Boost from Changi City Point

• 3QFY14 DPU up 6.0% YoY
  
• Rental reversion at 7.8%
  
• Further growth expected
  

Strong 3QFY14 results as expected

Frasers Centrepoint Trust (FCT) reported a promising set of 3QFY14 results last evening, with gross revenue growing 3.1% YoY to S$41.2m and NPI improving 2.4% to S$29.1m. The better performance was mainly due to higher revenue from Causeway Point and maiden contribution from newly-acquired Changi City Point. Distribution to unitholders of S$25.5m (+8.6%) was further boosted by the release of S$2.1m cash retained in 1HFY14. As such, DPU for the quarter came in at 3.022 S cents, up 6.0% YoY. This brings the 9MFY14 DPU to 8.402 S cents (+5.7%), meeting 75.9%/76.4% of our/consensus full-year DPU projections.

Improvement in operating metrics

Noteworthy in 3Q was the significant improvement in FCT’s portfolio occupancy to 98.5% from 96.8% in preceding quarter. We understand that Bedok Point’s occupancy rose to a strong 99.3% from 77.0% in Mar, after several new tenants including anchor tenant Harvey Norman commenced operations in the quarter. On the portfolio basis, positive rental reversion of 7.8% was also achieved (2Q: +9.3%), with only Bedok Point registering a mild 2.9% negative reversion. Overall shopper traffic in 3Q14 picked up 2.7% QoQ, led by Causeway Point which saw a 9.0% robust growth.

Maintain BUY

While management cautions that more retail space alternatives and labour shortages are likely to pose challenges to retail landlords going forward, it expects its portfolio occupancy and rental rates to remain sustainable. We maintain our view that Causeway Point and Northpoint will continue to underpin organic growth in the year ahead, while Changi City Point will provide further boost to FCT’s income. We make minor adjustments to our forecasts as the interim results were mostly consistent with our expectations. Our fair value is unchanged at S$2.08. Maintain BUY on FCT as upside potential remains attractive.

Operationally strong

FCT’s 3QFY9/14 results were largely in line, with 9M distributable profit at 75% of our full-year forecast. Gross revenue and net property income were up 2-3%, as the better performance at key malls had more than offset the weak performance at Bedok Point. FCT remains our top pick in the retail REITs space as we believe it is strong operationally with growth expected from both rental reversions and CCP contributions. We maintain our Add rating and raise our target price slightly to S$2.18 as we roll forward our estimates. We lift our FY14-15 EPS by 0.6-1% as we factor in lower interest costs.

Results and operations highlights

FCT continued to grow operationally during the quarter. Portfolio occupancy grew to 98.5% from 96.8% in the previous quarter, as occupancy at Bedok Point improved to 99.3% from 77% with the lease commencement of several tenants. There was an average 7.8% rental reversion in the quarter. Tenant sales and occupancy cost remained flat yoy.

Healthy balance sheet, potential interest savings

FCT’s gearing increased to 30.2% post the Changi City Point (CCP) acquisition, but it was still well within the S-REITs’ peer average of 32.9%. In the results conference call, management said it believes interest rates are likely to stay low, and hedged 75% of the company’s debt, instead of 94% previously. This resulted in a lower interest cost of 2.50% as opposed to 2.85% as of end-FY2013, and is likely to lead to interest savings and slightly higher distributions in the coming quarters.

Outlook

We expect FY2015’s revenue to grow by 14% yoy, largely from the CCP acquisition. Additionally, we believe organic growth will be driven by the 39% and 27% of leases (by gross rental income) expiring in FY2015 and FY2016, with the majority of the expiring leases emanating from Causeway Point, Northpoint and CCP. We believe CCP will experience a 20-30% positive rental reversion being its first rental cycle, and low passing rent of ~S$9 psf. FCT remains our top pick in the retail space as we like the resilience of its suburban mall offerings and growth profile from both the CCP acquisition and positive rental reversions.

New mall to propel growth

• Initial NPI yield at 5.43%
  
• Funded partially by placement
  
• Gearing to increase slightly to 30.3%
  

New addition to portfolio

Frasers Centrepoint Trust (FCT) announced that it has completed the acquisition of Changi City Point (CCP) from its sponsor’s joint venture Ascendas Frasers Pte Ltd on Mon. Recall that FCT first proposed to acquire the retail mall for a purchase consideration of S$305.0m (or S$1,472 psf NLA) on 8 Apr. According to the circular for unitholders, CCP is expected to generate an NPI yield of 5.43% and to contribute positively to DPU, assuming that the transaction is funded via a combination of debt and equity.

Strong interest for private placement

FCT has since launched a private placement of 88m new units at an issue price of between S$1.79 and S$1.835 per unit, upon getting unitholders’ approval for the related-party transaction. We note that the issue price was later fixed at the top range of S$1.835, backed by strong demand from new and existing Asian and European institutional investors. This represents a slight 3.6% discount to the VWAP for the full market day prior to the placement announcement. The total net proceeds of S$158.7m raised from the placement exercise was used to part finance the acquisition, while the remaining balance of the purchase price was funded by borrowings and internal resources. Based on our projections, the CCP deal is expected to add an annualised 0.12 S cents to FCT’s DPU. FCT’s gearing ratio, on the other hand, is likely to increase from 27.7% as at 31 Mar to 30.3%.

Maintain BUY

In connection with the placement, FCT has also declared an advance distribution of 2.288 S cents per unit for the period of 1 Apr to 9 Jun 2014, payable on/around 17 Jul. This translates to a respectable yield of 6.4%. We now incorporate the private placement and acquisition into our forecasts. Consequently, our fair value is raised from S$2.02 to S$2.08. Given that upside potential remains attractive, we maintain our BUY rating on FCT.

Inching in on Changi City Point’s contribution

• Results in line, DPU rises 7% y-o-y to 2.88Scts
  
• Changi City Point (CCP) acquisition to be completed in May, expect S$120m of fundraising
  
• Maintain BUY, TP S$2.13
  

Highlights

Higher contributions from Causeway Point. FCT reported 2Q14 revenue of S$41m (+3% y-o-y), NPI of S$29m (+2%). The improvement in revenue was largely driven by Causeway Point (CWP), while the remaining malls, sans Bedok Point, returned a stable performance. However, this was dampened by higher operating costs stemming from higher maintenance expenses, property tax and property manager’s fees. DPU of 2.88Scts was 7% higher y-o-y, as the Trust distributed 100% of its income available for distribution in 2Q14 vs retention of c.5% in 2Q13.

Our View

Higher retail spending compensates for lower footfalls. Shopper traffic came in at 20.4m visitors, a decline of 8%, attributable to lower footfall at Bedok Point and competition from newer malls at Jurong East. However, the Manager has guided that tenant sales have increased 2.5% for FYTD Feb, and given that (i) FCT’s major tenants include supermarkets (Cold Storage, NTUC) and departmental stores (Metro) which have seen growing retail spending, and (ii) portfolio reversions remain healthy at 9.3%, we don’t think that the decline in traffic will have too much impact on rents from FCT’s portfolio at large.

Changi City Point (CCP) to be acquired soon; contribution from 4QFY14 onwards. As previously mentioned, we have forecasted one quarter of contribution from CCP for FY14, pending its EGM. We are positive on the impact of CCP on the REIT and see upside coming from the bulk of CCP’s leases expiring in 1QFY15, and given that the Manager is looking to refresh the tenant mix, we could potentially see double-digit rental uplifts at the mall, given passing first cycle rents of S$9.08 psf. In our numbers, we have assumed EFR of close to S$120m (c.40% of total acquisition cost of CCP), gearing to settle at c. 32% post acquisition.

Recommendation

Maintain BUY, TP S$2.13. We like FCT for its ability to sustain organic rental growth momentum at CWP and Northpoint post-AEI. Furthermore, income contribution from CCP in 4Q14 should be immediately accretive to earnings for FY14. The stock is currently trading at yields of 6.3-6.8%, or 1.0 P/BV. We maintain our BUY call

It’s getting better

FCT’s 2QFY9/14 results were largely in line, with 1H DPU coming in at 51% of our full year forecast. Revenue growth of 2.9% yoy and NPI growth of 6.7% yoy enabled 2Q to achieve 48-51% of our half-year forecast. Thanks to strong performances from its malls, FCT is fundamentally solid. We expect the pcoming S$305m acquisition of Changi City Point (CCP) to contribute to the next stage of growth. We maintain our Add rating and DDM-based target price (discount rate: 8.4%) of S$2.19.

Another stellar quarter

2QFY14 revenue came in at S$41m (+2.9% yoy) while DPU was 2.88 S¢ (+6.7%). The strong showing was mainly attributed to the good performance of most of the malls in the portfolio. During the quarter, Causeway Point and Northpoint achieved rental growth of 9.7% and 10.9%, respectively. Other smaller malls posted strong rental reversion averaging 11.5% though this was partially offset by negative rental reversion (-11.8%) for Bedok Point. Although this quarter’s result is c.2.0% above our expectations, this is largely because it does not yet reflect the higher interest payment that we believe will come through when the acquisition of CCP is completed in c.3Q14.

To benefit from CCP and upcoming lease expiry

Currently, with CCP’s average monthly passing rent at S$9.08 psf, we believe FCT will be able to achieve 20-30% positive rental reversion when the majority of the leases are renewed over the upcoming two years. In addition, with 13.3% and 39.6% of leases (as % of total gross rental income) due to be renewed in FY14 and FY15, respectively and most of these leases concentrated at Northpoint and Causeway Point, we believe that FCT will continue to post positive rental reversion for years to come.

Maintain Add

Although the 77% occupancy at Bedok Point may seem worrying on the surface, management indicated that it will recover to above 95% in 2H14 when the leases for several tenants commence. We continue to favour FCT for its solid portfolio, room for further rental reversions and upcoming acquisition of CCP. We maintain our Add rating and target price of S$2.19.