Category: FCOT
FCOT – OCBC
STRONG VALUE PROPOSITION
- Likely redemption of CPPUs
- Expecting uplift in income
- Fair value estimate raised
Completion of sale of KeyPoint
Frasers Commercial Trust (FCOT) announced on 28 Sep that it had completed the sale of KeyPoint to Bayfront Ventures Pte Ltd for S$360.0m. With the divestment, FCOT is likely to sit on a hefty net proceeds of S$357.8m (after professional and related expenses relating to the sale) and book in a gain of S$72.8m. We are maintaining our view that FCOT will likely use the bulk of the sale proceeds to redeem half of its Series A Convertible Perpetual Preferred Units (CPPUs) and reduce its existing debt liabilities. This is because the funding costs (distribution rate) of the CPPUs and its gearing ratio are relatively high at 5.5% and 39.5% respectively. Based on our understanding, the CPPUs are only redeemable on the first business day of each calendar quarter. Hence, the earliest period FCOT will be able to make the redemption and relieve the drag on its distributable income is in the Dec quarter.
Expecting enhanced performance
Going forward, we are staying positive on FCOT’s financial performance. Apart from a positive impact from the likely redemption of the CPPUs, FCOT is also expected to gain from interest savings as a result of the early refinancing of its S$500m term loan facility at favourable borrowing margins. In addition, the acquisition of the balance 50% interest in Caroline Chisholm Centre and direct tenant leases at China Square Central (CCC) earlier this year are likely to contribute positively to its rental income. Hence, we expect FCOT to meet our FY12-13 forecasts comfortably.
Maintain BUY
We continue to like FCOT for its growth potential, strong execution and attractive P/B of 0.87x. We are holding our FY12-13 forecasts intact as the recent developments are in line with our expectations. However, as we roll our valuations to FY13, our fair value is now raised from S$1.23 to S$1.31. Maintain BUY.
Office REITs – OCBC
RENTAL DECLINES LIKELY SLOWING IN 3Q12
- Rental decline likely slowing in 3Q12
- Limited supply till 2H13
- Maintain OVERWEIGHT
Office rentals decline likely to slow in 3Q12
We believe the office rentals are likely to show a more subdued dip in 3Q12 after three consecutive quarters of declines since 3Q11. Over 2Q12, Grade A office rentals fell 4.7% QoQ to S$10.10 which cumulated in an 8.7% decline over three quarters. Core CBD vacancies, however, showed a reversal from a rising trend in 2Q12 to register a 0.9 ppt dip to 8.4%. A similar picture was seen for islandwide vacancy rates which declined 0.9 ppt to 6.4% (end 2Q12) from 7.3% (end 1Q12). We expect a similar trend for vacancies in 3Q12 which would likely contribute to a muted rate of rental decline.
Office absorption coming in above expectations
The 2Q12 decline in vacancies was mostly due to net absorption coming in at ~470k sq ft – in line with our forecast but markedly above market expectations which had anticipated a softer demand on macro-economic weaknesses. Grade A capital values also dipped an estimated 2% QoQ marginally to $2,450 psf in 2Q12 (1Q12: S$2,500 psf) as investment sales slowed and market players adopted a wait and see attitude in light of the residual uncertainty in the macroeconomy.
Limited supply till 2H13
Looking ahead to the remainder of FY12, it is likely that a situation of limited office pipeline completion would ensue with only ~70k sq ft of office space slated for opening – a mixed use development in Upper Pickering St – which has been fully pre-leased to AGC. We see this dynamic continuing until mid 2013 when Asia Square T2 and The Metropolis T1&2 are slated for completion.
Maintain OVERWEIGHT on Office REITs
We note that, since we have upgraded Office REITs to OVERWEIGHT on 21 Aug 2012, our top pick CCT has appreciated 4.0% against the STI’s 0.2 gain%. We maintain an OVERWEIGHT rating on Office REITs. Our top picks in the sector are CCT [BUY, FV: S$1.53] and FCOT [BUY, FV: S$1.23].
FCOT – OCBC
UPDATES ON PREFERRED UNITS
- Expiry of restriction period
- CPPU redemption likely in FY13
- P/B still attractive at 0.88x
Update on CPPU conversion and redemption
Further to the expiry of the restriction period for redemption and conversion of Series A Convertible Perpetual Preferred Units (CPPUs) on 25 Aug, Frasers Commercial Trust (FCOT) announced that it has not exercised its right to redeem the CPPUs. However, CPPU holders had successfully exercised their right to convert ~1.0m CPPUs at a conversion price of S$1.1845 per unit. We understand that 878,697 new ordinary units will be issued on 1 Oct through the conversion process (0.14% of total units outstanding as at 30 Jun), but they will not be entitled to any distributions on FCOT’s ordinary units declared during the period between 1 Apr and 30 Sep. We estimate that ~341.5m CPPUs will be left in issue post conversion.
KeyPoint sale proceeds likely used to redeem CPPUs
We are currently maintaining our view that FCOT will likely redeem half of its CPPUs as the distribution rate is relatively high at 5.5% of its offer price. The divestment of KeyPoint is expected to be completed by 8 Oct, and will provide FCOT the financial resources to redeem the CPPUs as well as pare down its existing borrowings. As a reference, FCOT had proposed on 24 Apr to sell KeyPoint for a consideration of S$360m, representing a 26.3% premium to its latest valuation of S$285m. This is expected to result in a gain of S$72.8m.
Maintain BUY with unchanged fair value of S$1.23
In view of the CPPU conversion, we now factor in the new ordinary units into our model. Our fair value, however, remains unchanged at S$1.23. We continue to like FCOT for its growth potential, strong execution and attractive P/B of 0.88x. Based on our understanding, FCOT may possibly be in the final stages of discussion with potential tenants to take up most of the remaining 85% space formerly occupied by Marsh & McLennan at China Square Central. This, together with potential interest savings, may likely translate to better financial performance at FCOT’s portfolio going forward. Maintain BUY.
FCOT – DMG
A counter with much room for growth
We initiate coverage on FCOT with a BUY rating. Based on our DDM model, by assuming a terminal growth rate of 2.0% and a COE of 10.3% (with a risk-free rate of 1.5%, 0.8x beta and 6% equity risk premium), we arrive at our target price of S$1.23. We like FCOT due to (1) potential divestment of KeyPoint will allow the trust to par down its gearing with a possibility of enhancing unitholders' returns via share buy backs/redemption of CPPU, (2) growth in DPU from the acquisition of the additional 50% stake in Caroline Chisholm Centre, (3) the JV to turn China Square Central into part of China Place will benefit both the trust and unitholders with long term growth potential.
Potential upside from the divestment of KeyPoint. Apart from being able to reinvest the capital into higher yielding properties and strengthening the asset portfolio, we believe the divestment of KeyPoint could significantly lower the gearing of the trust from its current 39.5% by c.14ppt (assuming 100% of proceeds are used to par down gearing). Alternatively, if part of the Series A Convertible Perpetual Preferred Unit (CPPU), which represents a distribution yield of 5.5%, based on the issue price of S$1.00 per CPPU, is redeemed by using the proceeds from this divestment, the trust could possibly save 100bps in terms of the interest being paid, thus directly benefitting the unitholders.
FCOT posted a strong 3QFY12 results. FCOT reported 3QFY12 DPU of 1.70S¢ (+23.2% YoY), equivalent to 25.1% of our FY12 DPU estimate. Revenue for this period grew to S$35.7m (+17.0% YoY) while net property income rose by 7.1% YoY mainly due to an increase in contribution from the additional 50% stakes in Caroline Chisholm Centre (+ 76.7%) and positive rental reversion in China Square Central (+11.0%). In the subsequent quarters, we expect FCOT to continue to register strong numbers on the back of 1) contributions from Caroline Chisholm Centre, 2) redeem a portion of CPPU using the proceeds from the divestment of KeyPoint, 3) lower interest payments and 4) positive rental reversion from China Square Central.
DPU growth as a result of both acquisitions and positive rental reversion. We forecast FCOT's DPU to come in at 6.76S¢ (+17.5% YoY) in 2012 and 7.68S¢ (+13.6% YoY) in 2013. Given FCOT's strong potential together with the recent drop in Singapore government 10 year bond yield to 1.33%, we initiate coverage on FCOT with a DDM based (COE: 10.3%, terminal growth: 2.0%) TP of S$1.23. Our TP represents a spread from 10-year government bond of 4.8% and a potential upside of 14.4%.
FCOT – OCBC
MORE TO COME
•Good 3QFY12 showing
•Healthy operating numbers
•Expecting interest savings
3Q results were within expectations
Frasers Commercial Trust (FCOT) turned in a strong set of 3QFY12 results last evening. NPI and distributable income were up 7.1% and 16.7% YoY to S$26.6m and S$15.6m respectively. DPU for the quarter came in at 1.70 S cents (+23.2% YoY), after netting off S$4.7m in distribution to CPPU holders. For 9MFY12, DPU totaled 4.94 S cents, representing a growth of 16.8%. This is roughly in line with our estimates, given that it formed 73.1% of our full year DPU forecast.
Improvement from all fronts
The robust quarterly performance was mainly driven by the acquisition of the balance 50% interest in Caroline Chisholm Centre (CCC) and higher income from direct tenant leases at China Square Central (CSC) following the expiry of the master lease. Leasing activities within FCOT’s portfolio has also remained robust. Overall portfolio occupancy as at 30 Jun was at 96.7%, up marginally from 96.1% in the previous quarter, thanks to improved occupancy rates at its Singapore and Australia properties. FCOT also secured a number of lease renewals during the quarter, such as leases with Cerebos Pacific at CSC. Together with long-term lease at CCC, the portfolio weighted average lease to expiry was strengthened to 4.2 years, up from 3.4 years in 2Q.
Retain BUY, raising FV to S$1.16
Management also updated that it has successfully completed the early refinancing of its S$500m term loan facility using two new facilities (S$320m and S$185m loans). Notably, blended interest margin is ~1ppt lower than its previous borrowing margin. Hence, we expect FCOT to gain from interest savings going forward. We also understand that unitholders had approved the sale of KeyPoint. We believe FCOT may possibly use the proceeds to redeem 50% of its CPPUs and pare down its debts, given that its aggregate leverage is at 39.5%. After factoring in the results and redeployment of KeyPoint sale proceeds, our fair value is now raised to S$1.16 from S$0.97 previously. Maintain BUY on FCOT.