Strong uplift from refinancing

• Refinancing of its S$500m loan at 100 bps lower rate

• FY13F DPU to increase by up to 9.7%

• Maintain BUY at a revised TP of S$1.26

Refinancing of its S$500m loan. Frasers Commercial Trust (FCOT) announced that they have entered into facility agreements for the following (1) a 3-year term loan facility amounting to S$320m (at a rate of SOR + 1.55% p.a.) and (2) a term loan facility of S$185m (at a rate of SOR +1.83% p.a.). The S$320m facility will be secured by a mortgage over FCOT’s interest in China Square Central and 55 Market Street while the S$185m facility will be secured over its interest in Alexandra Technopark. These new facilities are expected to be drawn down before June to refinance its S$500m term loan expiring in November 2012.

Strenghtening balance sheet. Via the refinancing, the trust is expected to (i) reap significant interest savings upon refinancing. We estimate annual savings of cS$5m as the weighted average cost of the new facilities is SOR +1.65%, much lower that the expiring term loan (SOR + 2.65%). Assuming that the refinancing takes place before 4QFY12, we expect FY12 DPU to increase by 2.0% and FY13 DPU to increase by 9.7%; (ii) extend FCOT’s debt maturity profile. The break-up of the S$500m loan into two smaller tranches of 3 and 5 year maturities will lengthen the trust’s weighted average debt maturity from 1.36 years to 3.88 years, reducing any risks of a large refinancing exercise in any one year; and (iii) free up the mortgage on Keypoint property, paving the way for a potential sale (subject to shareholders’ agreement in the upcoming EGM).

Maintain BUY, at a higher TP of S$1.26. The trust is trading at 0.74x P/BV and FY12/13 yield of 6.6% – 7.8%. We continue to like FCOT’s pro-active efforts to reshape its portfolio since the beginning of the year. We believe rerating catalysts from the stock would depend on the reit’s ability to deploy Keypoint proceeds to the repurchase of CPPUs or share buyback (resolutions in the upcoming EGM) which are more yield enhancing in our view compared against debt repayment. Maintain BUY at a slightly higher DCF-backed TP of S$1.26.

Refinancing savings round 2

Secured rates for FCOT’s SGD loan (overall margin savings of 100bps) met our expectations. We expect a partial repayment eventually when unit holders approve the sale of KeyPoint and when management finalises the best use for the sales proceeds.

We keep our DPUs and DDM-based target price (discount rate: 9.1%) unchanged. Our estimates assume the use of KeyPoint divestment proceeds for 50% redemption of its CPPUs and part-repayment of loans. Maintain Outperform on catalysts from more accretive capital deployment.

What Happened

FCOT has announced that it has entered into agreements for a S$320m three-year loan and a S$185m five-year loan to refinance its S$500m SGD term loan facility. Interest rates for the loans are at SOR plus margins of 1.55% and 1.83% respectively from the date of first drawdown. The loans are secured over China Square Central, 55 Market Street and Alexandra Technopark.

What We Think

Loans are secured at an overall margin of 165bps over SOR, a 100bps saving from the previous borrowing spread of 265bps. This is fairly in-line with our expectations. While FCOT has entered into agreements for a collective S$505m in borrowings for refinancing, we expect a partial repayment eventually when unit holders approve the sale of KeyPoint during the EGM on 12 Jul 2012and management finalises the best use of the sales proceeds. Management had raised the possibility of a partial CPPU redemption, partial loan repayment, and share buyback in its circular dated 18 Jun. We understand that management had entered into the facilities to ensure flexibility in the use of KeyPoint sales proceeds and there are no major penalties for early repayment.

What You Should Do

We keep our DPUs and DDM-based target price unchanged with refinancing rates fairly in-line with our expectations. Our estimates assume the use of KeyPoint divestment proceeds for 50% redemption of its CPPUs and part-repayment of loans. Maintain Outperform on catalysts from more accretive capital deployment.

FCOT secures new facility agreements to refinance $500m term loan

Frasers Commercial Trust (FCOT) has secured new facilities to refinance its existing $500 million term loan facility, its manager Frasers Centrepoint Asset Management (Commercial) Ltd said on Monday.

A transferable three-year term loan facility of S$320.0 million has been secured by a mortgage over and other security documents relating to FCOT's interest in China Square Central and 55 Market Street. The interest rate for the facility is the Singapore Swap Offer Rate plus a margin of 1.55 per cent per annum.

A transferable five-year term loan facility of S$185.0 million was secured by a mortgage over and other security documents relating to FCOT's interest in Alexandra Technopark. The interest rate for the facility is the SOR plus a margin of 1.83 per cent per annum.

"FCOT will be entering into hedging arrangements to hedge its interest rate exposure in accordancewith the terms of the new facilities," the manager said.

MAKING GOOD PROGRESS

•Expecting improved performance

•Positive move to divest KeyPoint

•Valuations still undemanding

Outperformer in S-REIT space

Frasers Commercial Trust (FCOT) has emerged as the top performer in the S-REIT space YTD given its expected improvement in operating performance and financial position. The REIT’s acquisition of the remaining 50% stake in Caroline Chisholm Centre in Australia, which had been completed on 13 Apr, is expected to contribute positively to its DPU and strengthen its portfolio lease expiry profile. In mid-May, FCOT jointly announced the China Square Precinct Master Plan with Far East Organization and The Great Eastern Life Assurance, which will enhance the traffic and connectivity of the downtown heritage area, including China Square Central (CSC). This will likely enable FCOT to better position CSC for quality tenants and ultimately benefit from yield optimization, now that FCOT has taken over management of the asset following the expiry of master lease.

Divestment of KeyPoint a plus

FCOT had also announced the proposed sale of KeyPoint on 24 Apr, much to the market’s anticipation. The sales consideration was at S$360.0m and represents a 26.3% premium over the property’s latest valuation of S$285.0m (NPI yield at 3.11%). We see several positives from the divestment, especially when the proceeds are used to pare down its borrowings or even redeem its CPPUs (Convertible Perpetual Preferred Units). First, it is expected to alleviate the heat on its aggregate leverage (currently close to 40%), hence providing it with greater financial flexibility for future investment opportunities. Second, FCOT may be able to refinance its debts at more favourable terms, as its financial position is now stronger. Furthermore, interest expenses are likely lower from lower outstanding debts.

Maintain BUY

We continue to like FCOT for its growth potential, proactive management and respectable FY12F DPU yield of 7.3%. Amid the positive outlook, we expect FCOT’s performance to be sustained (valuations undemanding at 0.7x P/B). We are holding off adjusting our estimates as the divestment of KeyPoint is subject to unitholders’ approval. Maintain BUY with unchanged fair value of S$0.97.

On track to unlocking more value

Enhancing China Square Precinct. Frasers Commercial Trust (“FCOT”) together with Far East Organization (“FEO”) and The Great Eastern Life Assurance announced that they will be undertaking asset enhancement initiatives (AEI) to revitalise the China Square Precinct. The AEI works under the China Square Precinct Master Plan is expected to improve connectivity and integrate the companies’ respective developments, namely China Square Central (“CSC”), Far East Square and Great Eastern Centre, into a precinct known as “China Place.” One of the key features of the China Square Precinct Master Plan is the construction of a covered link way between the three properties and future Telok Ayer MRT station. The link way will cost an estimated S$14m which will be shared equally among the three partners. This project will commence in June 2012, and targeted for completion by February 2013. Separately, FEO is planning two hotel developments within Far East Square. These developments comprise a 37-room designer boutique hotel that will be converted from offices within the conservation shop houses, and a new 28-storey 292-room hotel.

Impact on FCOT:

More room to drive rents and occupancy up. While impact on earning is minimal in the shorter term, we view this exercise positive for CSC as this will help to improve connectivity to the MRT station and inject more vibrancy to the area, enabling it to better compete with surrounding properties in view of the upcoming supply. This would pave the way for FCOT to optimize CSC’s retail mix and at the same time drive up occupancy, which is at 91% and raise signing rents if possible, which is currently >S$6 psf per month. We believe more value could be extracted from CSC including the possibility of a hotel development in the longer term. CSC contributed about 18% to FCOT NPI in 2Q12.

Strong balance sheet. Gearing is expected to remain unchanged at its current level of 36.1%. We expect FCOT to fund its c.S$4.6m portion by internal sources including the sales proceeds from its recent sale of Keypoint.

Maintain BUY, more upside from the coming refinancing. We continue to like FCOT for its undemanding valuation at 0.7x P/BV and attractive FY12/13F yields of 6.4 – 7.5%. Since the beginning of last year, FCOT has been taking pro-active steps to reshape its portfolio and strengthen its balance sheet. We expect to see more upside in earnings when the company refinances its S$500m SGD loan due in November this year at a more attractive interest rate. Maintain BUY at an unchanged TP of S$1.24.