Category: FCT
FCT – BT
FCT distributable income down 6% in Q1
FRASERS Centrepoint Trust (FCT) has announced income available for distribution of $10.4 million for its first quarter ended Dec 31, 2008, which is 6 per cent lower than a year ago.
Distribution per unit (DPU), however, was 1.67 cents, higher than 1.61 cents previously, as DPU for the latest quarter was based on 100 per cent of FCT’s income available for distribution compared with 90 per cent in year-ago quarter.
FCT said that gross revenue for the quarter ended Dec 31, 2008 was $19.5 million, a decrease of 3.2 per cent over the corresponding period last year, mainly due to the planned vacancies at Northpoint as part of the additions and alteration work to re-position the mall. The decrease was partially offset by the higher rental rates for new and renewed leases achieved in Causeway Point and higher turnover rent.
It said that it continued to make positive rental reversions with the bulk of the rentals of new and renewed leases during the quarter contributed by Causeway Point, which showed an average increase of 18.9 per cent from the preceding period. The occupancy rate had improved from 87.7 per cent as at Sept 30, 2008 to 88.7 per cent as at the end of the December quarter.
Actual property expenses for the quarter ended Dec 31, 2008 were $6.7 million, higher than the previous corresponding period by $0.5 million or 7.5 per cent, mainly due to higher property tax and staff costs. Net property income for the December quarter was $12.8 million, which is $1.1 million or 8 per cent lower than the same period last year.
Commenting on the outlook, FCT said that its property portfolio is suburban in nature, located next to key transportation hubs, catering to local/regional needs where there are no or limited alternative shopping choices. Suburban malls have their own population catchment.
During the current economic conditions, FCT’s portfolio of suburban malls will likely provide defensive cashflow.
FrasersCT – CIMB
Taking stock
• Occupancy and shopper traffic remain high. A site visit to FCT’s three properties show occupancy levels remaining high, with the exception of Northpoint which is undergoing asset enhancement work. We are positive that rents and occupancy will stay stable in FY09.
• Outlook for FCT properties remains positive. Despite a negative macro environment, we believe that suburban retail malls such as FCT’s will be resilient with no significant new supply in the suburbs, limited lease expiries in 2009 and stepped-up rents incorporated in 86% of its leases.
• Further provision for decline in Northpoint occupancy levels. While we earlier only provided for a moderate decline in Northpoint’s occupancy to 95% from full occupancy, we now factor in a more conservative decline to 70% in anticipation of more rent-free periods or rebates which may be dished out to new tenants.
• Maintain Outperform with lower target price of S$1.06 (from S$1.13). We have a lower DPU of 7.0cts (from 7.3-7.4cts) for FY09-10 as a result of lower occupancy assumptions for Northpoint. Still using DDM valuation, we have a lower target price of S$1.06 (unchanged discount rate of 9.4%). At 0.6x P/BV, FCT remains a cheaper exposure to Singapore’s retail market than CMT (0.7x). Yields remain high at 9.9%.
REITs – DBS
A tale of two Rs
Sector debt refinancing and recapitalising issues are likely to be the major drivers of the S-reit sector in 2009. As credit markets remain tight, access to credit takes priority over cost of funding. We see recapitalising prospects gathering momentum when asset writedowns begin. We see this as necessary to the sector but size and timing is uncertain under current market conditions. Valuationwise, these developments appear to have been largely anticipated in the share price, however, the uncertainty could hamper share price outperformance in the near
term. In terms of strategy, we prefer well-sponsored reits with good access to capital as well as those in the more resilient sectors such as retail, industrial and healthcare. Maintain buy on Parkway Life Reit and Areit and upgrade FCT on the back of attractive valuations.
Refinancing speed bumps linger: An estimated one third of the Sreit total indebtedness or $4.9b is due to be rolled over in 2009. The tight credit market environment would mean that access to funding would be crucial while increasing competition for funds would lead to an increase in cost of debt. Overall interest cost in the Sreit sector would rise above 4% from the present 3.2%. For every 50bps hike in average interest cost, DPU would be eroded by 10-15%.
Resetting the bar: We expect asset writedowns to begin as early as this year-end. Recapitalising issues are likely to gather momentum in the coming year, however, timing is uncertain as Sreits weigh the need to strengthen balance sheet against the commercial perspective of shareholder value dilution and investor appetite. Post funding, average DPU yield is estimated at 9% and P/adjusted book NAV of 0.75x, indicating that this possibility is reflected in the share price. Amongst Sreits, those with gearing closer to the 50% LTV mark and riskier sub-sectors such as office would have greater recapitalisation possibilities. This includes FCOT with a current loan to asset ratio of c49%. In the longer run, the higher geared reits such as CMT, Areit, CCT may look to strengthen balance sheet when equity markets recover.
Be selective: Given the headwinds from refinancing and recapitalisaton rises as asset writedowns, particular in the office segment, filter through, our strategy would be selective. In terms of large cap stock picks, we prefer Areit for its long lease tenure. In the mid cap sphere, we favour Parkway Life Reit and FCT with their resilient business model and attractive
valuations. Strong balance sheet and low gearing also reduces the need for recapitalising.
Link – Tables
FrasersCT
Fundamental call still stands
Strong sponsor. We believe perceived risk will drive REIT performance in 2009. Sponsored REITs like Frasers Centrepoint Trust (FCT) are generally thought to have a lower risk profile as the sponsor is seen as a bastion of support for the S-REIT – especially financial support. FCT has a strong sponsor whose recent show of tangible financial support for newly affiliated Frasers Commercial Trust speaks volumes. FCT is geared at 28.1%, with 80% of its outstanding debt expiring only in July 2011. Our main balance sheet related concern is the financing of ongoing capital expenditure – FCT is currently using uncommitted drawn banking facilities for this purpose. The likely strength of lending relationships inherited from its sponsor alleviates our concern (somewhat).
Refining assumptions. We continue to like FCT’s suburban assets and their mass-market consumer focus. The malls are strategically located adjacent to MRT stations and bus interchanges, and enjoy captive markets with strong population catchments and limited alternative shopping choices. The primary focus is on non-discretionary spending and both Northpoint and Causeway Point have had a good track record in previous crises. However, we are refining our assumptions. We had previously assumed flat YoY reversionary growth in rentals. We are now pricing in a 5-7% decline per annum over the next two years (except for an expected uplift at Northpoint next year post-asset enhancements). This is in line with our assumptions for rental contractions at Suntec City Mall (est. 8-10% pa decline) and CapitaMall Trust (est. 5% pa). We have also refined our estimate for the value of FCT’s stake in Malaysian Hektar REIT.
Fundamental call still stands. FCT’s share price has continued to fall in tandem with the S-REIT sector. It is currently trading at a 53% discount to book value. However, we believe our fundamental call still makes sense. In our opinion, FCT’s current portfolio lacks critical mass. FCT was in the process of building a scale portfolio on the back of a clearly defined sponsor pipeline. Unfortunately, even the best laid plans can go awry. FCT has now postponed its expansion plans indefinitely, citing credit market conditions. We believe that the pace of acquisitions will dramatically slow across the S-REIT sector because of the rising cost of capital, overstretched balance sheets, and limited access to capital. While slowing growth is a sectorwide problem, its importance to FCT is above average (in our opinion). Maintain HOLD. Based on the adjustments described above, our fair value estimate drops from S$0.72 to S$0.62.
FrasersCT – BT
Moody’s Investors Service has on Monday downgraded the Fraser Centrepoint Trust’s (‘FCT’) corporate family rating from A3 to Baa1.
The rating remains on review for possible downgrade.
‘The downgrade reflects Moody’s views that FCT is unlikely to grow in the next two years to a scale and diversity that is consistent with its previous rating’, says Kathleen Lee, Moody’s lead analyst for the trust.
‘Consequently, FCT’s relatively small size and asset concentration risk whereby Causeway Point contributes a significant 71% of net profit from its portfolio of 3 retail assets do not support a continuation of its previous rating when compared to similarly rated peers in the REITsector’, adds Lee.
The rating remains on review for downgrade given the use of uncommitted drawn banking facilities to fund capital expenditure. While the amount is relatively small – and with banks with good relationships with FCT — Moody’s believes the continued use of such facilities is a source of weakness especially as the bank lending environment continues to tighten.
Moody’s notes that FCT has reported sustainable income streams, supported by its good quality, well-located and seasoned suburban retail malls which enjoys relatively high entry barriers and is more resilient to economic downturns as tenants mainly provide daily necessities.
The rating review will focus on FCT’s plans to secure committed bank facilities or find alternate mitigating measures to address the weakness of the existing uncommitted facilities and to fund ongoing capital expenditure.
The last rating action was on 20 October, 2008 when the ratings of FCT were placed under review for possible downgrade.
FCT is a Singapore-based real estate investment trust with particular focus on retail properties in Singapore. The trust is sponsored by Frasers Centrepoint Ltd, the wholly owned property arm of F&N group, one of Singapore’s leading shopping centre operators and developers.