CapitaLand Integrated Commercial Trust: Spotlight On Acquisitions And Divestment

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CapitaLand Integrated Commercial Trust still has the financial capacity to engage in further property acquisitions, following its recent proposed purchase of the 50% interest in the ION Orchard asset....

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My view is that the REIT has the potential to engage in acquisitions and divestment that create value for shareholders. CPAMF's proposed purchase of the ION Orchard asset has multiple positives, and I think that the REIT has the financial capacity to do further asset purchases. On the other hand, CapitaLand Integrated Commercial Trust is looking at the possibility of selling certain assets, which could help to finance new acquisitions and enhancement initiatives for existing properties. My earlier February 12, 2024, article touched on CPAMF's 2H 2023 results and the REIT's midterm financial prospects. Investors can buy or sell CapitaLand Integrated Commercial Trust's shares on the Singapore Exchange and the OTC (Over-The-Counter) market. The REIT's OTC shares have limited trading liquidity. But the three-month average daily trading value for CapitaLand Integrated Commercial Trust's Singapore-listed shares was reasonably high at around $50 million as per S&P Capital IQ data. Readers can deal in CapitaLand Integrated Commercial Trust's Singapore-listed shares with US stockbrokers like Interactive Brokers. Acquisition Of 50% Stake In ION Orchard Property Could Be The First Of Multiple Deals In early October this year, CapitaLand Integrated Commercial Trust issued an announcement revealing that it will be utilizing approximately S$1,082.6 million of funds to fund the proposed purchase of a 50% stake in the ION Orchard retail property asset. This transaction is expected to be concluded in the final quarter of the current year. An Overview Of The ION Orchard Property CapitaLand Integrated Commercial Trust's ION Orchard Acquisition Presentation ION Orchard's Trade Mix And Key Retail Tenants CapitaLand Integrated Commercial Trust's ION Orchard Acquisition Presentation CPAMF's proposed purchase of the ION Orchard property is an accretive deal, as the REIT's estimates suggest that its FY 2023 distribution or dividend per unit would have been +1.2% higher on an adjusted basis factoring in this transaction. I have a positive opinion of CapitaLand Integrated Commercial Trust's latest acquisition for several reasons. Firstly, CPAMF will become a more focused Singapore commercial property play following the planned acquisition of ION Orchard. Singapore, CapitaLand Integrated Commercial Trust's home market, will account for 94.2% of the REIT's aggregate asset value when this deal is completed as disclosed in its acquisition presentation slides. Assets in Singapore currently represent a relatively lower 93.7% of CPAMF's total property value before the conclusion of this transaction. CPAMF also owns other assets in Germany and Austria. It is reasonable to think that investors will prefer to invest in REITs with a clear geographical focus, as they can choose to diversify at the portfolio level by being vested in various REITs focused on specific markets or countries. As such, CapitaLand Integrated Commercial Trust could potentially command a superior valuation going forward, with the ION Orchard deal increasing its Singapore asset exposure. Secondly, this proposed deal will help to optimize CapitaLand Integrated Commercial Trust's Singapore retail property mix favorably. Approximately 52% and 48% of CPAMF's Singapore retail assets in terms of net lettable area are located in downtown and suburban areas, respectively. Once the purchase of ION Orchard is done, CapitaLand Integrated Commercial Trust will have a relatively higher 57% of its Singapore retail property portfolio contributed by assets in downtown areas. These numbers are sourced from CPAMF's acquisition presentation. Singapore Tourism Board has forecasted that the number of tourists visiting the country will potentially rise by +10%-21% to between 15.0 million and 16.5 million this year. CapitaLand Integrated Commercial Trust's purchase of the ION Orchard property will increase the REIT's downtown retail exposure, and allow it to benefit from an increase in tourist arrivals for Singapore. Lastly, CPAMF still has debt headroom to fund further acquisitions after completing this asset purchase. CapitaLand Integrated Commercial Trust's financial leverage ratio is expected to go up slightly from 39.8% to 39.9% when the ION Orchard deal is completed, as the REIT has chosen to rely on equity financing to fund the ION Orchard transaction. Therefore, CPAMF still has room to increase its leverage to support future asset purchases. On the REIT Association of Singapore's website, it is noted that there is a “45% cap on gearing” for Singapore REITs which is raised to 50% if the REITs have an “adjusted interest coverage ratio of 2.5x” or better. CPAMF's interest cover is 3.0 times, so the REIT could potentially have its gearing or financial leverage ratio rise to 50%. Another key factor that increases the chances of CPAMF engaging in further acquisitions going forward is the favorable interest rate environment. In my recent October 4, 2024 write-up for another Singapore-listed REIT CapitaLand Ascendas REIT (OTCPK:ACDSF) [A17U:SP], I indicated that ACDSF “will have an easier time finding M&A deals where the capitalization rate for the acquired asset is higher than the debt financing cost in an environment of declining rates.” This holds true for Singapore-listed REITs in general and CPAMF as well. In summary, I have a favorable view of CapitaLand Integrated Commercial Trust's proposed purchase of ION Orchard, and I expect the REIT to do more of such acquisitions to boost its inorganic growth prospects. Potential Divestment Could Fund Future Capital Investments There is a high likelihood of CapitaLand Integrated Commercial Trust selling some of its properties to finance future asset purchases and asset enhancements. A recent October 8, 2024, Bloomberg News report mentioned that BlackRock (BLK) is interested in buying “a group of serviced apartments in a prime office building in Singapore’s Central Business District” known as “Citadines Raffles Place” for approximately “S$290 million” based on its sources. CapitaLand Integrated Commercial has a 45% interest in a joint venture that owns Citadines Raffles Place. Furthermore, CPAMF had emphasized at the REIT's 1H 2024 analyst briefing in August this year that “monetizing part of the portfolio is an important source of capital for us to look at redeployment.” This suggests that the REIT is considering asset sales to fund fresh capital investments. Separately, research firm RHB had previously identified the Citadines Raffles Place, 21 Collyer Quay and Bukit Panjang Plaza assets as “mature/non-core” properties owned by CPAMF in its September 4, 2024 report. Media reports, third-party research, and the REIT's comments mentioned above suggest that it is highly probable that CapitaLand Integrated Commercial Trust will divest certain properties to raise capital for future investments. Apart from potential acquisitions highlighted in the previous section, investing in the enhancement of the REIT's existing assets is another area where CPAMF could possibly allocate the proceeds realized from property sales. CapitaLand Integrated Commercial Trust's Ongoing Asset Enhancements CapitaLand Integrated Commercial Trust's October 2024 Investor Presentation Slides As per the chart presented above, CPAMF has certain properties that are already undergoing asset enhancement. Singapore broker UOB Kay Hian issued a report (not publicly available) titled “Increasing Dominance Of Singapore's Retail Scene” on October 11, 2024, detailing takeaways from CapitaLand Integrated Commercial Trust's participation in the brokerage's latest investment conference. As per this recent UOB Kay Hian report, CapitaLand Integrated Commercial Trust has indicated its intention to consider a new asset enhancement initiative for another one of its properties, Plaza Singapura. This is to be executed as early as the later part of next year. To sum things up, CapitaLand Integrated Commercial Trust might divest certain assets, and such divestment proceeds could be used for property purchases and asset enhancement initiatives. This implies that there are both organic (asset enhancements) and inorganic (acquisitions) drivers in place for CPAMF. Variant View There are specific risks to watch regarding CapitaLand Integrated Commercial Trust. A key risk is that CPAMF's inorganic growth outlook becomes less favorable, as the REIT fails to locate suitable acquisition targets. The other key risk is that CapitaLand Integrated Commercial Trust monetizes its assets at a slower-than-expected pace, which means that the REIT has less capital available for investments. Conclusion My existing Buy rating for CapitaLand Integrated Commercial Trust stays unchanged. CPAMF's financial outlook has become more favorable, considering potential acquisitions and divestment. In my prior February 12, 2024, update, I shared my view that CPAMF “can trade at a more demanding valuation or a lower distribution yield in the 4.5%-5.0% range” driven by a faster pace of dividend growth. CapitaLand Integrated Commercial Trust's current consensus next twelve months' dividend yield is 5.3% as per S&P Capital IQ, so there is still room for further yield compression or valuation re-rating. CapitaLand Integrated Commercial Trust's estimated dividend per share CAGR for the FY 2023-2027 time frame is +5.6% based on data sourced from S&P Capital IQ. As a comparison, the REIT's actual FY 2015-2019 (pre-COVID) dividend per share CAGR was a modest +1.6%. I think that a faster pace of dividend growth supported by acquisitions and asset enhancements will be supportive of dividend yield compression for the REIT in time to come.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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