FCOT – CIMB

A step closer to catalysts

Positives in 1Q came from renewals at China Square Central (CSC) and occupancy increases at Key Point. With the start of discussions on early refinancing of its expensive SGD loan and lapsing of the CSC master lease in Mar, we think FCOT is a step closer to realising its catalysts.

1Q12 DPU was in line with our estimate, forming 24% of our full-year forecast. We expect back-end loaded interest cost savings. We retain our DPU and DDM-based target price (disc. rate: 9.4%). Forward yields of 8% are attractive. We keep our OUTPERFORM call.

Occupancy improvements

1QFY12 NPI was up 7% yoy on higher occupancy and rentals at Central Park where three new leases have been secured. Performance from local assets was stable with a key highlight coming from the crossing of the 90% mark in occupancy at KeyPoint after 11 quarters of steady occupancy improvements.

China Square Central master lease lapsing in Mar

Barring major downtime with low occupancy from negotiations, we expect the direct management of CSC on expiry of the master lease in Mar-12 to provide some upside. Slight disappointment comes from lower underlying occupancy of 92.5% though management has successfully reduced FY12 lease expiries from 56% of income in 4QFY11 to 40.1% (excluding 12.6% of committed leases). Signing rents are at high S$6psf, based on our understanding, allowing positive rental reversions. Management is currently in talks with other tenants on renewals.

Closer to refinancing

With signs of borrowing spreads creeping higher, FCOT has started discussions with tenants on plans to refinance its SGD loan ahead of maturity. Management has thus far successfully refinanced its A$ loan with 110bp margin savings. We expect margin savings when it refinances its SGD loans given high spreads for existing loans and on the back of a stronger parent in F&N and an improved property portfolio.