Category: FCT
FCT – CS
3Q10 results in line; announces AEI for Causeway Point
● 3Q10 DPU of 2.07Scts (+6.7% yoy, +0.5% qoq), brings 9MFY10 to 6.04Scts, in line with our and consensus FY10 estimates of 8.1-8.2cts. Revenues grew 45% yoy to S$30.7mn mainly on NP2 and YTP which were acquired in Feb 2010.
● 3Q10 occupancy remained steady at 99.4%, while rent reversions were strong at 8.5% on average, from AP and CWP. Gearing is 31.2% with cost of debt of 3.76%.
● As expected, FCT has announced the AEI programme for its largest asset, Causeway Point (CWP). Spanning 30 months starting from July 10, it will raise NPI by 22% to S$51.5mn. It is expected to be done in phases and management expects that at the peak of works, likely in 2011, occupancy will be 70%, and earnings should pick up substantially from 2012 as higher rents from rejuvenated space flow through.
● We reduce FY11e DPU forecast by 4%, but raised DDM-based TP to S$1.60 from S$1.58, on higher rental contributions from CWP beyond 2012e. FCT offers steady 5.8-6.5% FY10-12e yields.
Strong contributions from new acquisitions.3Q10 revenues rose 45% to S$30.7mn, and NPI rose 46% yoy to S$21.5mn, mainly on contributions from Northpoint 2 and Yewtee Point which were acquired in Feb 2010, and strong rent and occupancy improvements in Northpoint post AEI. DPU growth was 6.7% yoy on higher interest expense and an enlarged share base. Including the S$1.2mn retained in 1H10, management retained S$1.6mn of distributable income for distribution in 4Q10, to smooth out earnings as 4Q10 could be affected by the AEI works at CWP.
Causeway Point AEI to generate 13% ROI. As expected, FCT has announced the AEI programme for its largest asset, Causeway Point (CWP). Spanning 30 months starting from July 10, it will raise rent by 20% to S$12.20/sqft/mth, from the current S$10.20, and raise NPI by 22% to S$51.5mn, an ROI of 13% based on S$71.8mn of capex. It is expected to be done in phases and management expects that at the peak of works, likely in 2011, lowest occupancy will be 70%, and earnings should pick up substantially from 2012 as higher rents from the rejuvenated space flow through. It expects the capex to be evenly spread out throughout the 30 months, and would be funded by its revolving credit facility which cost less than 2% currently. This could be termed out as it approaches a sizeable amount.
Cut FY11e earnings by 4% for downtime. We expect occupancy at CWP to average to 90% in FY11 and 98% in FY12 as the AEI works are carried out in phases. We estimate revenues and NPI would be most affected in FY11, which leads to a flat DPU in FY11, but would improve by FY12 where DPU would improve 12% yoy. As a result, we have adjusted FY11e forecasts by -4%, while FY10 and FY12e earnings are relatively unchanged. We have raised our DDM-based TP marginally to S$1.60 from S$1.58, mainly from stronger earnings beyond 2012 due to the AEI, which are partially offset by lower DPU in FY11e.
Medium-term catalyst: acquisitions. FCT still has a substantial acquisition pipeline from its Sponsor, Frasers Centrepoint, which includes Bedok Mall (81,666sqft, under construction, to be completed by 2H10), The Centrepoint (392,100sqft), and a mall at Changi Business Park (c.200,000sqft, under construction, to be completed by end-2011). This could add up to 84% to its asset size of 797,433sqft, and double its asset value of S$1.4bn. We view this as a medium term catalyst.
FCT – DBSV
Making waves at Causeway point
• Makeover of Causeway Point to cost S$72m
• DBSV projects ROI of 15%, ahead of management guidance of 13%
• Lowered FY11 DPU estimates by 5% due to AEI works at CWP
• BUY with raised target price of S$1.66 on higher profitability post AEI.
Record 3Q10 DPU of 2.07 Scts. Revenues and net property income increased by 44.7% and 46.3% to S$30.7m and S$21.5m respectively with new contributions from Yew Tee Point and Northpoint II acquisitions. Northpoint 1 continued to deliver strong yoy growth post asset enhancement works. Distributable income grew to S$16.3m (+34.6% yoy) translating to a DPU of 2.07 Scts.
Causeway Point (CWP) enhancement works over 30 months will cost S$72m. Together with its results announcement, FCT unveiled plans to re-make aging CWP over the next 30 months. When completed at S$72m, the AEI works are expected to yield 13% ROI.
DBSV expects ROI of 15% instead. We believe that management’s initial guidance is conservative. As Causeway Point is the only mall located in Woodlands town, refurbishment of the mall should fetch higher than the guided S$12.20 psf pm, which is even below Northpoint’s achieved average of S$13.20 psf pm. We project 15% ROI and average rents of S$12.50 psf pm in our estimates.
BUY, TP S$1.66. We lowered FY11 estimates by 5% to take into account lower occupancies at CWP during refurbishment. However, we raised TP to S$1.66 for higher ROI estimates on CWP. Continuous enhancement works will drive yields for its underlying portfolio. In addition, longer-term prospects are underpinned by visible pipeline (Bedok Mall in CY11, Changi Point – longer term) of new malls injections.
FCT – DMG
Growth intact; asset enhancement in focus
3QFY10 results in-line with expectations. FCT reported 3Q10 DPU of 2.07¢ (+6.7% YoY; +0.5% QoQ), representing 25% of our FY10 DPU forecast of 8.3¢. Net property income rose 46.3% due to accretive contributions from Northpoint 2 and YewTee Point. FCT will trade ex-3QFY10 distribution on 29 July. We expect asset enhancement works of Causeway Point to be yield accretive in the long term. Maintain BUY, DDM-based TP of S$1.66.
Causeway Point refurbishment likely to boost long term DPU by 10%. FCT has commenced the refurbishment of Causeway Point and the AEI programme is expected to take 30 months to complete. Capex is estimated at S$72m and will be financed fully with debt (~3.5% interest). Management guided a 22% increase in net property income upon completion in 1QFY13. This is based on a projected passing rent of S$12.2/sqft (current S$10.2/sqft), which we believe is reasonable. Occupancy for Causeway Point is likely to decline to the 75% level in FY11, resulting in a 7% decline in DPU. We expect a strong DPU recovery in FY12 as the bulk of lower level refurbishment works will be completed. Upon completion, we estimate FY13 DPU to be 0.9¢ (or 10%) higher than our current estimates. Over the course of this AEI programme, we expect net DPU to be marginally higher at 0.1¢.
Augurs well with the relocation of KTMB to Woodlands. The government recently announced the relocation of Malaysia’s KTMB station from Tanjong Pagar to Woodlands by July 2011. We believe this will likely have a direct impact on retail footfall in Causeway Point given that the mall is located next to Woodlands MRT, and visitors are highly likely to patronise the mall enroute from the railway station to the MRT.
Short term impact, long term gain. Whilst DPU is expected to be impacted in the near term, we expect returns from this investment to be accretive in the long term. Reduce FY10 DPU estimates to 7.9¢. Maintain BUY; TP of S$1.66.
SREITs – OCBC
Guidance could diverge at 2Q10 results
Strong economic numbers at home. Singapore is likely to become Asia’s fastest-growing economy this year
on the back of increasing tourism numbers, rising employment, and strong manufacturing numbers. Economists are increasingly turning positive on Singapore, with their GDP estimates now trending on the upper end of, or even higher than, the official Ministry of Trade & Industry estimate of 7-9% growth for 2010. The median forecast, according to Bloomberg, for real GDP growth this year is 10.65% with estimates ranging from 9.7% to 13%.
Guidance could diverge at 2Q10 results. Singapore’s strong growth numbers are being achieved against a backdrop of moderating global growth. Mixed economic data in the US and the threat of fiscal austerity measures being employed to address sovereign debt worries in Europe could portend sluggish global economic growth in 2H10. While Singapore is also vulnerable, dynamics at home are still going strong. As such, we believe we may see a divergence in guidance given by REIT managers as Singapore-listed REITs begin reporting 2QCY10 earnings from this week onwards. This divergence could be driven by the degree of the REIT’s exposure to Singapore versus other economies. Multi-geography REITs, in our view, could be quicker to adopt a cautious tone on the outlook for earnings performance this year. In contrast, Singapore-skewed retail or industrial REITs may report stronger guidance and/or more aggressive growth plans.
Focusing on value. We remind investors that while market attention has been on a correction, the FTSE REIT index is, in fact, up 2.3% year-to-date at 632.16 points – a gain of 126% against its March 2009 low. Valuations for several REITs, especially the larger cap plays that are trading at a significant premium to book value, are increasingly looking fairly priced, in our opinion. As such, we are maintaining our NEUTRAL view on the S-REIT sector. We prefer mid-to-large cap REITs that have a stable-to-positive earnings outlook, strong balance sheets, and that are still trading at attractive yields and discounts to book value. Under these criteria, we like Starhill Global REIT, which trades at a 30% discount-to-book and derives some 60% of its gross revenue from Singapore where it holds stakes in Wisma Atria and Ngee Ann City. We also like Frasers Centrepoint Trust (FCT), which focuses exclusively on suburban retail in Singapore. At 2Q10 results, FCT is likely to disclose details on the proposed asset enhancement of Causeway Point, which could potentially lift passing rents and income at its largest asset, unlocking value for unitholders.
Shopping Malls – BT
Rents at suburban malls catching up with Orchard Rd
Upper levels in such malls already drawing higher rents than equivalent space in Orchard and Scotts area, says DTZ
Rents at suburban malls in Singapore are fast catching up with those for prime Orchard Road retail space as neighbourhood malls draw increasing shopper numbers and more interest from tenants.
The difference between prime Orchard Road rents and suburban rents narrowed to just 9 per cent in Q2 2010 – from as much as 24 per cent at the start of 2009 and 21 per cent in Q1 2005 – according to CB Richard Ellis (CBRE).
In fact, upper-storey space at these suburban malls is already more expensive than upper-storey space in the Orchard Road and Scotts Road area, according to data from DTZ.
The rental gap tightened as Orchard Road rents fell for the seventh consecutive quarter while suburban rents continued to edge up in the second quarter of 2010, CBRE’s data shows.
Prime Orchard Road rents fell to $31.10 per square foot per month (psf pm), reflecting a 3.4 per cent decrease from $32.20 psf pm in Q1 2010.
Suburban malls, on the other hand, saw a 1.4 per cent quarter-on-quarter increase in prime rentals to $28.50 psf pm.
And when it comes to retail space on the upper floors, suburban malls are in fact fetching more than their Orchard Road and Scotts Road counterparts.
According to DTZ, upper-storey rents at suburban malls inched up 0.4 per cent quarter-on-quarter to $22.90 psf pm in Q2 2010, while upper-storey rents in the Orchard Road/Scotts Road area stayed flat at $20.50 psf pm.
Analysts said that rents in the Orchard Road area are depressed after a large amount of new supply – from malls such as Ion Orchard, 313@somerset and Orchard Central – came onstream over the past year.
‘Competition in the Orchard Road and Scotts Road and other city areas has intensified and the increased range of retail choices has rendered consumers to be more selective in their purchases,’ said Anna Lee, DTZ’s associate director for retail.
‘Retailers, particularly in the newer malls, are adjusting to the vagaries of consumer preferences and resulting in early termination of leases in some cases,’ she added.
In contrast, rents in the suburban areas continued to edge up in the second quarter of 2010. Suburban malls, with their built-in catchment of shoppers and mass market offerings, largely performed better than malls in the city during the financial crisis.
These malls, which draw more and more shoppers every year, are now able to command higher rents from tenants.
‘Generally, 2009 shopper traffic at our suburban malls is higher than that in 2008,’ said a spokesman for CapitaMall Trust (CMT). CMT has eight suburban malls in its portfolio.
Frasers Centrepoint Trust (FCT), which owns four suburban malls, also said that footfall across its portfolio rose 6 per cent from the 2008 financial year (October 2007 to September 2008) to the 2009 financial year (October 2008 to September 2009). The figures exclude Anchorpoint, where traffic counters were removed for asset enhancement works.
The increased visitor numbers have translated into higher rents for both retail trusts.
FCT said that in the first six months of its 2010 financial year (October 2009 to March 2010), its portfolio achieved average rental reversions of 4.5 per cent. And for the suburban malls in CMT’s portfolio, the rate of average rental growth per year ranged from 1.1 per cent to 2.3 per cent in Q1 2010.
Developers are extremely bullish on the potential of suburban retail space here.
Australian developer Lend Lease, which paid $749 million for a mixed-use land parcel in the Jurong Lake district, intends to build a suburban shopping mall on most of the site.
Lend Lease, which owns the 313@somerset and Parkway Parade shopping malls here, is required to set aside a mandatory 30 per cent of the gross floor area for office use. But the remaining 70 per cent will be used solely for retail space, said Ooi Eng Peng, executive officer for retail and investment management in Asia for Lend Lease.
‘The mall will be the Parkway Parade of the west,’ Mr Ooi said. Suburban malls offer good prospects for developers who can come up with the right tenant and product mix for the surrounding catchment population, he added.
Looking ahead, the gap between prime Orchard Road rents and prime suburban rents will narrow even more over the rest of this year as Orchard Road rents dip further.
‘We expect prime Orchard Road rents to dip 5 per cent to 10 per cent in 2010 due to the settling of business and trading patterns,’ said Letty Lee, CBRE’s director for retail services. ‘But prime suburban rents are likely to see a 3-5 per cent upside in the same period, underpinned by catchment demand.’
But it is not all doom and gloom for malls on Singapore’s best-known street; analysts expect that over the next two to three years, rents in the Orchard Road will rebound.