FCT – OCBC

New supply to cap suburban mall rentals

Performance in FY2010. Frasers Centrepoint Trust (FCT) made an total DPU of 8.2 S-cents1, for the period from 1 Oct 2009 to 30 Sep 2010, with an average DPU yield of 6.15%2. At yesterday’s closing price, its share price has also appreciated 9.89% YoY (with the low of S$1.26 on 26 May and a high of S$1.58 on 23 Sep). It also completed the acquisition of Northpoint 2 & Yewtee Point in Feb 2010, which is financed 62% by private placement of new units (S$177.8m) and 38% by internal working capital and a draw down of an aggregate S$110m from facilities made available by financial institutions.

Prime and Suburban rents narrowing. According to CBRE, suburban retail rents averaged $29.10 psf/month in 4Q10, reflecting a rental increase of 2.8% YoY and 0.34% QoQ. This is the only segment of the retail sector that showed a rental gain, proving the resilience of the suburban areas, underpinned by catchment demand. In contrast, the monthly rents for Orchard Road softened 2.6% QoQ to average $30.20 psf in 4Q10. On a YoY basis, Orchard rents fell 6.6% from the $32.40 psf in Q4 2009, as malls adjusted to the new supply. The narrowing gap between Suburban and Prime Orchard rents was most prominent in 2010. In Q1 2010, the difference was 12.6%. It narrowed to a mere 3.6% gap in Q4 2010.

New supply to cap suburban rentals. According to our estimates, another 1.62m sqft of retail space will be added in 2011-2012. This is expected to depress rental growth at the neighbourhood malls. In fact, CBRE estimated that suburban rents are likely to see a maximum 3% upside in 2011 as tenant’s resistance sets in. FCT, with its 100% exposure to suburban malls, is likely to be affected. Moreover, with only four local malls under its asset portfolio (Causeway Point, Northpoint, Anchorpoint, Yewtee Point), there is a limit to how much further it can scale, compared to CapitaMall Trust – the largest retail REIT which has 15 malls under its belt. We continue to like FCT because of its pure suburban positioning but we maintain our HOLD rating, with a revised fair value of S$1.58, on rental cap and valuation grounds. FCT continues to trade at a tight FY11F yield of 5.4%, and at a 17% premium to book value. Further re-rating catalyst, in our view, would stem from the manager announcing further acquisitions or development projects opportunities.

1 Computed based on summing the quarterly DPUs and Advanced DPU.

2 Computed based on total DPU divided by average closing price from 1 Oct 2009 to 30 Sep 2010