Category: FCOT
SREITs – DBSV
Refinancing Risk to surface
- Refinancing risks as SOR rate rises
- Acquisitions to complement modest organic outlook
- Picks MAGIC, MCT, FCOT and CDL HT
Refinancing to cost more. The recent increase in the benchmark 10-year yield to 2.3% and 30-50 bps rise in the 3-month/3-year swap offer rates (SOR) could cap upside to S-REIT unit prices. Although most S-REITs have hedged the bulk (estimated 75%) of their debt at fixed rates, these will start to expire starting 2015 and they would be more expensive to roll over. We estimate a 1% hike in the refinancing rate on debt renewals in 2015 and 2016 would reduce distributions by an average of 2.0% (ranging from 0.0% to 5.6%). This suggests average FY16F yield might dip as much as 15 bps to 6.05%, and there would be only marginal growth this year. As refinancing risks rise, we may see limited upside for S-REIT unit prices from current levels.
Modest 4% growth in distributions over FY15-16F. The outlook guidance for 2015 remains modest for most sub-sectors with estimated c.4% growth in distributions over FY15-16F. Retail REITs remain cautious of the rental outlook amid rising occupancy costs as average portfolio tenant sales remain static. Industrial REITs continue to see acquisitions as rental growth moderate due to the competitive operating environment. For office REITs, the squeeze in CBD space remains a key catalyst for landlords to remain optimistic of near-term rentals, and we are seeing demand flowing into the business park sub-sector (both A-REIT and MINT saw back-filling of vacant space at Changi Business Park). Despite a better outlook for 2015, Hospitality REITswill see near-term weakness but remain optimistic that a strong line-up of events in Singapore this year will improve tourist arrivals. Most are looking outside Singapore for opportunities.
Acquisition-led growth partly funded by new equity. Supported by conservative c.33% gearing and ample access to capital, most S-REIT managers can continue to gear up for growth. But we are cautious of rising gearing levels at the start of an interest rate upcycle. The S-REITs are currently trading at 1.1x average P/Bk NAV, which suggests the managers may partly fund acquisitions by raising new equity, so as not to dilute NAV substantially. Sponsored REITs and industrial/hospitality REITs offer stronger visibility in termsof acquisition-led growth.
Picks. The current yield spreads, at 3.7%, are close to historical trading levels. Hence, we see limited upside to S-REIT unit prices going forward. Our top picks are REITs with strong growth potential like MAGIC, MCT, FCOT and CDL HT.
FCOT – OCBC
Robust start to FY15
- 1QFY15 DPU jumped 20% YoY
- Growth driven by Singapore
- Raise FV and reiterate BUY
1QFY15 results met our expectations
Frasers Commercial Trust (FCOT) made a positive start to FY15, with 1QFY15 revenue and DPU increasing by 23.3% and 20.0% YoY to S$35.5m and 2.46 S cents, respectively. This was within our expectations, as the former and latter formed 25.6% and 26.0% of our full-year forecasts, respectively. The strong set of results was driven by higher income contribution from the underlying leases of Alexandra Technopark (ATP), with NPI surging 66.2% YoY to S$8.9m, following the expiry of the master lease in Aug 2014 and higher occupancy and rental rates at China Square Central (CSC) and 55 Market Street (55 MS). This was partially offset by softness in its Australian properties. Portfolio occupancy stood at 96.6% (Singapore: 97.5%; Australia: 94.9%), relatively stable from the 96.5% achieved in 4QFY14.
Expect rental reversions trend to remain robust
FCOT attained positive weighted average rental reversions of 1.2% for CSC, 16.9% for ATP and 7.1% for 55 MS in 1QFY15. CSC's rental reversion would have been closer to 10% if not for one lease which was renewed at a lower rate. The passing rents for leases expiring in FY15 for CSC, 55 MS and ATP are approximately 22%-27%, 15%-20%, and 20% below current spot rents, respectively, based on our estimates. Hence, we expect FCOT's robust rental reversions trend to continue in FY15. Although the situation in Australia remains challenging, we note that current passing rent of AUD610 psm per annum at its Central Park asset is still below the Perth premium Grade office average net face rents of AUD715-AUD810 psm per annum. In addition, only 0.7% of Central Park's NLA is up for renewal for the remainder of FY15.
Maintain BUY
We believe FCOT has managed its FX and interest rate risks well, having hedged 100% of its net AUD exposure and 73% of its total borrowings. It has no refinancing needs until FY17 (S$180m) and gearing ratio of 37.2% remains manageable, in our view. Given FCOT's resilient performance and wellhedged strategies put in place, we lower our discount rate assumption from 8.5% to 7.9%. Consequently, our fair value estimate increases from S$1.50 to S$1.65. Maintain BUY.
FCOT – CIMB
In a sweet spot
4Q and full-year results were in line, boosted largely by higher Singapore contributions on positive rental reversions and one month of higher ATP income. However, Australia was adversely affected by a weaker A$. Looking ahead, we retain our Add call given its strong organic growth profile. FY15 DPU is projected to expand by 12% yoy, with a direct flow-through of higher underlying rents at ATP to the trust’s topline. We estimate that this could expand its portfolio revenue by 7-8%. In addition, positive rental reversions and inbuilt rental escalations and rent reviews from its other local and offshore assets could provide another boost to earnings. We slightly raise our DDM-based target price to S$1.56.
Higher Singapore, lower Australia due to forex impact
FCOT saw a 9% increase in 4Q NPI to S$23.8m, thanks to higher contributions from Alexandra Technopark (ATP) and China Square Central (CSC). This offset a moderate performance in Australia, which was impacted by a weaker A$. Distribution income rose by 9% yoy to S$15m (DPU: 2.2 Scts). FCOT benefited from c.1 month of underlying higher rental income at ATP with the expiry of the master lease on 25 Aug 14. In addition, there were positive rental reversions of 18.4% at CSC and 15.3% at 55 Market St. The group also enjoyed a 0.7% uplift in its portfolio value, boosting its book value to S$1.59/unit.
Full year ATP lift in FY15
In FY15, FCOT should continue to benefit from a full 12 months’ of higher income from ATP as the underlying gross rent is higher than the master lease income. We estimate that the higher income from ATP could lift its portfolio topline by c.7-8% in FY15. In addition, the rising rental trend in Singapore should enable it to enjoy positive rental reversion at CSC and 55 Market St. as
the average expiring rents are lower than spot levels. This provides the trust with strong income visibility. Its Australian assets should continue to improve steadily, with fixed rent reviews and inbuilt rental escalation clauses.
Maintain an Add rating
We maintain our Add rating and continue to like FCOT for its strong and certain growth prospects, underpinned by an organic expansion within its existing portfolio. The trust is currently offering an FY15 DPU yield of 7.1%. We tweak our FY15 forecast marginally by 0.2% and lift our DDM-based target price to S$1.56.