FCOT’s Q4 property income rises 16%

Distributable income surges 78%; DPU up 55% to 0.31 cents

FRASERS Commercial Trust (FCOT) rounded off its financial year ended Sept 30 with a strong set of earnings.

Net property income for the fourth quarter rose 16 per cent year on year to $23.2 million, boosted largely by contributions from Alexandra Technopark, which FCOT bought in August last year.

Contributions from two of FCOT’s properties in Australia, Central Park and Caroline Chisholm Centre, also grew partly as the Australian dollar strengthened.

Total distributable income was $14.3 million, surging 78 per cent from a year ago. Distribution per unit (DPU) rose 55 per cent to 0.31 cents. Distribution per Series A convertible perpetual preferred unit (CPPU) was 1.39 cents – 2.6 times of 0.54 cents last year.

‘We have been experiencing an increase in leasing activity in the Singapore and Australia properties due to new leases and expansion by existing tenants. This has translated to higher occupancies which will boost the distributable income,’ said Low Chee Wah, CEO of FCOT’s manager.

‘With the recovery in the economy, we have also seen the rental rates increased accordingly.’

At China Square Central, for instance, the committed occupancy rate was 93.1 per cent in September, up from 91.5 per cent in June.

FCOT also enjoyed an increase in its portfolio value. Based on its latest property valuation exercise as at Sept 30, its portfolio was worth $1.96 billion, up 1.9 per cent from the last valuation in 2009.

The trust’s properties in Singapore and Australia posted valuation gains, but those in Japan saw their values slip.

For the full year, FCOT’s net property income was $93 million, rising 25 per cent from last year. Total distributable income shot up by 89 per cent to $53.3 million.

DPU for the full year was 1.12 cents, up 29 per cent; distribution per CPPU was 5.5 cents, some 10.2 times of 0.54 cents a year ago.

FCOT will pay a distribution of 0.5549 cents per ordinary unit and a distribution per CPPU of 2.7575 cents for the second half of the financial year on Nov 29.

The counter closed unchanged yesterday at 16.5 cents.

3QFY10 Results

• 3Q10 revenue of $29.2 million, net property income of $22.7 million, distributable income of $7.7 million

• 3Q10 DPU of 0.25 cents

• Downgrade to Hold, fair value of $0.17

FCOT recorded 3Q10 revenue of $29.2 million (+28.9% y-y, -1.8% q-q), net property income of $22.7 million (+32.9% y-y, -3.9% q-q) and distributable income available to unitholders of $7.7 million (+38.7% y-y, -21.5% q-q). 3Q10 DPU was 0.25 cents (-65.8% y-y, -21.9% q-q). The improved y-y performance is mainly attributed to the contribution from Alexandra Technopark. However we also note that there was a general drop on a q-q basis. DPU was much lower from the previous year due to the increased unit base from the equity fund raising. Revenue contributions from Singapore, Australia and Japan are 52%, 35% and 13% respectively. Average portfolio occupancy rate is 93.1%, with most properties holding steady. Zooming in on the individual properties, KeyPoint and Galleria Otemae occupancy increased by 2.9% and 7.7% respectively however 55 Market Street saw a drop of 6.1%. There are five properties with full occupancy. KeyPoint has seen a gradual take-up in occupancy since management started repositioning the property to capitalize on the opening of the circle line MRT station. On Japan side, Cosmo Plaza continues to be the drag and the property is still listed as an asset to be sold. Effective occupancy is only 25.6% which drags down overall Japan properties occupancy to 77.6%.

FCOT has total debt of $818.5 million and gearing is 40.4%.

We think the property portfolio has shown consistent results, with not much change from the prior quarters. Step-by-step, we have seen management carrying out its plan to rebalance the REIT. A quick flow of event is the recapitalization of the REIT through the injection of Alexandra Technopark, forming a natural hedge of the foreign sourced income by rebalancing debts in the local currencies, the improvement in occupancy of KeyPoint. We believe there is further upside to KeyPoint occupancy rate. Something we would like to see is the divestment of the Cosmo Plaza and the AWPF investment since these two are not contributing effectively to the bottomline and which is also part of management plan when it took over from the previous management team.

We tweaked some of our expenses assumptions as we had been overly conservative in estimating the non-core expenses. This reduces our FY10E DPU forecast by 11% to 1.12 cents. Accordingly, we lower our fair value from $0.18 to $0.17. Thus we are downgrading our recommendation to Hold and reiterate that our said divestment and lowering of debt would be a re-rating catalyst for the stock.

Steady performance

At a Glance

• 3Q10 DPU of 0.25 Scts in line

• Keypoint’s occupancy inching up to 78.6% as of 3Q10

• HOLD, TP S$0.16 maintained

Comment on Results

3Q10 DPU of 0.25 Scts in line. Gross revenues and net property income were higher by 29% and 33% yoy to S$29.2m and S$22.7m respectively. Performance was largely due to contributions from Alexandra Technopark, which was acquired back in 4Q09. Distributable income to unitholders came in at S$7.7m (DPU of 0.25 Scts), up 39% yoy, partly lifted by lower interest costs post debt re-financing in conjunction with its rights issue a year back.

Stable balance sheet metrics. FCOT’s balance sheet remains healthy with gearing at 40.4% and interest cover of 2.74x.

95% of income secured YTD, Keypoint’s occupancy inching up. With a quarter to go, FCOT has secured majority of its income to date. Keypoint has also seen an improvement in average occupancy after the opening of nearby MRT train station– inching up to 78.6% as of 3Q10. Looking forward, 11.6% of revenues will be up for renewal in FY11, of which a majority will be for leases in Keypoint asset in Singapore (5.3% of portfolio income). Average expiring rentals are at cS$5.50psf pm and we expect renewals to remain flattish.

Recommendation

HOLD, TP S$0.16 maintained. Valuations are undemanding at 0.6x P/BV and FY10-11F yields of 7.6-8.0%. However, we see further catalysts only upon completion of its portfolio restructuring with the proposed sale of its Japanese assets. Maintain HOLD.

FCOT DPU for Q3 up 39% to 0.25 cent

FRASERS Commercial Trust (FCOT) said income distributable to unit-holders increased 39 per cent year on year to $7.7 million for its third quarter ended June 30.

Distribution per unit (DPU) for the quarter is 0.25 cent, also up 39 per cent. This takes DPU for the first three quarters to 0.81 cent, an increase of 21 per cent from the same period last year.

FCOT recorded a 29 per cent rise in gross revenue of $29.2 million and a 33 per cent increase in net property income to $22.7 million in Q3.

Total distributable income was up 123 per cent year on year to $12.4 million. This was mainly due to full-quarter contributions from Alexandra Technopark, a stronger Australian dollar and lower finance costs due to reduced borrowings and lower interest rates.

$4.7 million has been set aside for distribution to Series A Convertible Perpetual Preferred Units (CPPU) holders.

FCOT’s portfolio occupancy rate was 93.1 per cent at June 30, up 0.7 per cent from Q2, due to a rise in occupancy at its KeyPoint and Galleria Otemae properties.

The average occupancy rates for Singapore and Australian properties remained healthy – above 95 per cent – and they contribute more than 90 per cent of portfolio net property income, said FCOT. The portfolio’s weighted average lease term to expiry is about 4.1 years.

There is no distribution payment for Q3, as FCOT distributes semi-annually.

2QFY10 Results

• 2Q10 revenue of $29.8 million, net property income of $23.6 million, distributable income available to unitholders of $9.8 million.

• 1Q10 DPU of 0.32 cents.

• Maintain Buy, fair value $0.18

Things have stabilized

FCOT recorded 2Q10 revenue of $29.8 million (+24.3% y-y, +0.4% q-q), net property income of $23.6 million (+26.5% y-y, +0.5% q-q) and distributable income available to unitholders of $9.8 million (+81.6% y-y, +33.0% q-q). 1Q10 DPU was 0.32 cents (-55.6% y-y, +33.3% q-q). The y-y better performance is mainly due to the revenue contribution from Alexander Technopark as well as the favourable AUD exchange rate. As can be seen from the q-q results, 2Q10 results have stabilized from 1Q10 (Fig 1 and Fig 2). Revenue contribution from Singapore, Australia and Japan are 51%, 35% and 14% respectively.

Average portfolio occupancy rate is 92.4%. Occupancy for the Singapore and Australia properties remained high at 95.2% and 96.3% respectively. The strong occupancies are backed by master leases. 36.3% of revenue is backed by master leases of Alexandra Technopark and China Square Central. Whereas for Australia, 27.5% of total revenue includes blue chip tenants with long leases. The single biggest is the Centrelink property at 9.5% with a long term lease expiry at 2025. The Japan properties average occupancy rate was 74.2%, effectively adversely affected by the Cosmo Plaza master lease tenant who is in financial difficulty. Effective occupancy of the building is only 23.2%. FCOT has already classified Cosmo Plaza as a divestment asset and will be looking to sell the asset. The portfolio weighted average lease expiry (WALE) is 4.2 years

Capital management

FCOT has no near term refinancing needs. It has total debt of $829.7 million which is due in 2012. Gearing is at 40.1%.

Forecasts

We hold our view that FCOT is still on the rebuilding process. We think the injection of Alexandra Technopark was a prudent decision and it has proven to be so, having a stabilizing effect on total revenue. The overseas properties have also fared respectably, especially the Australia properties, with long WALE and high occupancies. Coupled with the rebound in the AUD dollar, contributions to total revenue are strong. The Japan properties continue to be a drag on the portfolio, stemmed mainly from Cosmo Plaza. Our main concern now is on how soon FCOT managed to divest Cosmo Plaza and also the AWPF investment, since these are not contributing effectively to the revenue. It would be a plus to use the divestment proceeds to pare down debts, therefore lowering gearing and we think that would be a re-rating catalyst. Maintain our buy recommendation and fair value of $0.18.