Can CapitaLand Integrated Commercial Trust Continue to Increase its DPU?

CapitaLand Integrated Commercial Trust
CapitaLand Integrated Commercial Trust

It is uncommon to find REITs that boast a track record of ever-increasing distributions.

The combination of soaring inflation and high interest rates are headwinds that threaten to eat into their distributable income.

As a result, many REITs have succumbed to these pressures and announced a year-on-year decline in their distribution per unit (DPU).

However, there have been notable exceptions.

One of these is healthcare REIT Parkway Life REIT (SGX: C2PU) with its track record of rising core DPU since 2007.

Yet another is data centre REIT Keppel DC REIT (SGX: AJBU) which we recently wrote about.

A third candidate might be CapitaLand Integrated Commercial Trust (SGX: C38U), or CICT.

The retail and commercial REIT has demonstrated good traction in increasing its DPU, but investors may be curious to know if it can continue to do so.

Short DPU track record with robust metrics

CICT’s DPU track record has not been long as it was only spun off as a standalone REIT in the latter half of 2021 through a merger between CapitaLand Mall Trust and CapitaLand Commercial Trust.

Hence, the REIT only has three full years of comparable DPU to work with.

Still, the numbers have been promising as DPU rose from S$0.0869 in 2020 to S$0.1058 in 2022 for a compound annual growth rate of 10.3%.

Granted, this is too short of a track record as compared with Parkway Life REIT or Keppel DC REIT.

The REIT’s recent fiscal 2023’s first quarter (1Q 2023) business update provides more assurance on its DPU growth.

CICT reported double-digit year on year increases for both revenue and net property income in what was a strong start to 2023.

No DPU information was available, however, as the retail and commercial REIT only pays out its distributions on a half-yearly basis.

History of acquisitions

Next, we studied the acquisition history for CICT in the short period that it was listed.

There were three acquisitions made by the REIT since December 2021.

The first was the purchase of two Grade A buildings in Sydney while the second involved the acquisition of three assets, also in Sydney, for A$1.1 billion.

The third acquisition was that of a 70% stake in 79 Robinson Road which was subsequently renamed “CapitaSky”.

The good news is that all three transactions were yield-accretive, but investors should note that the CapitaSky acquisition was conducted in March 2022, more than a year ago.

CICT’s manager has not announced any acquisitions since then but the trio of acquisitions show that the REIT can source for and conduct acquisitions that boost its DPU.

With a gearing of 40.4% as of 31 March 2023 and a low cost of debt of 2.7%, CICT can still tap on cheap debt for further acquisitions.

Engaging in capital recycling

Aside from acquisitions, REITs can also increase their rental income and, by extension, their DPU, using a variety of methods.

Two of these are positive rental reversions and asset enhancement initiatives (AEIs).

CICT has done well for the former, with rent reversion registering a positive 1.2% and 7.6%, respectively, for its retail and commercial portfolios for 2022.

As for the latter, the REIT has an ongoing AEI at CQ @ Clarke Quay that is on track for completion by 3Q 2023.

This AEI cost S$62 million and is set to enhance Clarke Quay’s appeal as a day-and-night destination.

CICT also engages in active capital recycling to improve the quality of its portfolio.

It sold off One George Street in November 2021 for around S$1.3 billion and divested JCube, a mall located in Jurong, for S$340 million.

A reputable sponsor

Finally, another indicator as to whether CICT can increase its DPU boils down to its sponsor, CapitaLand Investment Limited (SGX: 9CI), or CLI.

CLI is well-known for its consistent focus on growing both its assets under management and funds under management.

For 2022, CLI conducted S$3.1 billion of divestments of which 56% of these went to its stable of listed funds.

For this year, the real estate giant is targeting at least S$3 billion of divestments.

Thus, there is a good chance that some of these divestments may form a potential pipeline of acquisition opportunities for CICT.

Get Smart: A high probability

The evidence is compelling.

Not only is CICT anchored by a strong sponsor in CLI, but the REIT also has a track record of accretive acquisitions.

There are catalysts present for CICT’s rental income to grow further through organic means such as rental reversions and AEIs.

Investors should feel assured that there is a high probability that the REIT can continue to raise its DPU, barring unforeseen circumstances.

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Disclosure: Royston Yang owns shares of Keppel DC REIT.

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