QoQ improvement as asset enhancement winds up

DPU up QoQ. Frasers Centrepoint Trust (FCT) posted S$21.1m in 2Q09 revenue, down 2.4% YoY but up 8.3% QoQ. NPI margins improved to 69.7% from 66.8% a year ago and 65.9% in 1Q09 due to the absence of one-off expenses and cost management. FCT will distribute S$11.6m for the quarter, up 7.3% YoY because of a larger 100% payout (versus 90% a year ago) and up 11.3% QoQ. Unitholders will receive 1.86 S cents per unit, or an annualized yield of 10.7%. FCT’s results were slightly better than expected: 1H09 revenue and distributed income make up 52% of our full-year estimates.

Asset enhancement winding up. In recent quarters, the trust’s earnings have been distorted by planned enhancement works at Northpoint. The property earned S$2.5m in net property income, down 29.1% YoY but up 58.2% QoQ as the temporary vacancy situation corrected in line with progress on the works (72% actual occupancy at Mar 09 versus 52% as at Dec 08). We expect occupancy figures to improve further in 2H09, with the work scheduled to be completed by June 2009. The manager has secured or is in advanced negotiations for leases on 94% of the mall’s NLA. FCT re-affirmed its guidance for post-enhancement rents at the mall, and says Northpoint can achieve S$4.5m in NPI with 100% occupancy – which is 77% higher than what the property earned this quarter.

Portfolio holding course. FCT’s other two properties maintained occupancy rates of 99.5%-100%. Causeway Point recorded an 8% QoQ increase in NPI to S$11m, while Anchorpoint registered a 16% QoQ increase in NPI to S$1.1m. Only 0.9% of portfolio NLA was renewed in 2Q09, at a 7.3% increase over preceding rents. This is a significant step down from the increases achieved in the preceding four quarters, which have all been in the high teens.

For stability seekers. We still like FCT’s relatively “safer” suburban portfolio and it’s mass-market, non-discretionary spending focus. Our valuation prices in a 5-7% decline per annum in new rentals/ renewals over the next two years (except for the uplift at Northpoint post-works). FCT is geared at a low 29.7%, with the bulk of its loans maturing in July 2011. We think FCT
is an attractive proposition for investors seeking yield stability. However, from a value perspective, we think there are better deals out there in the sector. The lack of critical mass in the current portfolio, with growth plans on hold, is also a concern. Maintain HOLD with S$0.62 fair value

Steady Yield

At a glance

• Results in line. DPU rose 6.3% yoy due to organic rental growth and higher distribution income payout of 95%

• Higher rental renewals supported by increased shopper traffic and high average portfolio occupancy of 93.4%

• Northpoint AEI on track with high lease pre-commitments and a 20% expansion in average rental rates. This will underpin forward earnings growth

• Maintain BUY, TP $0.81

Comment on Results

Results in line with street estimates. Gross revenue remained stable at S$21.1m (-2% yoy, +8% qoq) on higher portfolio occupancy of 93.4% and positive rental reversions, averaging +7.3% over pcp. NPI grew 2% yoy (+15% qoq) to S$14.7m, lifted by better expense ratio of 30%. Distribution income increased 7.3% yoy to $11.6m (DPU: 1.86cts), thanks to improved operating performance and a higher dividend payout of 95% (vs 90% in 2Q08). As at 2Q09, gearing remains healthy at 30% and interest cover at 4.6x.

Positive DPU Cagr over FY09/11. Despite challenging conditions, DPU is expected to grow by a 4% Cagr over the next 3 years. To date, FCT has locked in 96% of its FY08 gross rental income and has a small 2.5% and 12% of NLA to be renewed in FY09-FY10. Full impact of higher income from Northpoint AEI will be felt from FY10. The makeover, completing mid 09, has enabled the group to tie in 20% higher rentals and boost property NPI by 30%.

Recommendation

Maintain BUY, TP $0.81. We like FCT for its exposure to the suburban retail sector. Earnings resilience derived from a welllocated portfolio catering largely to necessity shopping. In addition, successful enhancement initiatives at Northpoint would lead to a positive 4% DPU Cagr over the next 3 years while healthy balance sheet and little near term refinancing need would mitigate any need for a dilutive fund raising exercise. At current price, FCT offers a potential total return of 25%. Maintain Buy.

FCT reports 1.7% rise in Q2 income

It expects to sustain income levels despite downturn

DESPITE lower gross revenue, Frasers Centrepoint Trust (FCT) has posted a 1.7 per cent rise in distributable income to $12.2 million for its fiscal second quarter ended March 31.

Distribution to unitholders for the three months stood at $11.6 million, after a retention of 5 per cent of this distributable income by FCT.

This is still 7.3 per cent higher than the $10.8 million distribution to unitholders for Q2 last year. As a result, distribution per unit edged up to 1.86 cents, from 1.75 cents a year ago.

FCT said its gross revenue for the quarter slipped 2.4 per cent to $21.1 million largely due to planned vacancies at Northpoint as a result of ongoing addition and alteration works to enhance and reposition the mall.

This was partly offset by an average increase of 7.3 per cent in rentals among replacement and renewal leases. As at end-March, occupancy rate of the properties in its portfolio was 93.4 per cent, up from 88.7 per cent as at end-December.

Property expenses fell 10.9 per cent to $6.4 million. Including share of associate’s results, total return after tax dipped 2.3 per cent to $14.1 million.

The performance brings its half-year income currently available for distribution to $22.7 million, a dip of 2 per cent. Total distribution to unitholders in the six months to March climbed 5.9 per cent to $22 million. Gross revenue dipped 2.8 per cent to $40.6 million.

Despite the challenging economic climate, FCT is expected to sustain its income performance. Said Christopher Tang, chief executive of the trust manager: ‘FCT is well positioned to meet the prevailing challenging economic conditions with its defensive suburban retail profile, robust capital structure and the completion of Northpoint’s enhancement works.’

Shares of FCT went up two cents to 69.5 cents yesterday.

In good shape

• DPU in line despite the retention of 5%. 2Q09 results are in line with Street and our expectations. 2Q09 DPU grew 6.4% yoy to 1.86cts, 26% of our full-year forecast. Distribution income of S$11.6m grew 7.3% yoy and excluded S$0.6m (5% of available distribution of S$12.2m) retained in the quarter. Gross revenue of S$21.1m deteriorated 2.4% yoy due to planned asset enhancement work at Northpoint. Despite this, net property income grew 2% yoy and 15% qoq to S$14.7m, attributable to: 1) expenses coming off a higher base in 4Q08 from oneoff maintenance expenses; 2) greater economies of scale as expenses were partially shared with the completed Northpoint 2 held by the sponsor; and 3) upgrades to M&E systems during asset enhancement work that resulted in reduced utility costs.

• Operations in good shape. Despite ongoing asset enhancement work in Northpoint, portfolio occupancy continued to climb to 93.4% from 88.7% in Dec 08 as occupancy at Northpoint improved 19.9% pts to 72.1%. Additionally, traffic count for the whole portfolio moved up 8% yoy.

• 96% of gross rental income locked in for FY09. FCT has made good progress with lease renewals in 2Q09. To date, it has locked in 96% of gross rental income for the rest of FY09. This leaves only 15,706 sf of space expiring in FY09. Leases renewed were up 7.3% over preceding rents, or an estimated 2.4% increase per annum. Pre-leasing at Northpoint was positive with 94% of the space taken and completion is expected in Jun 09.

• Intention to term out S$80m of short-term debt. FCT has S$80m of short-term debt that it rolls over every three months. Management is exploring options to term out these short-term loans for longer periods.

• Maintain Outperform and target price of S$1.06. FCT’s progress with pre-leasing renewals, improving occupancy and unfaltering traffic count are encouraging in this difficult time. FCT remains our preferred pick for suburban retail exposure. Our DDM-derived target price of S$1.06 (discount 9.4%) is unchanged. Maintain Outperform.

FCT DPU up slightly to 1.86 cents

FRASERS Centrepoint Trust has posted a 1.7 per cent gain in its Q2 income currently available for distribution to $12.2 million.

For the three months ended March, distribution to unitholders went up 7.3 per cent to $11.6 million, as the trust manager has retained 5 per cent of its income currently available for distribution.

As a result, distribution per unit edged up to 1.86 cents, from 1.75 cents in the year-ago period.