Category: FCT
FCT – DBSV
Making the right moves
• 1Q11 earnings in line with expectations
• Positive rental renewals, lower financing cost and potential acquisition to underpin profit growth
• Maintain Buy with TP $1.73
Results in line. 1Q11 gross revenue increased by 18.5% yoy to $27.6m, while NPI rose 16.8% to $18.6m benefiting from the acquisition of NP2 and Yew Tee Point. However, on a sequential basis, gross revenue and NPI fell by 15% and 16.2% respectively due to the AEI works at Causeway Point (CP). Portfolio occupancy fell from 97.2% in the preceding quarter to 86.1% with the withdrawal of space at CP to facilitate the ongoing AEI activities. On a yoy basis, distribution income rose 2.0% to $15.0m, translating to a DPU of 1.95cts.
Leveraging on strong retail performance. A remaining 130,218sf of NLA (c17.7% of total), largely from CP, will expire in FY11. The group has renewed 27,169sf of NLA (c3.4% of total) in Q1 with leases contracted at 11.6% above the previous period. We believe similar performance for the remaining expiring leases this year would be achievable given the still low occupancy cost of 13.1% vs industry benchmark of 16-17%. Meanwhile, we expect portfolio occupancy to trough in Q2 and trend up from 3Q11 as Phase 1 AEI works at CP completes progressively. As at end 1Q11, 12.8% of the AEI is completed and 92.2% of Level 1 has been pre-committed. The group targets to achieve a 20% improvement in CP’s average rents when the exercise is fully completed. Apart from organic growth, potential acquisition of Bedok Point, recently completed, could provide further upside to earnings and valuation. Gearing remains healthy at 30.6%.
Proactive debt management FCT secured a $264m five-year loan facility in Nov 2010 to refinance its CMBS expiring in July 2011 at lower interest cost of 3% (95bps above 5-year SOR) vs 4.12% currently. The impact of interest savings will likely be felt from FY12.
BUY call retained, TP S$1.73. Maintain our Buy call with TP of $1.73. The stock offers FY11/12 yields of 5.5-5.8%, translating to a total return of 20%. No new acquisitions have been factored in, which could provide future catalysts.
FCT – BT
Frasers Centrepoint Trust’s Q1 DPU up 2.1%
FRASERS Centrepoint Trust (FCT) yesterday announced improved results for the first quarter ended Dec 31, 2010, even as portfolio occupancy slipped with one of its malls undergoing refurbishment.
Gross revenue in Q1 rose by 19 per cent year-on-year to $27.6 million, largely due to the acquisitions of Northpoint 2 and YewTee Point.
Net property income grew 17 per cent to $18.6 million. This pushed distribution to unitholders up 25 per cent to $15 million. Distribution per unit (DPU) in Q1 increased by 2.1 per cent to 1.95 cents.
FCT’s portfolio occupancy rate was 92 per cent as at Dec 31, down from 98 per cent a quarter ago, as refurbishment works at Causeway Point drove up vacancies there.
The makeover is ‘proceeding smoothly’, FCT said. As at December, 13 per cent of construction had been completed and retailers had committed to lease 92 per cent of space on the first level, where most of the works are taking place.
The refurbishment should be completed by December next year and FCT expects Causeway Point’s net property income to increase.
‘Although income is expected to be affected in the short term, the rejuvenated Causeway Point will provide enhanced income sustainability and growth prospects in years to come,’ said Chew Tuan Chiong, CEO of FCT’s manager.
FCT is also aiming to acquire Bedok Point in this calendar year. Retailers have committed to leasing around 97 per cent of space there, and some are in advanced negotiations to take up another one per cent.
As at Dec 31, FCT’s gearing ratio was 30.6 per cent. In November last year, it inked an agreement with several banks for a $264 million secured five-year loan facility, and will use that to pay down a $260 million debt expiring in July.
FCT closed unchanged on the stock market yesterday at $1.52.
FCT – OCBC
New supply to cap suburban mall rentals
Performance in FY2010. Frasers Centrepoint Trust (FCT) made an total DPU of 8.2 S-cents1, for the period from 1 Oct 2009 to 30 Sep 2010, with an average DPU yield of 6.15%2. At yesterday’s closing price, its share price has also appreciated 9.89% YoY (with the low of S$1.26 on 26 May and a high of S$1.58 on 23 Sep). It also completed the acquisition of Northpoint 2 & Yewtee Point in Feb 2010, which is financed 62% by private placement of new units (S$177.8m) and 38% by internal working capital and a draw down of an aggregate S$110m from facilities made available by financial institutions.
Prime and Suburban rents narrowing. According to CBRE, suburban retail rents averaged $29.10 psf/month in 4Q10, reflecting a rental increase of 2.8% YoY and 0.34% QoQ. This is the only segment of the retail sector that showed a rental gain, proving the resilience of the suburban areas, underpinned by catchment demand. In contrast, the monthly rents for Orchard Road softened 2.6% QoQ to average $30.20 psf in 4Q10. On a YoY basis, Orchard rents fell 6.6% from the $32.40 psf in Q4 2009, as malls adjusted to the new supply. The narrowing gap between Suburban and Prime Orchard rents was most prominent in 2010. In Q1 2010, the difference was 12.6%. It narrowed to a mere 3.6% gap in Q4 2010.
New supply to cap suburban rentals. According to our estimates, another 1.62m sqft of retail space will be added in 2011-2012. This is expected to depress rental growth at the neighbourhood malls. In fact, CBRE estimated that suburban rents are likely to see a maximum 3% upside in 2011 as tenant’s resistance sets in. FCT, with its 100% exposure to suburban malls, is likely to be affected. Moreover, with only four local malls under its asset portfolio (Causeway Point, Northpoint, Anchorpoint, Yewtee Point), there is a limit to how much further it can scale, compared to CapitaMall Trust – the largest retail REIT which has 15 malls under its belt. We continue to like FCT because of its pure suburban positioning but we maintain our HOLD rating, with a revised fair value of S$1.58, on rental cap and valuation grounds. FCT continues to trade at a tight FY11F yield of 5.4%, and at a 17% premium to book value. Further re-rating catalyst, in our view, would stem from the manager announcing further acquisitions or development projects opportunities.
1 Computed based on summing the quarterly DPUs and Advanced DPU.
2 Computed based on total DPU divided by average closing price from 1 Oct 2009 to 30 Sep 2010
Singapore Reits – DBS
The quest for growth
• S-REITs offer FY11 yields of 6.1%, an attractive 340 bps spread against long bonds
• As inflation inches higher, we prefer SREITs with ability to continue delivering strong organic growth
• Strong balance sheets to leverage on in the chase for further acquisitions
• BUY FCT, P-Life, Cache, MLT, CDL HT, ART, CMT
Normalized FY11F yield of 6.1%. The S-REIT sector now trades at a normalized FY11F distribution yield of c6.1%, slightly below its historical mean of c6.5%. Spreads have narrowed but still remain attractive at c340bps above the long-term government bond yield, currently at c2.7%.
The quest for DPU growth. S-REITs offer a good hedge against inflation given that earnings growth can potentially outpace inflation, which is expected to inch higher to 3.2% in 2011. We prefer S-REITs with the ability to deliver growing distributions organically while having the opportunity to acquire accretively. We continue to hold the view that hospitality and retail sectors offer a more robust outlook on the back of expected strong visitor arrivals in 2011. Office REITs are expected to see topline pressure from negative reversions in 2011 though the sector is on an uptrend.
Interest rate hikes to have minimal impact on distributable income. Given the current low interest rate environment, S-REITs have taken the opportunity to refinance, lengthen the debt maturity profile as well as widen their sources of debt, hence enjoying savings in interest. DBS economist expects interest rate hikes only towards the end of 2011. Even then, our scenario analysis reveals that the impact on S-REITs FY11 distributable income is limited to -0.2 to -3.0% as majority of the S-REITs have hedged/fixed their interest rate positions.
Industrial & Sponsored REITs have potential for further accretive acquisitions. Even after acquiring cS$6bn of assets YTD, S-REIT sector gearing remains low at 34.4%. Further growth from acquisitions is possible and we look towards the industrial REITs for their ability to acquire earnings accretive assets given the relative higher yields of industrial assets while sponsored REITs continue to offer long-term portfolio growth visibility to investors from potential asset injections in the medium term.
Stock picks. CMT, FCT, CDL HT and Ascott REIT are expected to deliver strong organic growth potential coupled with sponsor injection possibilities. P-Life offers downside protection as revenue is pegged to inflation. MLT and Cache offer potential earnings surprise given their visible sponsor pipeline.
Retail REITs – OCBC
Common themes of 3QCY10 results; NEUTRAL
Common themes. At 3QCY10 results, we found a few common themes in the guidance given by the Retail REIT managers: strengthening rents, increased DPUs and asset enhancement/acquisitions. The unifying message was to capitalise on the recovery-cycle that will both strengthen the REITs and also grow distributable income.
Retail rents strengthening. According to CBRE, Prime-Orchard rents remained stable in 3Q10, after seven quarters of contraction, averaging $31.10psf/month. Suburban malls continued to strengthen, underpinned by strong catchment demand, rising 1.8% QoQ to $29.00psf/month. The supply pressure along Orchard/Scotts Roads is also expected to ease as the increase in retail space from 2009/10 is eventually absorbed. With limited supply expected in 2011 and 2012, retail rents there should increase gradually next year, particularly if the nascent recovery in retail sales, which grew 2.3% MoM in July, continues.
Increased DPU. Most Retail REITs reported higher DPU for 3QCY10. We see an average increase of 3.6% QoQ but a decline of -1.7% YoY. The YoY growth was pulled down mostly by Suntec REIT (more issued units) and LMIRT (forex losses and rental guarantees expiry). The remaining Retail REITs, however, were able to ride on the recovery cycle.
Asset-enhancements/Acquisitions. On the organic-growth front, most REITs stepped up or continued their asset enhancement plans. CMT will complete its asset enhancements for Raffles City by Nov while works for JCube and The Atrium are on track to finish in 1Q2012 and 3Q2012 respectively. FCT has completed 3.4% of its refurbishment for Causeway Point. The $72m facelift, announced in July, for the 12-year-old mall will be carried out over a 30-month period. StarHill Global is also looking at enhancements for Wisma Atria, which will add about 40,000sf in 2011. On the acquisition side, Suntec REIT has announced the proposed acquisition of a one-third interest in Marina Bay Link Mall, with approx. 94,464 sq ft of NLA.
Valuations. Retail REITs are trading at an average price-to-book of 0.96x, similar to the broader S-REIT sector. Barring any unforeseen external shocks, prospects for the retail property market are expected to remain positive in the last two months of 2010, leading up to the year-end festivities and school holidays, which traditionally is a peak season for the retail sector. Nonetheless, in view of slower economic growth and weaker demand from the west, we expect retailers to remain cost-sensitive. Any potential quarterly upside in retail rents in 2011-2012 is forecasted to be kept within 3%-5%. We thus have a NEUTRAL rating on the Retail REITs subsector. Top of our pick is StarHill Global with a fair value estimate of S$0.66.