4QFY08: Rental reversion higher than anticipated

Strong rental reversion at Causeway Point. Frasers Centrepoint Trust (FCT) reported gross revenue of S$21.6m in 2QFY08, an increase of 10.3% yoy. 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. Revenue contribution from Anchorpoint doubled to S$1.6m after completion of asset enhancement initiative (AEI). Revenue contribution from Northpoint, however, dropped 3% yoy to S$5.4m. Occupancy at Northpoint declined from 100% in FY07 to 83.8% in 2QFY08 with anchor stores Cold Storage and Harvey Norman closed due to current AEI. Management has increased the number of leases with turnover rents from 16% in 2QFY07 to 62% in 2QFY08. Turnover rents currently accounts for 7% of total revenue.

Net property income increased 7.7% yoy to S$14.4m in 2QFY08 while distributable income grew 16.8% yoy to S$12m. FCT announced DPU of 1.75 cents for 2QFY08, an increase of 4.8% yoy. Management has again retained 10% of distributable income for distribution in 2HFY08.

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 to S$170.5m. Northpoint 2 is 70% completed and is expected to obtain temporary occupation permit by Aug 08. 68% of 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.

Northpoint: short-term pain for long-term gain. FCT commenced S$30m major AEI at Northpoint, which will last from Jan 08 to Jun 09. Gross floor area will be transferred from the fourth floor to Level one to three, which provides higher rental yield. The AEI will integrate Northpoint with Northpoint 2 to create an enlarged shopping mall with total NLA of 232,000sf. Management expects average rental for Northpoint to increase from S$11.00psf pm to S$12.91 after the revamp, thus increasing net property income from Northpoint by 27% to S$17.6m/year. Unfortunately, contributions from Northpoint will be affected from 3QFY08 to 3QFY09 with lower average occupancy of 82%.

Defensive Anchor From Suburban Malls

Frasers Centrepoint Trust (FCT) is a retail-focused real estate investment trust (REIT). It delivers sustainable growth through four growth strategies: positive rental reversions, asset enhancement initiatives (AEIs), building up a pipeline of quality malls for injection into FCT and overseas expansion. FCT’s initial portfolio comprises Causeway Point, Northpoint and Anchorpoint in Singapore. FCT was assigned a corporate rating of A3 with a stable outlook by Moody’s Investors Services in Mar 07.

Ready pipeline of acquisitions. FCT has a ready pipeline of acquisitions that will double net lettable area (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 S$139.5m-170.5m. Northpoint 2 is expected to obtain temporary occupation permit by Aug 08 and to be injected into FCT in 1QFY09. We expect YewTee Point and Bedok Mall with NLA of 80,000sf each to be injected into FCT in 3QFY09 and 2QFY11 respectively. We estimate the three new malls to contribute about 29.1% of total revenue in FY12.

Contributions from Northpoint affected by AEI. FCT commenced S$30m major AEI at Northpoint. Gross floor area will be transferred from the fourth floor to level one to three, which will provide higher rental yield. Average rental is expected to increase from S$11.00 to S$12.40psf pm after the revamp. However, contributions from Northpoint will be affected from 3QFY08 to 3QFY09 with average occupancy estimated to decline from 100% to 85%.

Initiate coverage with HOLD. FCT focuses on suburban retail malls, which provides defensive qualities. Contributions from new malls to be acquired come much later, starting 1QFY09. Growth momentum would slow down in the near term due to AEI at Northpoint. FCT provides FY08 distribution yield of 5.47%. Our fair price for FCT is S$1.39 based on two-stage dividend discount model.

FCT to buy $480m malls from parent

FRASERS Centrepoint Trust (FCT) , which owns suburban malls, said yesterday that it would buy three properties worth $480 million in two years, funded mostly through loans as investor appetite for new equity dries up. ‘Right now, the capital market is not there unfortunately, but the banks are still lending and I’ve got the debt headroom to go much higher,’ Christopher Tang, CEO of Fraser Centrepoint Asset Management, told Reuters.

FCT is acquiring the three suburban malls from parent Frasers Centrepoint, the property arm of conglomerate Fraser and Neave, and is prepared to raise its debt gearing from 29 per cent to 45 per cent to do so, he said. ‘Our long-term target is always about 30-35 per cent but we’re now prepared for short periods of time to go as high as 40-45 per cent, until the capital market works through its issues.’

FCT’s share price rose up to 3.3 per cent in late session trading before ending 0.9 per cent up in line with the broader market. Rival retail Reits CapitaMall Trust was up 1.2 per cent, while Suntec Reit lost 0.7 per cent.

Poor market conditions have caused Reits such as MacarthurCook Industrial and Allco Commercial to scrap plans for fund-raising by issuing new shares. With the Reits’ ability to fund their growth and repay existing debts squeezed, analysts such as Goldman Sachs and UBS are predicting that smaller Reits such as MacarthurCook will become acquisition targets.

Mr Tang said that FCT’s balance sheet remained strong with most debts due in 2011, and FCT had an A3 corporate rating from Moody’s. He declined to say if he was planning to acquire another Reit, but did not rule it out. ‘I think, as a strategy, it’s something that most people would not rule out. It’s obviously another way of growing. M&A will probably be an area that will have more activity in the Singapore Reit market in the future. Like in the United States and Australia, it’s an inevitable phase for the market that there will be consolidation from time to time.’

Mr Tang remains bullish about the outlook for suburban malls, despite concerns that consumers would cut expenses amidst fears of a slowing global economy and surging inflation. ‘Even in the worst of times, during the Sars period in 2003, our occupancy never dropped because suburban malls are non-discretionary spending and it rides economic cycles very well,’ he said. — Reuters