Frasers wants all of Caroline Chisholm

Singapore-listed Frasers Commercial Trust is considering the purchase of the remaining half stake in the Caroline Chisholm Centre in Canberra, up for sale by Record Realty Group receiver KordaMentha.

The Singaporean trust, which owns the other half stake in the complex, could pick up the rest at a slight discount to the $95 million at which it holds its interest.

The trust initially picked up its stake in the tower at $108.75 million in mid- 2007, alongside Record Realty, when both were controlled by the now collapsed Alleo Finance Group.

The bulk of Record Realty’s Australian portfolio fell under the control of Bank of Scotland International. KordaMentha has already sold a series of towers out of the portfolio.

These include Melbourne’s St Kilda Road; one in Margaret Street, Brisbane, and global property manager RREEF Real Estate bought Sydney’s Exchange Centre for $186 million. The Singapore trust, known as Allco Commercial REIT (real estate investment trust) before Frasers took over management, emerged as the likely purchaser after talks with Sydney-based fund manager CorVal Partners ended.

CorVal, which is backed by property investor Andrew Roberts, best known as the former head of Multiplex Group, had been a contender to buy the stake.

CorVal has a good history with Canberra properties. It acquired Industry House in the city during the property crunch for $123 million. However, the Singapore trust is believed to have pursued the opportunity to take full control of the complex. It also owns a half stake in Central Park, a 47-level office tower on St George’s Terrace in Perth. But last year it sold its minority stake in the unlisted Wholesale Australian Property Fund.

The Caroline Chisholm Centre was designed as the headquarters for the federal Department of Human Services, formerly known as Centrelink.

The department has a lease for 18 years from July 2007 with 3 per cent annual reviews.

The premium-grade, five-storey, freestanding office building was completed in 2007 by Multiplex. The entire complex has a passing net income of $14.41 million and it has a net lettable area of about 40,244 square metres. John Marasco and Jim Shonk of Colliers International Property Consultants are marketing the property, but declined to comment as did Korda-Mentha and Frasers.

A sale would be the city’s largest this year as international groups appear set to dominate the early buying.

Property tycoon Lang Walker is advancing the sale of one his key Canberra holdings, the new 40,000 square metre headquarters of the Department of Education, Employment and Workplace Relations, to a Malaysian unit of CIMB-TrustCapital Advisors Singapore and pension fund Employees Provident Fund. The sale of the $230 million Canberra building, an A-grade complex at 50 Marcus Clarke Street, is likely to show a yield of 7.4 per cent. The department

has committed to a 15-year lease for the building.

Clarification from FCOT

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.

Frasers Commercial Q1 DPU jumps 21%

Reit’s topline up 6% as occupancy rates, rentals at Central Park improve

FRASERS Commercial Trust (FCOT) reported a distribution per unit (DPU) of 1.51 cents for the first quarter ended Dec 31, 2011.

This is 21 per cent higher year-on-year after factoring in the consolidation of every five units held by unitholders into one unit on Feb 11, 2011.

Distribution for Series A convertible perpetual preferred units (CPPU) for the period remained little changed at 1.38 cents.

Q1’s total distributable income to both unitholders and CPPU holders rose 13 per cent from the previous year to $14.3 million, on the back of higher net property income, which rose 7 per cent year on year to $24.6 million. Distributable income to unitholders increased 22 per cent to $9.6 million over the same period.

The real estate investment trust (Reit) also managed to grow its topline, which climbed 6 per cent to $30.7 million as a result of better occupancy rates and rentals achieved for Central Park. Average occupancy rates stood at a healthy 97.6 per cent due to strong take-up in both the Reit’s Singapore and Australian portfolios, which was 98.1 per cent and 97.8 per cent, respectively. Occupancy levels in the Japanese portfolio stood at 91.4 per cent.

Said CEO of FCOT’s manager, Low Chee Wah: ‘In the coming quarter, we will be taking over the management of China Square Central upon the expiry of the master lease on 29 March, 2012.’ He said rejuvenation plans for the asset will be explored to capitalise on the opening of Telok Ayer MRT station next year.

The counter lost half a cent, or 0.6 per cent, to 76.5 cents yesterday.

Moderate growth within expectations

4QFY11 DPU in line. Frasers Commercial Trust (FCOT) reported 4QFY11 gross revenue of S$30.4m, up 3.8% YoY due to higher contribution from Central Park and KeyPoint. This was partially offset by loss of revenue contribution from Cosmo Plaza following its divestment, and lower revenue from 55 Market Street (55MS) as a result of negative rental reversion. NPI, on the other hand, was up 4.8% YoY to S$24.3m, while distributable income was up 1.0% YoY to S$14.4m. For the quarter, DPU stood at 1.52 S cents, representing a slight 1.9% YoY decline. This brings the full-year DPU to 5.75 S cents, which is roughly within our and consensus expectations of 5.6 S cents and 6.0 S cents, respectively.

Improvement in occupancy rates. FY11 portfolio average occupancy rates tracked a substantial improvement from 90.8% in FY10 to 98.0%, underpinned by healthy rates of 97.8% for Singapore and 99.8% for Australia. We note that 55MS was one of the key drivers for the robust occupancy growth in Singapore. This helped to minimize the fall in its gross revenue contribution to 13.0%. In Japan, the occupancy rates remained unchanged at 93.6%.

Healthy portfolio WALE. As at 30 Sep, the weighted average lease to expiry (WALE) was about 3.6 years, aided by long Australian portfolio duration of 6.8 years. For FY12, 29.3% of the gross rental income is due for renewal, of which 16.0% is attributable to the expiry of China Square Central master lease arrangement. Management highlighted that the annualized halfyear unaudited net operating income for the underlying leases at the property is above the master lease net rent of S$17.55m per annum, hence presenting an opportunity for FCOT to enhance value. As such, it intends not to renew the lease but to take over the management of the property upon its expiry in Mar 2012 (committed occupancy increased to 95.7% in Sep from 94.5% in Jun).

Business outlook appears challenging. Looking ahead, FCOT expects the business environment to remain challenging, amid the current uncertain market condition and ongoing Eurozone debt situation. In view of this, it will focus on its active strategy to improve portfolio occupancy and rental rates while keeping its expenses low. The group will also embark on an early re-financing exercise of its existing debts due next year end to take advantage of the prevailing low interest rate environment. We are putting our Buy rating and S$0.87 fair value UNDER REVIEW due to a change in analyst coverage.

Steady quarter; catalysts intact

With stronger occupancy, we believe FCOT can tide through tough times better than before. Refinancing catalysts are intact. We also expect buffers against office headwinds from master and long leases.

4Q11/FY11 DPU is in line with our estimates though slightly below consensus, at 26%/100% of our FY11 estimate. We lower our DPU estimates and DDM-based target price (discount rate 9.4%) on interest-cost adjustments. Maintain Outperform on refinancing catalysts.

Boost from occupancy

We believe FCOT is better-positioned to handle tough times this time round, given stronger asset occupancy and support from master/long leases. Management notes slower leasing but expects support from healthy occupancy and low rents. FY11 NPI grew 3% yoy on stronger contributions from almost all its self-managed assets. 4Q occupancy surged to 98% from 91% last year on proactive leasing with KeyPoint chalking up its 10th straight quarter of occupancy improvements, to 88%.

Upside from China Square

We believe direct management of its largest asset, China Square Central, could provide upside. Management guides that net operating income for underlying leases here exceeds that for its master lease. Underlying occupancy is healthy at 95.7% while recent signing rents are S$6.30-8psf vs. expiring rents of S$6psf.

Refinancing catalysts

A 50bp margin reduction (all debt due in FY12) is expected to lift DPU by more than 10%. Management will focus on its A$ debt first. Given rising uncertainties, it could be more proactive in refinancing its S$ debt though we believe the timing could be affected by its decision for KeyPoint. There are no penalties for early refinancing.

Keeping mum on KeyPoint

Management has not confirmed recent news reports on the closure of expression of interest for this asset. It maintains that its move is largely exploratory.