From an initial portfolio of just 3 retail properties (in Funan, Junction 8, and Tampines Mall) when it was listed back in July 2002, CapitaLand Integrated Commercial Trust’s (SGX:C38U) portfolio now comprises a total of 26 retail, office, and integrated development properties in 3 different countries (Singapore, Germany, and Australia.) The REIT is also a constituent of Singapore’s benchmark Straits Times Index (STI) since September 2008.

Following the conclusion of its financial year on 31 December 2022 (you can read my review of its Q4 and FY2022 results here), the REIT have made available its annual report, along with its novice of annual general meeting (AGM) early this morning (22 March 2023.)

In today’s post, you’ll find key highlights to take note of in its annual report, details about its upcoming AGM, as well as an EGM conducted after the conclusion of its AGM on the very same day to seek unitholders’ approval for the REIT’s entry into the ‘New Singapore Property Management Agreement’ (more details below):

Message to Unitholders

Delivering Growth Amid Headwinds:

  • Despite headwinds posed by geopolitical tensions, high energy prices, and inflation, CapitaLand Integrated Commercial Trust (or CICT for short) continued to deliver growth in its distributable income, where it went up by 4.1% to S$702.4m (FY2021: S$674.7m), as a result of higher contribution from the enlarged portfolio, and better performance from existing properties. However, the REIT had retained distribution income of S$7.9m and S$2.7m received from CapitaLand China Trust and Sentral REIT respectively for general corporate and working capital purposes. Distribution Per Unit was up by 1.7% to 10.58 cents (FY2021: 10.40 cents.)
  • Gross revenue climbed by 10.5% to S$1,441.7m (FY2021: S$1,305.1m), and net property income surpassed the S$1 billion mark for the first time, growing by 9.7% to S$1,043.3m (FY2021: S$951.1m), due to contributions from the REIT’s new acquisitions (which includes 66 Goulburn Street, 100 Arthur Street, a 50.0% interest in 101-103 Miller Street and Greenwood Plaza in Sydney, Australia, and a 70.0% interest in CapitaSky), higher revenue from gross rental income and gross turnover rent. However, this was partly offset by higher energy cost, as the energy tariff rate was almost double that of FY2021.

Maintaining a Healthy Balance Sheet:

  • Underpinned by the REIT’s proactive capital management strategy, it continued to enjoy access to diversified funding sources and maintain a well-spread debt maturity profile of 3.9 years, with the longest tenor debt maturing in 2033.
  • During FY2022, it managed to secure a total of S$2.7 billion of sustainability-linked/green loan facilities, including the issuance of HK$900m 9-year fixed rate notes to finance or refinance, in whole or in part, eligible green projects undertaken by CICT in accordance with the CICT Green Finance Framework.
  • Aggregate leverage ratio was at 40.4% as at 31 December 2022 (compared to 37.2% as at 31 December 2021), with interest coverage remaining healthy at 3.7 times. 81% of total borrowings have been hedged to fixed rates to mitigate potential risks from interest rate hikes.

Singapore Retail Takes a New Glow:

  • Shopper traffic climbed 25.0% year-on-year (y-o-y) in FY2022, boosted by a strong recovery of traffic in the REIT’s downtown malls since Q3 FY2022.
  • Riding on the positive momentum of Singapore’s reopening, the REIT unveiled new retail and lifestyle openings at its downtown malls, including Bugis Junction, Bugis+, Funan, and Raffles City Singapore, in June 2022 to attract shoppers and tourists. This is in addition to leveraging on CapitaStar, the main digital enabler of CapitaLand’s holistic retail ecosystem, to delight shoppers and drive more sales to its tenants.
  • Rental reversion of its retail portfolio for FY2022 was +1.2%, compared to -3.2% in FY2021, with encouraging recovery seen at suburban and downtown malls, with the weighted average lease expiry (or WALE) as at 31 December 2022 was stable at 2.2 years.
  • Occupancy of the REIT’s retail portfolio as at 31 December 2022 improved by 1.5 percentage points (pp) to 98.3%, higher than the Urban Redevelopment Authority’s (URA) retail occupancy rate of 92.9%. The occupancy rate of its integrated development portfolio held steady at 97.1% for the same period.

Singapore Office Segment Rebounds:

  • Office demand in Singapore was robust (due to the country’s position as a resilient financial hub), with the committed occupancy of its Singapore office portfolio rising by 5.8pp y-o-y to 96.2%, above CBRE’s Singapore Core CBD market occupancy of 94.7%
  • During the post-pandemic recovery phase in FY2022, tenants had the options to consider flexible workspaces for remote working, business continuity planning, and split team arrangements – these include managed or leased flexible workspaces within the REIT’s portfolio. This helped the REIT to maintain a stable performance in the Singapore office market in 2022, where it achieved a tenant retention rate of 81.1%, with a healthy WALE at 3.8%.

Proactive Management of the REIT’s Overseas Portfolio:

  • To enhance value of the REIT’s overseas assets, it focused on optimising the properties through proactive lease management to ramp up occupancies and providing fitted-out workspace to target different segments of the market.
  • Specifically, for its newly acquired portfolio in Australia, comprising 66 Goulburn Street, 100 Arthur Street, and 101-103 Goulburn Street, the REIT is also exploring flexible workspace solutions in-line with its office strategy.
  • For Gallileo in Frankfurt, Germany, its anchor tenant, Commerzbank has given notice to end its lease in January 2024 – while the REIT is actively leasing the upcoming vacant space and evaluating possible asset enhancement initiative (AEI) works, this will take time. Hence, this property is expected to be non-income generating for at least 18 months.

Seizing Properties, and Strengthening its Position:

  • With Singapore being CICT’s core market, it is continuing to explore opportunities to strengthen its position:
    • On 27 April 2022, it partnered with CapitaLand Open End Real Estate Fund (COREF) to acquire a 70.0% interest in CapitaSky, a quality Grade A office building in the Central Business District, for an agreed property value of S$1,260.0m, where it was partially funded by the sale proceeds from the divestment of JCube.
    • With the acquisition of CapitaSky, and together with Capital Tower, CICT now holds a dominant position in Singapore’s Tanjong Pagar office sub-market with more than 1.2m sq ft of NLA (Net Lettable Area.)
    • On the retail side of things, in FY2022, opportunities for AEI were also identified and embarked at Raffles City Singapore (where works began in January 2022 and completed in Q4 FY2022 to reconfigure and reposition 111,000 sq ft of space previously occupied by an anchor tenant across levels 1 to 3 to create smaller units to cater to large format and specialty retail brands, along with a new set of escalators added to provide greater convenience to shoppers) and CQ @ Clarke Quay (works began in Q3 FY2022 to transform it into a day-and-night destination, and is slated to complete by Q3 FY2023; the retail property continues to remain open as works are being carried out in phases.)

Growing Responsibly:

  • The REIT’s Sponsor, CapitaLand Investment Limited, has announced its commitment to achieve Net Zero emissions by 2050, building on its 2030 Sustainability Master Plan (SMP), and CICT is aligned with this vision.
  • Efforts taken by the REIT to reduce carbon footprint in its properties include the buying of green energy for use in its properties, and installing of renewable energy facilities onsite at more properties – one of them being the installation of solar panels in IMM Building in Singapore in 2 phases to generate renewable energy (with the first phase expected to be operational by April 2023, and the second phase by 1H FY2023.)
  • At the end of FY2022, about 30% of the REIT’s total borrowings comprised of sustainability-linked/green loan facilities and green bond issuance.
  • The REIT’s efforts in sustainability have garnered them a 5-Star Rating and an ‘A’ for Public Disclosure in GRESB 2022. CICT is also rated ‘AA’ by MSCI ESG and ‘Low Risk’ by Sustainalytics.

Outlook:

  • In light of macroeconomic uncertainty amid rising interest rates, inflation, and geopolitical tensions, the REIT’s strategy to navigate through the challenges include maintaining longer debt matures, with a high proportion of fixed rate debt while remaining vigilant against interest rate movements to time its refinancing appropriately.
  • The REIT expect energy prices to remain high in 2023, and as such, they have hedged their energy tariff rate to avoid further volatility in energy costs for 2023 and 2024. This is on top of measures taken to keep its properties energy efficient while increasing the use of green energy as much as possible.
  • Finally, Singapore will continue to be the REIT’s most important market for expansion and growth. At the same time, they will be patient for the right opportunities to deepen their presence in the existing overseas market.

Conversations with CICT’s CEO Mr Tony Tan

Opportunities and Threats in the Office & Retail Segments:

Retail Segment:

  • Downtown malls have recovered well, with the increase in domestic consumption and return of tourists. Demand for atrium space also rose as tenants launched campaigns to woo shoppers.
  • To keep up with the times, the REIT have consistently optimised tenant mix to curate offering that excite shoppers (examples include AEI works at Raffles City Singapore, and CQ @ Clarke Quay.) This is on top of the use of its loyalty programme CapitaStar, which has enabled the REIT to acquire new retailers and retain existing ones as they drive omnichannel activations on the platform.

Office Segment:

  • To cater to the tenants’ evolving needs, the REIT have adopted a core and flex strategy for their office business – one of them being its focus on managing flexible workspaces by partnering with The Work Project at CapitaSpring, and Six Battery Road, while taking on leased models with flex space tenants such as JutCo at Asia Square Tower 2 and WeWork at 21 Collyer Quay.

How is CICT Mitigating the Impact of Inflation and Rising Interest Rates:

Mitigating Impact on Inflation:

  • The REIT is coping with rising costs by encouraging the reduction of energy and water consumption, along with being prudent with less urgent expenses.
  • Other measures taken include the leveraging on economies of scale across CapitaLand’s Singapore portfolio through bulk tender, installing smart building features, and integrating automation initiatives.

Mitigating Impact on Rising Interest Rates:

  • The REIT has maintained a relatively high fixed-rate ratio (where the management is comfortable of 70-80% of borrowings on fixed rates) and a debt maturity profile that is well spread out.

Growth Opportunities that CICT is Eyeing:

  • Organic Growth: There are asset plans in place to drive net property income over time.
  • Inorganic Growth: The REIT’s management is adopting a disciplined and prudent approach, taking into consideration the prevailing market conditions – each acquisition must satisfy key criteria such as yield accretion, rental sustainability, potential for value creation over time, and whether the assets fulfil, or have the potential to fulfil its ESG objectives.
  • Portfolio will predominantly be Singapore-focused, covering office, retail, and integrated developments. At the same time, the REIT’s management will look overseas in developed markets for investment opportunities for diversification, and where possible, deepen the REIT’s presence in existing markets they are already in (Germany and Australia.)
  • Key objective is to deliver stable and sustainable returns to unitholders, while remaining committed to ESG requirements that underpin the REIT’s business.

CICT’s ESG Focus in 2023, and Plans to Achieve the Organisation’s 2050 Net Zero Target:

  • To progress towards the targets, the REIT is exploring green energy procurement, along with leveraging technology to enhance efficiency, such as initiating pilot programmes through the CapitaLand Sustainability X Challenge.
  • The REIT is also looking to achieve a 100% green-rated portfolio for its operational properties by 2030. For new investments, the green rating of each property will be an evaluation criterion.
  • Lastly, they have established a Green Finance Framework in February 2022 to allocate and manage green financing raised for projects which will deliver environmental benefits that supports the REIT’s objectives.

Details of CapitaLand Integrated Commercial Trust’s Upcoming AGM

The following are details about its upcoming AGM:

When? Wednesday, 19 April 2023
Time: 2.30pm
Where? Padang & Collyer Ballroom, Level 4, Raffles City Convention Centre, 80 Bras Basah Road Singapore 189560

Also, do note that on the very same day (at 4.30pm, immediately following its AGM), they will be conducting an EGM to seek unitholders approval on the proposed entry into the ‘New Singapore Property Management’ (which will cover CICT’s existing properties located in Singapore, and properties acquired in Singapore from time-to-time during the entire term of the agreement – which lasts for 10 years starting from 01 June 2023), following the merger and formation of CICT in 2020, for the following purposes:

  • Cost savings with improved efficiency in manpower and refinement towards a performance-based fee structure (from a fixed cost structure and reimbursement of Lease Market Staff cost previously – the proposed change will lead to overall net savings to CICT as such fees are only payable upon entry into licenses or tenancies);
  • Proven track record and experience of the Singapore Property Managers;
  • Inclusion of new clauses in the New Singapore Property Management Agreement to protect the interests of CICT, including key performance indicators to have a more robust process to review and track the performance of the Singapore Property Managers, along with the requirement for the Singapore Property Managers to abide by the ESG clauses, and use all commercially viable and reasonable efforts to further the ESG and sustainability practices, priorities, targets and goals from time to time as set out by the Manager.

You have the option to attend the meeting physically (if your units are in a custodian account, then you’ll need to inform your brokerage about your intention to attend, and it will register for you to attend as a proxy), or virtually, where you can sign up here (do make sure you sign up by Monday, 17 April 2023 if you want to attend the meeting virtually.)

Do note that both meetings will be held physically, with no options for unitholders to attend virtually. For unitholders who has units in your CDP account, you can just attend the meeting (where your unitholding will be verified on the spot.) However, if your units are in a custodian account, then you’ll need to inform your brokerage about your intention to attend, and it will register for you to attend as a proxy.

Related Documents

AGM:

EGM:

Disclaimer: At the time of writing, I am a unitholder of CapitaLand Integrated Commercial Trust.

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