FCOT – CIMB

Yield+ growth formula

Positives in 2Q were steady leasing and positive rental reversions. We see attractive yields and a strong DPU CAGR of 14% for FY12-15 after its CPPU redemption and the expiry of its current master lease at Alexandra Technopark in FY15.

2Q/1H13 DPUs broadly met Street and our forecasts at 26/46% of our FY13 number. We raise FY13-15 DPUs by 2-3% to incorporate lower borrowing costs and our DDM-based target price (discount rate: 7.7%) rises accordingly. Maintain Outperform with catalysts expected from further yield-enhancing moves.

Backend-loaded FY13

We expect backend-loaded earnings from further CPPU redemptions and the start of GroupM’s lease at China Square Central in Apr 13. 2Q13 DPU was up 14% yoy and 26% qoq. Yoy, lower CPPU distribution and interest expenses offset a 7% NPI decline after the divestment of properties.

Committed occupancy at China Square Central rose to 92.6% from 86.1% previously, with new tenants at China Square Central. Physical occupancy was a lower 73.0% for 2Q, but should pick up when its major tenant GroupM (13% of NLA at China Square Central) moves in in Apr. While take-up was dominated by smaller tenants (2k-5k sf), management notes healthy enquiries and positive rent reversions of 8-19% for its local assets and a one-off 87% at Central Park.

Asset leverage to rise to 39%

Asset leverage was 31.7% at end-Mar 13 but should climb to 38.6% after the funding of its Apr CPPU redemption through a combination of debt and internal funds.

Maintain Outperform

We reduce borrowing costs on lower debt (factoring in lower debt-funding for FCOT’s Apr CPPU redemption) and cost of borrowing. FCOT offers a strong DPU CAGR of 14% for FY12-15, backed by its completed CPPU redemption, ongoing leasing at China Square Central and the expiry of its current master lease at Alexandra Technopark (where we estimate a potential 13% NPI uplift in FY15 from higher underlying passing rents of S$3.37 psf vs. the master lease’s implied S$2.90 psf).