Frasers Commercial to sell property for S$360 mln

Frasers Commercial Trust , which owns office assets in Asia, said on Tuesday it will sell a Singapore commercial property to Bayfront Ventures Pte Ltd for S$360 million (US$288 million).

Bayfront Ventures is a company jointly owned by Fragrance Group Ltd and World Class Land Pte Ltd, a subsidiary of Aspial Corporation Ltd.

Frasers Commercial said it will realise a gain of S$72.8 million from the sale of the property.

POSITIVE SURPRISE ON DPU

•Better results from lower interest costs

•Stable operational performance

•Expecting positive income growth

Good set of results

Frasers Commercial Trust (FCOT) announced its 2QFY12 results last evening. NPI came in within our estimates at S$24.8m (+3.8% YoY), driven primarily by positive rental reversions from Central Park in Perth (+12.0%) and higher share of profits from the master lessee of China Square Central (CSC) in Singapore (+7.9%). Distributable income, on the other hand, increased at a faster-than-expected pace of 7.7% YoY to S$15.9m as a result of lower interest expenses. Consequently, DPU for the quarter stood at 1.74 S cents, up 8.1% YoY. For 1HFY12, NPI rose by 5.6% YoY to S$49.4m, while distributable income climbed 10.4% to S$30.2m. In addition, DPU was up 13.2% YoY to 3.2423 S cents, forming 48.5% of our DPU forecast. This is slightly ahead of our expectations, considering FCOT may likely benefit from future earnings uplift following its recent acquisition of the remaining 50% stake in Caroline Chisholm Centre (CTL).

Healthy occupancy and lease profile

On its operational front, we note that FCOT’s performance was largely stable. Average portfolio occupancy eased marginally to 96.1% from 97.6% seen in 1Q, due partially to a 1.3ppt decline in CSC’s occupancy to 91.2%. However, management revealed that it is mainly due to timing of the tenancy leases (expected to commence in Apr), and that fundamentals are still healthy. Weighted average lease to expiry as at 31 Mar was maintained at 3.4 years, with a comfortable 17.0% of its leases due to expire in FY12.

Maintain BUY

FCOT also provided a relatively upbeat outlook for the coming quarters. While management may likely be more prudent on its investment decisions given that FCOT’s aggregate leverage may trend towards 40% post acquisition of CTL, it expects positive income growth to its portfolio, supported by acquisition and positive rental reversions/escalations. We also understand that FCOT had taken over the management of CSC on 30 Mar and is currently exploring options to rejuvenate the asset. Maintain BUY with a revised fair value of S$0.97, as we incorporate the results into our forecasts.

Frasers Commercial Trust's Q1 DPU up 8.1%

Frasers Commercial Trust (FCT) said on Thursday its second-quarter distribution per unit (DPU) rose year-on-year to 1.74 Singapore cents from 1.61 Singapore cents a year ago.

Distributable income to unitholders was S$11.2 million for the second quarter ended March 31, a rise of 10.9 per cent from a year ago.

This is achieved on the back of good asset performance and lower interest expenses, said Low Chee Wah, chief executive of Frasers Centrepoint Asset Management, which is the manager of the trust.

FCT's Q2 net property income has also risen to S$24.76 million, up 3.8 per cent for the year-ago period. Gross revenue similarly gained 4.2 per cent to S$30.87 million.

For the half-year period, DPU rose 13.2 per cent year-on-year to 3.24 Singapore cents.

This works out to an annualised yield of 7.4 per cent based on FCT's closing price of S$0.88 per unit on April 18.

FCT's distributable income to unitholders for the half-year period was S$20.78 million, an increase of 16 per cent year-on-year. Net property income has also risen 6 per cent to S$49.39 million.

Its gross revenue grew 5 per cent year-on-year to S$61.53 million, helped by higher rental rates achieved from new and renewed leases.

FCT's Singapore portfolio occupancy of 96.6 per cent fared slightly better than its average occupancy rate of 96.1 per cent.

"The rents of our Singapore properties continue to be competitive and the occupancies remain healthy with positive growth from the Australian properties providing a good uplift to the income of the portfolio," Mr Low said.

"Collectively, they provide a strong platform and underpin the growth of FCT," he added.

Unitholders can expect to receive their first-half FY12 DPU on May 30.

Ready to fly high

Catalysts abound. Frasers Commercial Trust (FCOT) is an office REIT backed by a strong sponsor and offers income stability through long-term master lease agreements. In our view, the positive rental reversion for its two key assets, China Square Central (CSC) and Central Park (CP), and the unlocking of value through a sale or redevelopment of KeyPoint are positive catalysts for the REIT.

Positive rental reversion a boon. When the existing master lease agreement for CSC expires on 29 March 2012, FCOT will take over direct management of the property. CSC will likely experience an immediate lift to its net property income as the positive rental reversion kicks in – 53% of total gross rental income expiring in FY Sep12F with the average passing rent at $6 psf vs current market rent at $6.3-8.0 psf. The completion of the Telok Ayer MRT station next year should also boost CSC’s signing rents this year and next.

Potential asset sale to unlock value. FCOT has been granted an outline planning permission (OPP) for the redevelopment of KeyPoint, which could be rezoned from commercial to mixed commercial and residential use. In our view, FCOT could sell the asset and use the proceeds to purchase its sponsor’s pipeline of assets, redeem the convertible perpetual preferred units (5.5% coupon), and/or reduce its debt. We would prefer FCOT to refrain from redeveloping KeyPoint to preempt the risk of reducing the building’s attractiveness as an instrument for stable income. KeyPoint could possibly be sold for $1,200-1,300 psf, above its purchase price of $1,186 psf.

Trading at steep discount to book. FCOT trades at a steep 40% discount to its NAV and offers an attractive DPU yield of 7.7% based on consensus. It does not have any major debt refinancing risk until FY Sep13, when S$500m Singapore-denominated loan and S$120m JPY loan are due. Its gearing level is not excessively high at 36.8%. The average borrowing rate of 4% could be reduced upon the successful refinancing of its AUD loan next year.

ACQUIRES 50% INTEREST IN CAROLINE CHISHOLM CENTRE

•12.6% discount to valuation

•Accretive to DPU

•Enhance lease expiry profile and stability

Details of acquisition

Frasers Commercial Trust (FCOT) yesterday announced the proposed acquisition of the remaining 50% interest in Caroline Chisholm Centre (CTL) for AUD83.0m (S$112.6m). The purchase consideration was at a 12.6% discount to the last valuation of AUD95.0m (S$121.3m) of its existing 50% stake in the property, carried out on 30 Sep 2011. Management intends to finance the acquisition via bank borrowings and internal funds.

Benefits likely from investment

We are positive on the acquisition as CTL is fully leased to the Commonwealth Government of Australia, represented by Centrelink, with a balance lease of ~13.5 years and 3.0% annual rent increment. This will likely enhance FCOT’s portfolio lease expiry profile and provide stability in income growth. According to management, the portfolio weighted average lease to expiry is expected to improve from 3.4 years (31 Dec 2011) to 4.4 years, while the percentage income from master leases and blue-chip tenants is likely to increase from 43.1% to 48.3%. We also believe the move will give FCOT greater control and flexibility as the group will own the entire property upon completion of the transaction.

Maintain BUY

Based on FY11 NPI of AUD8.5m (S$10.9m) and valuation of FCOT’s present interest in CTL, we note that NPI yield of the property was at 8.9%. This compares favorably to the FY11 implied portfolio NPI yield of 4.9%. Assuming the acquisition was financed by bank borrowings and internal funds, management guided that it is expected to add 0.32 S cents or 5.6% to its DPU. In our view, FCOT appears poised to produce a good set of performance in the current financial year, given the better expected rental terms on China Square Central, potential interest savings from refinancing and current investment. Our DDM based fair value is now lifted to S$0.94 from S$0.87 previously, after factoring in the acquisition. Maintain BUY on FCOT.