FrasersCT – OCBC

Safety in the suburbs

Safety in the suburbs. We are resuming coverage on retail S-REIT Frasers Centrepoint Trust (FCT). We believe that its suburban assets – Causeway Point, Northpoint, and Anchorpoint – are an interesting low beta play in the current uncertain economic environment. We note that occupancy levels have generally held during previous crises and we like the malls’ massmarket consumer focus. These properties are strategically located adjacent to MRT stations and bus interchanges, and enjoy captive markets with strong population catchments and limited alternative shopping choices. FCT also owns a 31.06% stake in Malaysian Hektar REIT [RM 1.03, Notrated] whose retail assets enjoy a similar profile.

Asset enhancement focus. Since its July 2006 listing, FCT’s focus has been on extracting value from its existing portfolio. Asset enhancement works at Anchorpoint over 1Q07 – 1Q08 (year ending Sep 30) yielded a 41% jump in average rentals from S$5.32 psf per month to S$7.50 psf pm. Northpoint is FCT’s current target and management expects average rentals to increase 17% from S$11 psf pm to S$12.91 psf pm after works are completed in 3Q09. FCT’s largest property Causeway Point is next in line but details have yet to be announced.

Strong pipeline but financing a concern. FCT is ready to realize its sponsor-driven pipeline over the next two years. First in its sights is the 83,000 sf extension to Northpoint. Management has told us that 96% of Northpoint 2 is committed or in advanced stages of negotiations. Both the extension and the YewTee Mall could potentially be injected into the REIT in the next 6-9 months. Our major concern here is the lack of clarity about the executing of the portfolio expansion – the timing, pricing, financing and consequently, accretion. FCT is currently geared at a comfortable 29% and could ostensibly absorb Northpoint 2 on debt only. However, we believe a fresh equity injection will be necessary to fund subsequent buys, adding another layer of uncertainty.

Fully valued – resume with HOLD. FCT is trading at a FY09F DPU yield of 5.8% (existing portfolio), which we find expensive versus other SREITs. We like FCT but we believe it is fully valued at current price levels. The various uncertainties attached to acquisitions make us wary of awarding a premium to S-REITs for future external growth. The counter’s low liquidity arising from a small size and high sponsor ownership is another concern in a bear market. We resume coverage on FCT with a HOLD rating and S$1.20 fair value estimate.