Can CapitaLand Integrated Commercial Trust (SGX:C38U) Continue to Grow?

This week, I’m highlighting a Dividend Dominator. 

Dividend Dominators, in my view, are often the top in their industry and have built a great brand name. They are insanely good at running their businesses in their own unique ways, and beating their competition.

That’s how they remain leaders in the industry year after year. 

I’d say these are the stocks you want to hold forever.

For long term investors looking to grow their wealth, Dividend Dominators continue to reward shareholders year after year.

When you buy and hold on to these stocks for a long time, you’re tapping into a consistent income stream. 

CapitaLand Integrated Commercial Trust (SGX: C38U), or CICT is one perfect example. 

CICT is a S$14.7 billion “retail-office integrated” real estate investment trust (REIT). After its merger with CapitaLand Commercial Trust, CICT is now the third largest REIT in Asia, behind Hong Kong’s Link REIT and Australia’s Scentre Group. 

The public-listed Singapore REIT started out with only three properties — Tampines Mall, Junction 8 and Funan DigitaLife Mall — when it first IPO in 2002.

Today, this giant landlord collects between S$750 million to S$800 million of rental income yearly. 

Even foreign investors know CICT is a REIT powerhouse. 28% of CICT’s investors come from the US and Europe. Now, not many Singapore REITs can boast about their investors in its company reports.

What’s striking about CICT isn’t its high-quality properties. 

Dissecting a “Forever Stock”

You see, CICT is very clever at taking an older building and turn it into something innovative. This is also what property experts like to call, “asset enhancement initiatives” (AEI).

In CICT’s case, it’s only better. 

Take for example, CICT’s Funan DigitaLife Mall. The property was redeveloped in 2016 from a quiet consumer-electronics focused retailer to a bustling “social retail” platform. The refurbished Funan Mall, completed in 2019 now holds over 200 brands with more than 30% flagship-concept stores.

According to CICT’s 2019 annual report, monthly shopper traffic soared more than 70% compared to the old development. 

Even though Funan’s net leasable area (NLA) remained unchanged, its property’s valuation more than doubled from S$367 million in 2015 to S$775 million in 2019.

NLA is simply the floor space that can be rented to tenants in a building.

The fact is, that’s the type of hidden value CICT provides for its retail properties. Funan Mall’s occupancy rate also improved from 95% to 99%.

And you can see the stark difference.

Walk down two streets from Funan Mall to City Hall station and you can compare the mall to Capitol Singapore, which is another integrated property with a struggling retail business.

CICT’s Funan Centre wasn’t the only property which underwent AEI. It also transformed other properties into iconic retail developments, including Bugis+ and JCube.

You see, this is also a key reason why CapitaLand Commercial Trust merged with CapitaLand Mall Trust. 

More and more properties now offer both retail and commercial spaces together.

This maximizes foot traffic by driving office workers to adjacent retail shops during lunch and after office hours.

I like to call this “synergy”.

But what’s even more important is this.

As CICT expands across both retail and office properties, it can also spread the running cost of managing a bigger property portfolio. This is what I like to call, economies of scale.

Investment teams are not cheap to hire, but you don’t need a large team to run a REIT business.

Let me explain briefly as I can. 

A REIT is like a “virtual bank”.

All it simply does is borrow cheap, short term debt from a bank, and invests into longer term, higher-yielding properties like retail and office buildings. 

The difference in interest cost it pays and what it earns from the property income is the profit margin it keeps.

Imagine this, if you keep borrowing money and investing it in more and more high-quality properties, the amount of profits you make grows.

And all these while, you don’t need to keep growing your investment team. 

So, with specialized property experts, CICT can keep doing this as long its team can continuously find high-quality properties to buy and manage.

That’s all CICT ever does. 

This is also what I call the safest approach to leveraged investing. 

But I’m digressing.

Any Serious Income Investor Should Own This Type of REIT

Right now, CICT is doing just fine.

During its latest financial year ending Dec 2020 results, CICT maintained a 96% occupancy rate across its retail, office and mixed-development properties.

What’s even more impressive is, even during the peak of the Covid-19 pandemic last year, CICT maintained a strong 85% and 63% retention rate for its retail and office buildings.

This means its tenants are staying put and riding through the pandemic with its landlord.

Now, dividend payout is important to CICT. 

Over the past 10 years, CICT maintained an average S$0.10 per unit dividends. At today’s current share price, that’s a dividend yield of 4.8%.

And it’s triple the yield compared to a Singapore Savings Bond. 

Last year, dividends dropped because of the pandemic to S$0.0695 per unit. 

But if we look closely, CICT’s tough pandemic situation is improving very fast. 

In fact, its shopper traffic and tenants’ sales have recovered to 68% and 95% of the pre-pandemic levels. This is despite Singapore still in Phase 3 of its reopening, where the maximum group gathering limit is 8 people.

As a Dividend Dominator, I’m pretty sure the setback CICT faced last year is temporary.

And the newly formed merger should allow CICT to grow not only its retail properties, but also hunt for high-quality commercial properties. 

The type of scale CICT can  achieve should should fuel a huge dividend upside for long term investors in the future. 

Sometimes, investing can be simple. 

Always here for you,

Willie Keng, CFA

Founder, Dividend Titan

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