1Q09 results: below expectations; refinancing to conclude soon

● 1Q09 revenue and NPI were in line with our and consensus fullyear forecasts, while DPU was below our below-consensus forecast, due mainly to higher-than-expected trust expenses (legal and professional fees) and a S$0.5 mn realised loss on AUD forward contract undertaken to manage forex income exposure.

● Management further revalued downwards its portfolio of nine properties by 7.8% to S$1.53 bn to reflect deteriorating conditions. Gearing has risen from 54.4% to 58.3%, while interest coverage fell to 1.8x from 2.2x, though still meeting existing debt covenants.

● We expect management to conclude refinancing of its S$620 mn debt due this year soon, while balance sheet strengthening may require some equity fund raising or convertible preference issue.

● We cut FY09E income 2% on higher trust expenses, but raise FY10-11E income 3% from lower management fees on lower asset revaluations, and DDM-based target price to 18cts (from 16cts). While attractive at 20% FY09E yield and 0.2x P/B, we expect DPU to decline 46% to trough on falling rents and rising financing costs.

Results reflect weak conditions, loss of income support
Revenues fell 16% YoY to S$4.4 mn due mainly to the loss/reduction of income support at Central Park and KeyPoint, weakening of the AUD, partially offset by a stronger JPY. Occupancy fell to 88.9% from 94.6% mainly on the removal of the master lessee, who is in trouble at its Cosmo Plaza, Osaka and lower occupancy at KeyPoint. Financing costs rose 36% to S$13.2 mn increased debt margins under May 2008 debt extension.

Portfolio updates: first right of refusal on Canberra asset
Receivers and administrators have been appointed to the assets of Record Realty Trust (RRT), who is the other 50% joint owner to FCOT’s 50%-owned S$91 mn Canberra asset, Caroline Chisholm Centre (CCC). FCOT has the right of first refusal should they dispose of RRT’s indirect interest in CCC.

FCOT continues to explore divesting its stakes in Cosmo Plaza, Osaka and its 20.6% stake in Australian Wholesale Property Fund (AWPF). Cosmo Plaza saw occupancy fall to 23% due to master lessee, Restoration Asset KK surrendering the space and only 30% of the space has been re-leased.

Nearly there

Comment on Results
• Results slightly below expectation due to higher interest cost
• Gearing at 58%
• 19% of NLA up for renewal in FY09
• Maintain HOLD, TP S$0.18

Operationally weaker yoy. FCOT reported 1Q09 results which were slightly below expectations. Gross revenues and NPI fell by 16-17% yoy to S$24m and S$18.7m respectively on the back of (i) weaker earnings from its Australian properties due to weaker forex and loss of income support from Central Park, (ii) lower draw-down of income support from Keypoint (S$0.9m vs S$2.3m in 1Q08) and (iii) lower contribution from Cosmo Plaza due to the loss of a major tenant.

Further DPU erosion from increasing interest cost. DPU of 0.72 Scts for 1Q09 (-56% yoy, -47% qoq) was largely due to higher than projected interest cost on the extension of its debt facility. Our forward FY09-10 DPU estimates are adjusted downwards to 3.4cts to reflect higher interest cost on its debt.

Writing down a further S$143m off book. FCOT recorded a further devaluation of its portfolio in 1Q09, a reflection of an updated realizable value of its properties in current environment. Management believes that further write-down of its property value is unlikely in the immediate term. NAV is adjusted downwards to S$0.79. As a result, gearing level is hiked up to 58%.

19% of space up for renewal in remaining quarters. A majority of expiring leases are from Keypoint which has an average passing rent of S$4.45 psf pm, we expect continued positive rental reversions given its low base.

Recommendation

Maintain HOLD, TP S$0.18. We believe that improving its balance sheet strength will remain key for a possible re-rating of the stock in the near term. Maintain HOLD, TP S$0.18 based on DCF. FCOT currently offers a prospective FY09-10F yield of 19%.