FCT – OCBC

Refurbishment works drive down 1Q11 Results

Refurbishment works drive down 1Q11 Results. FCT reported S$23.5m of 1QFY11 revenue, up 18.5% YoY but down 15% QoQ. The YoY increase follows the acquisitions of Northpoint 2 and YewTee Point on 5 Feb 2010. The QoQ decline was primarily the result of asset enhancement works at Causeway Point (CWP), which has caused CWP’s gross rent income to dip 24% YoY and 22.8% QoQ. On a quarterly basis, we also noted that 1Q11 gross revenue income1 for YewTee Point and Northpoint (aggregated income) were down 9.9% and 14.7% respectively. We understand from FCT that there is typically a one-month accounting lag for computing tenant’s gross turnover. Thus, one should expect to see the Dec festive retail sales figures boosting the variable component of retail leases subsequently in Jan 2011. Overall portfolio occupancy was down 6pp YoY and 6.5pp QoQ to 92.1% due to the refurbishment works. Distributable income was also up 25% YoY but down 9.2% QoQ at S$15m, and noticeably 24% above 1Q11 operating cash flow2 . DPU amounts to 1.95 Scents, which trades ex-date on 27 Jan. FCT’s gearing ratio stands at 30.6%, with a weighted average cost of debt of 3.76% and interest cover of 3.69x as at 31 Dec 2010. It has recently also secured a five-year loan facility to pay down a $260m commercial mortgage-backed security expiring in July 2011.

CWP’s AEI update. As at Dec 2010, 13% of the construction works at CWP have been completed, with all works scheduled for completion by Dec 2012. Retailers have pre-committed 92% of the space on level one, where most of the work is currently taking place. FCT has projected an incremental annual NPI of S$9.3m for CWP’s enhancement, which is expected to contribute to the group’s bottom-line by 2013, with an overall ROI of 13%. The average rent is also expected to increase from S$10.20 psfpm before AEI to S$12.20 psfpm post-AEI.

Cautious on Outlook. We remain cautious on the outlook for suburban malls, on the back of new supply of retail space to be added in 2011-2012, which is expected to depress rental growth at the neighbourhood malls. In fact, CBRE forecasted that suburban rents are likely to see a maximum 3% upside in 2011 as tenant’s resistance sets. FCT continues to trade at a tight FY11F yield of 5.4%, and 18% premium to book value. We thus maintain our HOLD rating for FCT, with an unchanged fair value of S$1.58, on rental cap grounds. Further re-rating catalyst, in our view, would stem from the manager announcing further acquisitions or development projects opportunities.