Stronger than expected

MCT’s 3QFY13/14 revenue rose by 22.4% yoy and DPU rose by 11.9% yoy. 9MFY14 DPU was slightly better than expected at 78% of our FY14 forecast due to strong rental reversion and rising occupancy. With further room to grow through rental reversions and, in part, riding on the recovery trend in the office market, we raise FY14-16 DPU by 2% and upgrade our rating on MCT to Add from Hold. Our slightly higher DDM-based (discount rate: 8.4%)

target price is S$1.31.

Strong organic growth

Mapletree Commercial Trust (MCT) reported 3QFY14 revenue of S$68.4m (+22.4% yoy) and DPU of 1.865 Scts (+15.5% yoy), mainly driven by the 38.7% rental uplift in leases renewed at VivoCity. Similarly, the rising occupancy in the PSA Building office to 100% and in the Alexandra Retail Centre (ARC) to 97.4% has attributed to the strong earnings growth. With 1.8% of retail space and 1.2% of office space up for renewal in FY13/14, we are confident that the high portfolio occupancy of 98.7% will be maintained as we step into the new financial year. In addition, with 15.4% of retail space and 7.3% of office space up for renewal in FY14/15, we expect MCT to benefit from the strong positioning of VivoCity and the recovery in the office market.

Well-shielded from the rising interest rates

During the quarter, MCT secured term loan facilities of S$397.6m to refinance all of its debts (S$338.6m) due in FY14/15 and some of its debts due in FY17/18. Although its gearing is relatively high at 40.8%, we seek comfort in MCT’s accessibility to loans and the fact that the next tranche of debt is only due to be refinanced in FY15/16. The all-in interest cost at the moment stands at 2.18% (unchanged from a quarter ago), with 74.5% of its total debt under a fixed rate. With these structures in place, we expect MCT to be well-shielded from any hikes in interest rates.

We upgrade to Add

On the back of a stable balance sheet, room for further organic growth and the avenues to tap into the recovering office market, we raise FY14-16 DPU by 2% and upgrade MCT to an Add rating with a higher DDM-based target price of S$1.31.

A stable REIT

Frasers Commercial Trust (FCOT) has just announced its 1QFY14 results, posting a drop of 3.1% yoy in revenue, but a gain of 29.7% in DPU. Its 1QFY14 earnings were in line, with both revenue and DPU accounting for 24% of our full-year estimates. The higher DPU was mainly attributed to the savings from the buyback of the convertible perpetual preferred units (CPPU) in FY13. We maintain our Add rating, with an unchanged DDM-based (discount rate: 8.8%) target price of S$1.39. Positive catalysts expected to come from organic growth and the potential sale of the hospitality site at China Square Central.

Stable portfolio slightly dampened by forex losses

During 1QFY14, both gross revenue and NPI decreased to S$28.8m (-3.1% yoy) and S$22.1m (-3.5% yoy), respectively. Although its topline was lower, DPU grew by an impressive 29.7% yoy. The stronger DPU was mainly attributed to higher income from the additional 50% interest in the Caroline Chisholm Centre, higher rental rates, lower interest costs and the redemption of CPPU. The weaker revenue, a result of the weaker Australian dollar and the slightly lower occupancy for Central Park, was partially offset by the stronger Singapore portfolio performance which achieved a higher gross revenue of 7.5% yoy.

Good organic growth built in

For FY14, we expect additional contribution from China Square Central as the property benefits from the completed AEI and the new Telok Ayer MRT station, which in turn could boost the attractiveness of this office property. The NPI contribution from China Square Central rose by 15% yoy in 1QFY14, while occupancy has risen steadily from 74% in 4QFY13 to 92.9% committed occupancy in December 13. Although Alexandra Technopark is expected to post good organic growth, we believe that the bulk of growth will only be seen in FY15 as the masterlease expires in Aug 14.

We maintain an Add rating

FCOT currently offers 6.8% FY14 dividend yield and 5.0% NPI yield. Compared to the sector average of 6.3% and 4.2%, respectively, we continue to see value in FCOT and maintain our Add rating with an unchanged target price of S$1.39. Further upside surprises may come from the potential divestment of the hospitality site at China Square.

Cranking up further growth

• 1QFY14 DPU up 29.7% YoY
  
• Positive reversions up to 20.7%
  
• Well-positioned for rental uplift
  

1QFY14 results met expectations

Frasers Commercial Trust (FCOT) delivered 1QFY14 NPI of S$22.1m, down 3.5% YoY due to a weaker AUD, lower occupancy at Central Park and absence of contribution from its divested Japan properties. However, the softer NPI was more than offset by a realized gain from its cashflow hedges, lower interest expenses and savings in the convertible perpetual preferred unit (CPPU) distribution following the net conversion/redemption of the CPPUs. As such, distributable income to unitholders jumped 33.4% YoY to S$13.7m, while DPU climbed 29.7% to 2.05 S cents. This falls within market expectations, as the quarterly DPU constitutes 22.9%/23.3% of our/consensus full-year DPU projections.

Portfolio continued to exhibit resilience

China Square Central (CSC) and 55 Market Street were the key performers for 1Q, raking up NPI growth of 15.4% and 9.6% respectively on the back of higher secured rental and occupancy rates. As a result, Singapore portfolio contributed 50% of FCOT’s NPI, up from 47% in the prior quarter. Domestic leasing demand remained relatively buoyant in our view, as positive rental reversions ranging from 10.7% to 20.7% were achieved during the quarter. On the portfolio front, occupancy rate was also stable at 97.1% (4QFY13: 97.9%), while weighted average lease to expiry was largely unchanged at 4.4 years (4QFY13: 4.6 years).

Maintain BUY

Looking ahead, management continues to maintain its positive tone, highlighting that its under-rented portfolio assets and current occupancy rate provide room for further income growth. Specifically, FCOT shared that the opening of the Downtown Line nearby CSC is expected to improve its connectivity and boost its attractiveness. At Alexandra Technopark, we also note that FCOT is currently receiving S$1.80 psf pm net rent for the master lease (vs. S$3.40 gross rent for underlying leases), and is well positioned for rental uplift upon the lease expiry in Aug. Given that the master lease makes up a significant 21.7% of FCOT’s rental income and strong execution by management, we are thus positive on its performance in FY14. Maintain BUY with unchanged fair value of S$1.45 on FCOT.

Results in line. FCOT’s Q114 performance is in line with our expectations, with revenue only 0.8% higher than our estimate and DPU of 2.05c forming 23% of our full‐year forecast. Revenue for the quarter was marginally lower on a YoY basis. This was a result of the weaker Australian dollar and slightly lower occupancies for Central Park, which was partly cushioned by positive rent reversions and improved occupancies at 55 Market St and China Square Central (CSC).

Poised to achieve positive rent reversions. Underpinning our optimistic rent outlook, FCOT achieved another strong quarter of performance in occupancy and rent reversions. FCOT recorded an occupancy rate of 97.1% and rent reversions of up to 20.2%. Noting the recent opening of the Telok Ayer MRT station, we believe this enhances accessibility to CSC and could potentially improve CSC’s ability to fetch higher rents.

Majority of CPPUs redeemed. At present, 99.9% of the Series A CPPUs had either been converted or redeemed, leaving only approx. 0.2mil CPPUs outstanding. As the CPPUs are held at an interest cost of 5.5%, interest savings associated with the redemption of the CPPUs would provide another upli

Laudable set of results

• 4QFY13 DPU up 18.9% YoY
  
• Portfolio maintaining its resilience
  
• Robust growth essentially locked in
  

No surprises in 4QFY13

Frasers Commercial Trust (FCOT) released its 4QFY13 results last evening. NPI fell by 17.4% YoY to S$21.9m due mainly to continued weakness in AUD and divestments of KeyPoint and Japan properties. However, the decline in NPI was more than offset by realized gains from currency hedges, lower interest costs and savings in the Series A convertible perpetual preferred unit (CPPU) distribution following the net conversion/redemption of the CPPUs. As a result, distributable income to unitholders jumped 20.9% to S$13.7m. DPU for the quarter came in at 2.08 S cents, up 18.9% YoY. This brings the full-year DPU to 7.83 Scents (+17.0%), largely in line with both consensus and our DPU forecasts of 7.9 Scents.

Robust underlying performance

The direct management and rejuvenation works at China Square Central (CSC) has proven to be a great success, as it saw a robust YoY growth in NPI of 26.8% amid higher rental and occupancy rates. 55 Market Street also delivered 10.8% growth in NPI over the quarter. This helped to cushion the lower translated income from the Australia properties. We note that portfolio occupancy has remained healthy at 97.9%, compared to 98.1% a quarter ago. Positive rental reversions ranging from 4.4% to 23.2% were also recorded for the leases commenced in 4Q, demonstrating the resilience and quality of FCOT’s assets.

Maintain BUY

Looking ahead, we maintain our view that FCOT will continue to perform as its transformation initiatives over the past year are likely to underpin growth. We also understand that the Telok Ayer MRT station, which is just at the doorstep of CSC, is expected to open in Dec 2013. Coupled with the completion of enhancement initiatives around CSC, this is likely to boost its competitive position and growth potential. In addition, management noted that FCOT is receiving a net rent of S$1.80 psf pm at Alexandra Technopark, significantly lower than the underlying passing gross rent of S$3.50. As such, income uplift is expected upon the expiry of the master lease in Aug 2014. We maintain BUY with unchanged fair value of S$1.45 on FCOT.