CICT’s lower DPU, higher gearing since pandemic may have some investors questioning its strategy

AN AWKWARD question came up during the CapitaLand Integrated Commercial Trust (CICT) financial results briefing last week.

One analyst pointed out that CICT’s distribution per unit (DPU) of 10.75 Singapore cents for FY2023 was still well below the 11.97 cents it achieved in FY2019.

The trust’s current performance versus FY2019 is relevant not just because FY2019 was the year before the pandemic forced everyone to stay home, but also because FY2019 was the last full financial year before CICT merged with CapitaLand Commercial Trust (CCT).

CICT was previously known as CapitaLand Mall Trust. It merged with CCT in 2020, in what was touted as a game-changing transaction that would enable it to grow faster and more sustainably.

So, why did CICT – more than three years after its supposedly transformative merger – report a DPU more than 10 per cent below what it achieved in FY2019? And, when will its DPU recover to its pre-pandemic level?

“The interest rate environment is just different,” replied Tony Tan, chief executive of CICT’s manager. “But as a combined vehicle, we are more resilient,” he added.

Last week, CICT said that its average debt cost in FY2023 was 3.4 per cent. This was higher than its average debt cost of 2.7 per cent in FY2022, and 2.3 per cent in FY2021.

But it was not that much higher than CICT’s average debt cost of 3.2 per cent back in FY2019.

If CICT is feeling the pressure of higher interest rates, it might be partly because it is more heavily geared than it was before it enlarged itself by merging with CCT.

Under the merger, CICT paid S$259 in cash and issued 720 new units for every 1,000 CCT units. In total, CICT expanded its outstanding units by some 75 per cent and forked out S$1 billion in cash.

CICT’s aggregate leverage rose from 32.9 per cent at the end of FY2019, to 40.6 per cent at the end of FY2020.

With the surge in interest rates over the last two years, CICT is now trying to reduce its gearing while improving the yields from its properties.

CICT said last week that its aggregate leverage stood at 39.9 per cent at the end of FY2023, down from 40.4 per cent at the end of FY2022.

FCT’s big expansion

While there are several other property trusts in the Singapore market with DPUs below their pre-pandemic levels, one retail property trust has expanded significantly through the recent crisis.

In September 2020 – as CICT was working on its merger with CCT – Frasers Centrepoint Trust (FCT) said it would acquire the 63.1 per cent of the AsiaRetail Fund (ARF) that it did not already own for S$1.057 billion.

ARF held five shopping malls and an office building in Singapore, with a total agreed value of S$3.065 billion.

To fortify its balance sheet, FCT raised more than S$1.3 billion through a placement and preferential offering of new units, which expanded its total outstanding units by more than 50 per cent.

With ARF’s properties in its fold, FCT’s revenue and distributable income for the financial year to Sep 30, 2021, more than doubled. Its DPU for FY2021 came in at 12.085 cents – which was 33.7 per cent more than its FY2020 DPU of 9.042 cents, and just a hair above its pre-pandemic FY2019 DPU of 12.07 cents.

FCT ended its FY2021 with an aggregate leverage of only 33.3 per cent.

With further management of its portfolio, FCT’s DPU for FY2022 and FY2023 came in at 12.227 cents and 12.15 cents, respectively. Its aggregate leverage ended FY2023 at 39.3 per cent, but FCT said that it would decline to 36.1 per cent with the completion of two announced asset sales.

Improving performance

Against this backdrop, CICT’s higher aggregate leverage and lower DPU since the onset of the pandemic might have some investors questioning its strategy.

The good news is CICT’s improving operational performance is keeping analysts positive on its units.

For FY2023, CICT reported an 8.2 per cent rise in revenue to S$1.6 billion and a 7 per cent increase in net property income to S$1.1 billion. This was attributed to higher contribution from Raffles City Singapore, and the full-year contribution from acquisitions completed in 2022.

CICT’s portfolio occupancy rate stood at 97.3 per cent in FY2023, up from 95.8 per cent in FY2022. CICT reported positive rent reversion of 8.5 per cent for new leases and renewals in its retail property portfolio, and 9 per cent for its office property portfolio. Its portfolio property valuation increased 1.2 per cent to S$24.5 billion.

CICT is reportedly shopping some of its assets around, which could help reduce its aggregate leverage and facilitate further reconstitution of its portfolio.

DBS and RHB maintained their “buy” recommendations on CICT following the release of its results last week.

DBS has a target price of S$2.30, while RHB has a target price of S$2.20.

It may be a tall order for CICT to top its pre-pandemic DPU this year, though. DBS is forecasting a DPU of 10.3 cents for FY2024, while RHB is forecasting a DPU of 11 cents.