Yesterday afternoon (19 April 2023), retail and office REIT in CapitaLand Integrated Commercial Trust (SGX:C38U), or CICT for short, held its annual general meeting (AGM) for the financial year ended 31 December 2022, as well as its extraordinary general meeting (EGM) immediately after to seek unitholders’ approval for its proposed entry into the ‘New Singapore Property Management Agreement’.

As the option for unitholders to attend the meeting virtually was made available, I opted for it (because the time saving from traveling to and from the meeting can be put into compiling this summary.) However, unitholders who attended the meeting virtually could only vote for the resolutions via a proxy beforehand (which I have already done so.) Also, those who watched the meeting online weren’t able to ask any questions (which I am OK as well, as I do not have any questions to ask.)

In this post, you’ll find summary of the presentation by the CEO of the REIT, Mr Tony Tan, along with questions posed by physical attendees of the meeting, and responses provided by the management, as well as results of resolutions put to vote in both meetings – I will be starting off with the AGM, followed by the EGM:

Annual General Meeting for the Financial Year Ended 31 December 2022

Presentation by CEO Mr Tony Tan

Key Milestones in 2022:

• Mr Tan shared that it has been a busy 18 months for the REIT, with some of the milestones as follows:
  • Late-2021: TOP of redevelopment of CapitaSpring, and divestment of 50% stake in One George Street in Dec 2021 (with capital channeled into higher yielding assets);
  • Q1 FY2022: Commencement of AEI in Raffles City Singapore (in the space vacated by Robinsons), divestment of JCube in March 2022, along with acquisition of 66 Goulburn Street, and 100 Arthur Street in Sydney, Australia, in March 2022;
  • Q2 FY2022: Acquisition of a 70.0% stake in CapitaSky in April 2022, as well as a 50.0% stake in 101-103 Miller Street, and Greenwood Plaza in Sydney, Australia, in June 2022;
  • Q3 FY2022: Completion of AEI for Raffles City Singapore, and Six Battery Road, and commencement of transformation of CQ @ Clarke Quay (with target completion by the end of the year.)
• The above have also progressively contributed into the REIT’s financial performance for FY2022.

2022 Year in Review:

• 2022 was a year of major recovery from the Covid-19 pandemic, with safe management measures gradually relaxed, and travel borders reopening.
• As a result of this, the REIT’s retail malls saw footfalls returning (even though it was not yet back to pre-pandemic levels), and tenant sales surpassing levels recorded in 2019 (with peak seen in the 4th quarter, contributed by large-scale events such as F1, along with resumption of MICE events.) At the same time, people also returned to their offices (Mr Tan shared that for CICT’s office properties, an average of 65% to 70% of the employees returned to the workplace in a typical week, with peak seen between Tuesday and Thursday.) Demand for the REIT’s office properties in Singapore have continued to remain strong in the year, with tenants in diverse trade sectors.
• At the same time, the REIT had to deal with several headwinds, including interest rate hikes, rising energy cost, along with high inflation – that said, cost management will be a key focus for the REIT in the year ahead.

Higher Year-on-Year Financial Results for FY2022:

• Gross revenue saw a 10.5% increase to S$1,441.7m (FY2021: S$1,305.1m), and net property income climbed 9.7% to S$1,043.3m (FY2021: S$951.1m) due to contributions from completed acquisitions, higher gross rental income and gross turnover. However, this was offset by higher operating expenses (largely from the completed acquisitions, and utilities.)
• In terms of revenue contribution by property types, Mr Tam updated that all of the REIT’s retail properties registered an increase in gross revenue compared to FY2021. The same can also be said for its office properties, where it was attributed to contributions from CapitaSky, and contributions from leases secured earlier (such as those in 21 Collyer Quay, and Asia Square Tower 2.)
• Distributable income went up by 4.1% compared to last year, at S$702.4m (FY2021: S$674.7m), with distribution per unit up by 1.7% to 10.58 cents (FY2021: 10.40 cents.)

REIT’s Valuation as at 31 December 2022:

• Portfolio property value improved by 8.9% on a year-on-year (y-o-y) basis to S$24,211m, mainly due to the newly acquired properties. However, on a like-for-like basis, the REIT’s portfolio property value would have been up by just 0.5%.
• In particular, the decline in valuation for its German properties were due to a number of factors, including the heightened geopolitical risk (due to Russia’s invasion of Ukraine), a weaker Euro, as well as inflation. However, Gallileo saw a steeper fall in valuation due to Commerzbank vacating the premises in January 2024 (and the valuators factored this into consideration) – that said, Mr Tan updated the REIT has been actively looking for tenants to lease the vacated space, and at the same time, exploring possible asset enhancement initiative for the property – if the latter was embarked, then revenue contribution from this property would be disrupted for about 18 months.)

Capital Management:

• The REIT have hedged a high percentage of borrowings at fixed rates (at 81%), and moving forward, they will continue to stay nimble and agile in the high interest rate environment.
• As far as funding for the borrowings due in FY2023 is concerned, Mr Tan updated that the REIT have already secured sufficient committed facilities to refinance the loans, and is currently working to secure financing for borrowings due in FY2024.

Portfolio Performance:

• Committed occupancy as at 31 December 2022 was at 95.8%, up 1.9 percentage points (pp) y-o-y, and Mr Tan shared that the REIT is actively looking to lease out the remaining vacated spaces.
• On contributions by individual tenants, Mr Tan said no single tenant contributed more than 5% towards the REIT’s gross revenue, with its top 10 tenants contributing 19.8%.
• Tenant retention rate for the REIT’s properties was also at a high of 84.9% (of net lettable area.)

ESG Updates:

• Mr Tan stressed that ESG continues to be the core of the REIT’s operations, where they remain committed to achieve Net Zero by 2050, and elevate carbon emissions reduction target to 1.5°C.
• Some of the key highlights on the ESG-front include:
  • Installation of solar panels at the rooftop of IMM Building (3,633 completed in December 2022 for Phase 1, with another 672 to be installed in 1H FY2023, for Phase 2) – together, the estimated annual renewable energy to be generated is approximately 2.9 GWh;
  • Project Green – a sustainability initiative by Raffles City Singapore aimed to galvanise the community to adopt a greener lifestyle via a series of recycling programmes, educational content, and up cycling workshops.
• As at 31 December 2022, 99% of CICT’s properties have achieved green ratings.

Moving Forward:

• The REIT will continue to drive higher occupancy in its properties (particularly for its Germany and Australia properties), and at the same time, renew leases at optimal rental rates.
• Upgrading plans – with asset enhancement initiative works at CQ @ Clarke Quay (targeted for completion by the end of 2023), as well as the progressive upgrading of lifts at 66 Goulburn Street (which is expected to be completed in 2024.)
• Remaining agile and proactive in managing costs, including interest cost.

Responses to Questions Raised by AGM Attendees

• As a result of the Covid-19 pandemic, people are now used to working from home, as well as making purchases online. A unitholder wanted to know how the continuation of these 2 trends will impact the office and retail spaces respectively. In response, Mr Tan explained that for the former, an increase number of staff working from home does not necessarily equate to a reduction of office spaces (by the companies.) He added that demand for office spaces in Singapore continue to remain resilient, for the country’s strategic location for companies operating in the various industries who do not have a presence in the region to have an office location here. This, coupled with a tight supply of office spaces in the CBD, means that demand will continue to be robust in the foreseeable future. For the latter, Mr Tan shared that following the relaxation of the safe management measures, shoppers started to flock back to the retail malls to socialise with their friends and family. At the same time, the percentage of sales coming from e-commerce platforms started to decline. The number of e-commerce platforms have also consolidated. On top of that, retailers are also adopting an omnichannel approach in their businesses. All things considered, Mr Tan expressed his confidence on the future of the retail malls.
• Responding to a question on how the REIT can continue to grow its unitholder returns (where the unitholder cited that, over the last 5 years, it was at 21%, or about 4% a year – which was not too bad, but at the same time, not too good either), Mr Tan said that in the current elevated interest rate environment, with cost of capital more expensive, the REIT will have to look into other avenues for growth. One of them include the upgrading existing properties to lift asset quality (examples include the REIT’s recently completed asset enhancement works in Raffles City Singapore, and ongoing works at CQ @ Clarke Quay.) He also added that real estate in fact is an inflation hedge, as a rising CPI (Consumer Price Index) means that goods and services sold by the REIT’s retail tenants will rise in tandem, and so too will the rental rates, which implies improvements in the REIT’s top- and bottom-lines, leading to an increase in distribution payout to unitholders.
• With the average cost of debt at 2.7% (as at 31 December 2022), a unitholder wanted to know the impact of further interest rate hikes on distribution payouts. In response, Ms Wong Mei Lian, CFO of the REIT, said that for every 1% hike in interest rates, distribution per unit will be impacted by 0.28 cents.
• A unitholder wanted to know reasons for Commerzbank pre-terminating its leases in Gallileo (in Frankfurt, Germany), to which Mr Tan responded that it could be due to the bank trying to consolidate its position (as it had multiple offices in Frankfurt itself.) He added that the lease in Gallileo was not the only one the bank is pre-terminating in the city.
• The same unitholder wanted to know of the REIT’s plans for Gallileo after Commerzbank have vacated the premises in January 2024. Mr Tan said that currently, Gallileo was designed for single purpose use (for Dresdner Bank, which was subsequently acquired by Commerzbank.) Following the bank’s exit, the REIT will need to carefully consider whether to let the building remain as being single-tenanted, or convert it to be a multi-tenanted building. In terms of asset enhancement works, it will be shorter if the building continues to remain single-tenanted, and longer (projected to be about 18 months after the bank had vacated the premise) if converted to become multi-tenanted.
• With the influx of family offices in Singapore from East and South Area, a unitholder wanted to know if it will lead to an increase in demand for office spaces. On this, Mr Tan shared that while there may be some increases in total aggregate demand for office spaces, but the amount is not significant, as these family offices do not need big office spaces, and do not need to be located in the CBD. However, he shared that there is an increase in the number of global fund managers seeking to expand in Singapore, which will lead to an increase in demand for office spaces.
• Another unitholder voiced concerns about the decline in valuations for the REIT’s overseas properties. In response, Mr Tan shared that for 101-103 Miller Street and Greenwood Plaza (in Sydney, Australia), it was due to the retail component because of a slowdown in people returning to their offices, and the REIT had to provide rental rebates (very much like how rental rebates had been provided to the retail tenants when their businesses were disrupted during the pandemic in Singapore.) He added that the REIT has been taking the necessary actions to address that. As for the 2 other office properties in Sydney (66 Goulburn Street and 100 Arthur Street), Mr Tan is optimistic about their prospects, as in general, businesses in Sydney wants everyone to be back in the offices. On top of that, he pointed out the desire of the city government to rejuvenate the city (including the addition of a new train line) and create vibes to make it attractive once again. Finally, for the REIT’s properties in Germany, Mr Tan concedes that there are certain elements (one of which being geoplitical tension in neighbouring countries Russia and Ukraine leading to the valuations of the REIT’s office properties in Germany being impacted) that are out of the REIT’s control.
• With CICT having properties in Germany and Australia, a unitholder wanted to know how the REIT manages its foreign exchange risk. In response, CFO Ms Wong shared that for the REIT’s properties in both countries, they are funded in local currencies to mitigate impacts of forex movement. Hence, its impact on the REIT’s Net Asset Value is negligible. For the REIT’s financial reporting, contributions from these properties are based on prevailing forex rates. In terms of cash flow management, forward contracts have been entered to hedge the net returns coming back.
• Finally, responding to a question on how CICT sees itself being different from its competitors, Mr Tan said that the REIT is very well diversified within Singapore, with a full range of office and retail properties. For the latter, there is a 50:50 mix in downtown, as well as in suburban locations, which he explained that during the pandemic, suburban malls performed better, but now that Singapore have emerged from the pandemic, downtown malls recorded a better performance.

Results of the 4 Resolutions Put to Vote during the AGM

• Resolution 1, which is to receive and adopt the Trustee’s report, the Manager’s Statement, the Audited Financial Statements of CICT for the financial year ended 31 December 2022 and the Auditors’ Report thereon, was passed with 99.12% of the votes for, and 0.88% of the votes against.
• Resolution 2, which is to re-appoint KPMG LLP as Auditors of CICT and to authorise the Manager to fix their renumeration, was passed with 94.93% of the votes for, and 5.07% of the votes against.
• Resolution 3, which is to authorise the Manager to issue Units and to make or grant convertible instruments, was passed with 91.06% of the votes for, and 8.94% of the votes against.
• Resolution 4, which is to approve the renewal of the Unit Buy-Back Mandate, was passed with 99.67% of the votes for, and 0.33% of the votes against.

Extraordinary General Meeting

Presentation by CEO Mr Tony Tan

• One of the main changes in the new agreement is in the marketing fees – where for the retail properties, it will be more performance-based for rental and length of lease terms committed (from the fees being fixed previously), to which Mr Tan commented that this will motivate the Manager to work harder for CICT.
• There are also new clauses relating to the KPIs, which Mr Tan explained that this would allow for better review and tracking, and at the same time, for more targeted feedback to be given. On top of that, there are also KPIs for ESG and sustainability.
• In terms of potential cost savings based on the calculation of revised fees applied in FY2021 and FY2022, it amounts to S$8.9m (or average savings of S$4.5m for each financial year.)
• Some of the other reasons unitholders should vote in favour of the New Singapore Property Management Agreement include:
  • A track record of consistently high occupancies maintained, where the occupancy rates of CICT’s retail and office portfolio at a high of approximately 98.0% and 97.0% respectively over the past 10 years (from 2013 and 2022);
  • Experienced operational teams with a strong familiarity and understanding of CICT’s business model, who have been proactive in repositioning the REIT’s assets to meet changing real estate trends and needs (some examples include the asset enhancement works done in the REIT’s retail malls include Lot One’s Shopper’s Mall in 2021, Raffles City Singapore in 2022, and for the office properties, they are Six Battery Road, as well as 21 Collyer Quay in 2022)

Results of Resolution Put to Vote during the EGM

• The resolution to approve the entry into the New Singapore Property Management Agreement was passed with 99.95% of the votes for, and 0.05% of the votes against.

Related Documents

AGM:

• CEO’s Presentation Slides
• AGM Results

EGM:

• CEO’s Presentation Slides
• EGM Results

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

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