FCT to buy YewTee Point and Northpoint 2

Buying the malls at this time will be yield-accretive for the trust, says CEO

FRASERS Centrepoint Trust (FCT) is now ready to inject another two retail malls into its portfolio, chief executive Christopher Tang told BT recently.

While Mr Tang did not say when exactly the two malls – YewTee Point and Northpoint 2 – are likely to be bought over from parent company Frasers Centrepoint Ltd, the trust and the malls are all ‘ready’, he said.

Both malls are now stable income-producing properties.

YewTee Point, located next to Yew Tee MRT Station, has seen almost a million shoppers since it soft opened in March this year. The mall, which has a net lettable area of 73,000 square feet, has achieved an occupancy rate of 98 per cent.

Northpoint 2 at Yishun – an extension of Northpoint, which is already part of FCT’s portfolio – is also now seeing good occupancy and footfall, Mr Tang said.

Buying the malls at this time will be yield-accretive for the trust, he said. Previously, as FCT was trading at higher yields (due to a lower share price), buying the properties would not have been yield-accretive.

‘FCT is now trading at 5 per cent above net asset value and FY2010 dividend per unit (DPU) yield of 6.4 per cent, which could mean that acquisition of Northpoint 2 and YewTee Point from its sponsor (about $300 million) could be accretive,’ wrote UBS Investment Research analysts Regina Lim and Michael Lim in an Oct 27 note.

Analysts have also said that FCT can be expected to raise equity for acquisitions soon. The UBS analysts, for example, expect FCT to raise around $130-$170 million in the next four months for acquisitions.

Said CIMB analyst Janice Ding: ‘We believe FCT will use equity and debt to fund its acquisition of Northpoint 2 and Yew Tee Point in a bid to increase its stock liquidity. We have assumed 25 per cent debt and 75 per cent equity for the acquisition.’

The planned injection of the two pipeline assets is also expected to expand FCT’s asset base significantly. UBS estimates that the exercise could lift portfolio size by 27 per cent to around $1.4 billion.

YewTee Point was officially opened last Saturday. With the mall, Frasers Centrepoint unveiled its new ‘neighbourhood’ mall concept.

A neighbourhood mall, Mr Tang explained, is more intimately-sized than a suburban mall and will serve the needs of its immediate community: ‘For instance, residents can enjoy early morning or late-night grocery-shopping at anchor tenant NTUC FairPrice supermarket, which opens its doors at 7am and closes at 11pm.’

Some F&B tenants will also be open until the early hours of the morning, he said.

Good things are worth waiting for

At a Glance

• Results are in line with estimates
• Catalysts in sight.
• Maintain BUY, TP S$1.34, prospective 6.5-7.3% yield

Comment on Results

Ending the year well. 4Q09 results were in line with our estimates. Gross revenues and net property income were higher by 13% yoy and 25% yoy to S$24.8m and 17.6m respectively. The increase was mainly attributed to the improvement in revenue generated from Northpoint upon the successful completion of its enhancement works. Distributable income came in at S$12.8m ( 0% yoy) , translating to a DPU of S$2.04 Scts.

FCT recorded an upward revaluation of $37m even with higher cap rates (+0.25-0.75%) used by its valuers, highlighting the strong performance of its underlying assets.

Financial metrics are strong. Gearing remained relatively low at 29.9% with a healthy interest cover of 6.12x. NAV per share remained steady at S$1.22.

Catalyst for growth- acquisition. Looking ahead, other than organic growth drivers from rental reversions and contribution from Northpoint. We believe that further catalysts for growth will derive from their planned acquisition of Northpoint II and Yewtee Point properties which are both trading at almost full occupancy. This in our view, should address FCT’s current size and liquidity constraints. We have estimated a acquisition size of S$300m at 7% yield funded by a 30/70% Debt/Equity ratio in our numbers.

Recommendation

Maintain BUY, TP S$1.34. With potential catalysts in sight, we continue to like FCT as a good proxy into Singapore’s sub-urban retail sector offering a clear expansion pipeline of quality retail assets. FCT currently offers a prospective FY10-11F DPU of 6.5-7.3%.

Factoring in acquisitions

• Maintain Outperform with higher target price of S$1.64 (from S$1.21). 4Q09 results were in line with Street and our expectations. Full-year DPU of 7.51cts forms 103% of our full-year forecast. We are assuming that Northpoint 2 and Yew Tee Point will be injected in the near future at an estimated purchase price of S$326m, and raise our rental growth estimates to 3-5% (from 2%). Following our adjustments, our DPU estimates for FY10-11 rise by 6-18%, while our DDMderived target price (discount rate 8.1%) rises to S$1.64 from S$1.21. We also introduce FY12 estimates. We remain confident that FCT’s rents will stay resilient, backed by limited supply and tenants catering to non-discretionary spending.

• Good performance. 4Q09 DPU of 2.04cts, which includes income retained from previous quarters, deviated marginally from the 2.05cts declared in 4Q08. However, if retained income were stripped away, underlying DPU for 4Q09 (1.95cts) would have grown 23% yoy. Net property income for the full year
(S$59.9m) was up 5.8% yoy, driven by a strong performance from Causeway Point and the refurbished Anchorpoint. Notably, there were positive rental reversions of 15% in FY09, led by the largest asset Causeway Point. Occupancy rose 4.1% pts to 97.3% with the completion of asset enhancement work in Northpoint in the quarter.

• Asset enhancement update. Asset enhancement at Northpoint has been fully completed, in August. Some 97% of the space has been leased although physical occupancy was lower at 89.9%, as some tenants were still fitting out. Projected rents on completion average S$13.20psf, up 20% from before the refurbishments. Plans for Causeway Point’s refurbishment are on the cards and are likely to be carried out in phases to minimise disruptions to business.

• Expect equity for acquisitions in the near future. We believe FCT will use equity and debt to fund its acquisition of Northpoint 2 and Yew Tee Point in a bid to increase its stock liquidity. We have assumed 25% debt and 75% equity for the acquisition.

Strong earnings; BUY on defensive strengths

Maintain BUY for its defensive strengths. FCT reported 4QFY09 results DPU of 2.04¢ (-0.5% YoY) and 7.51¢ for FY09, 6% above our estimate. Net property income rose 24.9% due to Northpoint’s enhancement initiative and cost management measures. The better-than-expected earnings were largely due to the strong rental reversion from Northpoint following its AEI. FCT will trade ex-4QFY09 distribution on 29 October 2009. We raise our FY10 DPU estimate by 7.6% to 8.26¢, providing an implied yield of 6.6%. Maintain BUY, DDM-based TP of S$1.53.

3.5% capital value gains. FCT reported a 3.5% YoY gain in capital values to S$1.1b despite the 50bp increase in cap rate to 5.75-5.90%. This was largely due to the strong increase in its net property income. Management alluded that cap rates are unlikely to rise further under the current economic environment. We project NPI from the existing assets to rise by 7% in FY10, bringing about a corresponding increase in capital values, and a fall in gearing. We expect FCT’s gearing to hover below 30% in FY10.

Acquisition in the works? With its strong balance sheet, FCT has substantial debt headroom to acquire new assets. We expect Northpoint 2 and YewTee Point to be acquired within the next 12 months. We value both assets at ~S$300m, with NPI yields between 5.7-6.1%, above its WACC cost of 5.2%. With the acquisitions, FCT’s AUM will grow by 28% to S$1.4b by end-2010. Our valuation assumes the acquisition of these assets by mid-FY10.

Expanded AUM may address liquidity and compress yields further. With a low cost of equity, we expect the above acquisitions to be accretive, strengthening FCT’s retail oligopoly status in the northern region of Singapore. With an expanded AUM and equity base, concerns over FCT’s poor stock liquidity will be addressed. We expect a further re-rating on the stock as yields could compress closer to its 5% heyday levels seen in 2006-08. At our TP, FCT trades at 5.4% FY10 yield, a reasonable peg, in our view. Note that FCT traded at 4.6% during heydays of 2006 and 2007, suggesting that the stock has further legs to ride up the economic recovery.