FCT distributable income rises 19% in Q3

Gross revenue up 10% to $20.8m; DPU rises to 1.88 cents

FRASERS Centrepoint Trust (FCT) yesterday reported distributable income of $12.2 million for the third quarter ended June 30, 2008 – an increase of 19 per cent from the year-ago period.

This came on the back of a 10 per cent growth in gross revenue from Q3 2007 to $20.8 million.

Higher portfolio occupancy, strong rental renewals at Causeway Point, and better performance from the post-revamp Anchorpoint drove gross revenue increase.

Distribution per unit (DPU) for the quarter stood at 1.88 cents, 13 per cent higher than in the same period last year.

‘Strong organic growth coupled with the successful revamp of Anchorpoint delivered record distributable income to FCT unitholders for the second consecutive quarter,’ said Christopher Tang, CEO of FCT manager Frasers Centrepoint Asset Management Ltd.

With the completion of enhancement work at Anchorpoint, overall portfolio occupancy improved 2.8 percentage points from a year ago to 95.7 per cent as at June 30.

Anchorpoint enjoyed close to full occupancy and rents rose over 40 per cent, resulting in its gross revenue more than trebling to $1.7 million in Q3.

At Causeway Point, renewed rentals in Q3 2008 were 17 per cent above preceding rates.

‘Unitholders can also look forward to benefiting from the current enhancement work to Northpoint which remains on schedule for completion in June 2009,’ said Mr Tang.

As for Northpoint 2, construction is on schedule and work is in the final stages of completion.

The property is expected to obtain Temporary Occupation Permit by Q4 2008, and could be injected into FCT by the fourth calendar quarter this year or the first calendar quarter next year.

According to FCT, demand for Northpoint 2 is strong and almost all of its net lettable area has been leased or tagged in advanced stages of negotiations.

FCT has a gearing of 29.5 per cent and an A3 corporate rating from Moody’s.

‘Barring any unforeseen circumstances, the manager of FCT expects FCT to benefit from the rental renewals and the proactive asset management activities planned for the rest of the financial year ending 30 September, 2008,’ the trust’s financial statement said.

FCT’s units closed unchanged at $1.15 yesterday.

Turning in a good performance

Story: FCT reported Q3 distribution income of $12.2m (+19% yoy), bringing 9M contributions to $35.4m or 80% of our full year projections. This was achieved on a 10% hike in revenue to $20.8m. Management indicated it would distribute 95% of Q3 income or $11.6m (DPU: 1.88cts). However, it is committed to distribute 100% of its earnings for the full year. The better performance was largely driven by higher contributions from Anchorpoint and positive rental reversions at Causeway Point (CP). An estimated 43% of NLA at CP was renewed at 14% above preceding levels. This more than offset the income vacuum from Northpoint as occupancies declined to 83% during this AEI period.

Point: Looking ahead, DPU is expected to be underpinned by organic and acquisition growths. It has 31% of portfolio NLA to be reviewed in FY09. In addition, progressive roll out of the $38.6m AEI at Northpoint should boost NPI by $3.7m pa (+7%) when completed in 3Q09. Meanwhile, acquisition pipeline is on track with Northpoint II scheduled to TOP by Aug 08 and injected in late 08/early 09. This mall is 96% pre-committed and should be accretive to earnings when purchased. Other properties such as Yew Tee Mall and Bedok Mall are expected to be included in 1H09 and 2010/11 respectively. We expect the group to tap debt and capital markets for these purchases. Given its current gearing of 29.5% as at 2Q08, which would enable it to improve its asset size and stock liquidity.

Relevance: We have raised our FY08 and FY09 DPU marginally to 7.2cts and 7.8cts to reflect the better rental rates. At the present level, the stock is offering 6.3% and 6.8% yield. Our price target of $1.34, based of risk free rate assumption of 3.9%, offers 17% upside.

Holding fort North

• Well-located suburban assets. FCT is a retail real estate investment trust with three suburban retail properties concentrated in the north of Singapore. Its welllocated assets in the heart of suburban residential estates and major transportation nodes should be sustained by ready population catchments and limited competing supply.

• Strong sponsor to aid acquisitions. FCT is supported by Frasers Centrepoint Limited (FCL), which provides FCT with a ready pipeline of four assets for acquisition.

• Growth via acquisitions and double-digit rental-renewal rates. FCT is poised for growth via acquisitions and growth in retail rents from 2008 to 2010. We expect FCT to acquire S$480m of properties from 2008 to 2010. In addition, retail rents are expected to increase by up to 45% over preceding rates from 2008 to 2010 on the back of tight supply and ongoing asset enhancements.

• Initiate with Outperform and DDM-derived valuation of S$1.70. We have a target price of S$1.70, using DDM valuation (discount rate 8.5%, terminal growth rate 4%). This represents a total prospective return of 38.3% from a forward yield of 5.5% and potential price upside of 32.8%.

Rental Reversion Higher Than Expected

Strong rental reversion at Causeway Point. Frasers Centrepoint Trust (FCT) reported strong rental reversion for Causeway Point in its 2QFY08 results. Revenue contribution from its largest mall Causeway Point gained 11% yoy to S$14.6m, benefitting from strong rental reversion and higher turnover rent. 20,816sf of retail space at Causeway Point representing 5% of total net lettable area (NLA) was renewed at 16% above preceding rental rates in 2QFY08. FCT has also increased the number of leases with turnover rents from 16% in 2QFY07 to 62% in 2QFY08. Stronger performance at Causeway Point has offset lower occupancy at Northpoint due to ongoing asset enhancement initiative (AEI), helping FCT generate 10.3% yoy increase in revenue to S$21.6m and a 16.8% yoy increase in distributable income to S$12m in 2QFY08.

Ready pipeline of acquisitions. FCT has a ready pipeline of acquisitions that will double NLA to more than 1.2m sf when fully completed. It has entered into a put and call option agreement with sponsor Frasers Centrepoint Limited for the purchase of Northpoint 2 at between S$139.5m and S$170.5m. Northpoint 2 is 70% completed and is expected to obtain a temporary occupation permit by Aug 08. 68% of the NLA has been committed and Northpoint 2 is on schedule to be injected into FCT in 1QFY09. We expect YewTee Point and Bedok Mall with NLA of 80,000sf each to be injected in 3QFY09 and 2QFY11 respectively. We estimate the three new malls to contribute 28.6% of total revenue in FY12.

Upgrade to BUY. FCT focuses on suburban retail malls, which provide defensive qualities. We have raised our FY08 DPU forecast by 15% to 7.7 cents to factor in strong rental reversion from Causeway Point. FCT provides FY08 distribution yield of 6.4%. Our target price for FCT is S$1.66 based on the two-stage dividend discount model. We have upgraded our recommendation from HOLD to BUY as our new target price provides upside of 37.2%.