICT still eked out a +1.7% gain in gross revenue year on year, while net property income swelled +5.4% due to lower operating expenses.
This is in spite of the absence of income from one of its Germany property - Gallileo.
The retail and integrated development properties remain robust.
The evergreen and relatively predictable tenant base
Source: CapitaLand Integrated Commercial Trust 3Q 2024 Business Updates pg. 14
After going through CICT’s top ten tenant profile, I can conclude that its tenant base is one of the most predictable and stable ones. RC Hotels Pte Ltd, the operator of Fairmont and Swissotel Singapore, have been long time tenants of CICT. The same goes to GIC Private Limited and Temasek Holdings.
And with an inherent diversified tenant base due to its vast retail property portfolio, the risk of even a top 10 tenant non-renewal will already dilute the risk.
The sponsor’s beneficiary rather than CICT’s beneficiary
CapitaLand and CICT share a symbiotic relationship with each other. The Real Estate Investment Management (REIM) arm manages and provides expertise, while CICT allows capital recycling from CapitaLand.
Rather than selling off its prized properties to the hands of others, CapitaLand disposes properties to its umbrella of REITs, freeing up itself for cash and capital, while retaining control by holding on to stakes of its REITs.
This relationship is not unfamiliar, with plenty of big property development firms practicing something similar. On one side of the coin, REITs with good sponsors would find a predictable supply of properties that it could have Rights of First Refusal (ROFR).
On the flip side, they tend to be passive rather than proactive in managing acquisitions for growth opportunities.
Ever since its listing, CMT and CCT have little to no appetite for properties acquired other than from its sponsor.
Limiting headspace for ROFR growth
Source: capitaland.com
I dug deep to gain some foresight on how much more growth CICT has if it fully depends on CapitaLand alone.
And I really didn’t like what I found. Although there are still 56 properties within the retail and commercial segment still fully under CLI’s ownership, most of it is not situated in Singapore or Australia.
There are plenty in China, but even if these properties are marked for sale, CapitaLand China Trust (SGX: AU8U) would have first dibs on the ROFR.
Even if CICT were to be offered the ROFR China properties, I doubt in the current sentiments, it would be wise - just look at how MPACT and Plife suffered for “diworsifying” out of Singapore.
It is difficult to get sponsor-backed REITs to be proactive in accretive acquisitions. Even though they theoretically could, but that would defeat the purpose of why these REITs are first set up by the sponsor in the first place.
Flattish DPU trend
How a REIT really grows and prosper can be summarised in a brief sketch as below.
Acquisitions should translate to accretive DPU. Once a property is onboarded, it will sometimes undergo AEI to free up more rental spaces, enhancing the gross rental revenue.
Properties that are well managed will grow in valuation, therefore lowering down a REIT’s gearing. With an increasing DPU and NAV per unit, most likely the REIT price will also rise in tandem.
And as it discovers quality properties available for purchase, it can raise capital via debt and or capital which will make the acquisition accretive on a distribution per unit basis.
And the whole cycle continues.
Source: TIKR.com
Even though CICT has gone through a fair bit of mergers and acquisitions, its DPU over the past 10 years have been flattish.
Source: Google Finance
Unit price has also been flattish.
On the flip side, a good example of growing DPU, NAV per unit and increasing unit price would be Parkway Life REIT (SGX: C2PU).
Source: TIKR.com
Final thoughts
You might ask, is it really necessary for a growing NAV per unit and DPU? Well not really. Any REIT will still be able to raise capital via debt and equity. But there would be downsides.
A lower or flattish unit price, means potential more units to secure the capital required for acquisitions. This would translate to more dilution rather than accretion of value and returns per unit basis.
A great property acquisition might not translate to a great investment return to unit-holders.
Collecting rental and improving rental reversion, hinges on economic strength, rather than pure pricing power. There is only so much a tenant is willing to pay for a Grade A office or prime retail space.
While CICT’s track record isn’t necessarily bad, it really is nothing to shout out loud.
And based on the availability of ROFR properties from its sponsor, I question the future prospects after the much longed awaited Orchard ION acquisition.
The information available in this article/report/analysis is for sharing and education purposes only. This is neither a recommendation to purchase or sell any of the shares, securities, or other instruments mentioned; nor can it be treated as professional advice to buy, sell or take a position in any shares, securities, or other instruments. If you need specific investment advice, please consult the relevant professional investment advice and/or for study or research only.
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Lazy Cat Invests : Thanks for the sharing. Would like your opinion of how Frasers Centrepoint Trust stacks up against CICT.