RHB Research has upgraded Capitaland Integrated Commercial Trust : C38U 0% (CICT) to “buy” from “neutral” on the back of CICT’s strong operational growth, driven by retail rental reversion and office occupancy increases.

The research house maintained its price target at S$2, which implies an FY2023 yield of 6 per cent, it said on Friday (Oct 27).

CICT had reported its Q3 business updates on Thursday, with its results outperforming RHB’s expectations, said analyst Vijay Natarajan.

He noted that its unit valuations are now more attractive at a price-to-book value ratio of 0.8 times after the recent market sell-off, referring to the closing price of S$1.71 on Thursday.

He also expects a stable retail rental reversion in light of the resumption of economic activities.

“We expect the retail rental reversion (for FY2024) to be a mid-single digit, backed by higher tourism revenue and wage growth.”

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Turning to CICT’s office portfolio, he said he was not so concerned about the possible exit of WeWork, a major tenant. Based on RHB’s estimates, WeWork’s leases were signed at about 30 per cent lower rates than the current market rate. In the worst case, if it exits its lease, the space can be back-filled by a tenant paying a higher rental rate.

He added, however, that the management was in talks with WeWork, and there are no rental arrears so far.

He also said that the occupancy rates of overseas assets are expected to take a hit, with the imminent departure of Commerzbank from Gallileo, a Grade-A commercial building in Frankfurt, and a tenant leaving 100 Arthur Street, a Grade-A office building, in Sydney.

CICT is in advanced talks on backfilling 67 per cent of vacated space at 100 Arthur Street, and finalising the asset-enhancement plan at Gallileo, which may lead to a downtime of about 18 months.

With a relatively high gearing of 40.8 per cent, Natarajan noted CICT should divest some smaller retail malls and pare down its stakes in office assets to unlock value and bring gearing down to below 40 per cent.

“Acquisitions are unlikely, as its high cost of capital limits yield-accretive acquisition opportunities.”

Meanwhile, he expects CICT’s strong operational growth to offset interest cost pressures, with a relatively healthy debt hedge of 78 per cent. Net property income margins should also stabilise around current levels, and the average borrowing cost should stay below 3.5 per cent for the full year.

“We expect its overall portfolio to remain stable, with slight gains in its Singapore assets, mainly from income growth, offsetting a slight valuation decline for overseas assets and the foreign exchange impact,” said Natarajan.