Category: FCT
FCT – CIMB
Refinancing savings
As we have been highlighting refinancing savings as a potential catalyst for some time,FCT’snew MTN issuance wasn’t unexpected. Still, the good rates it securedwerea nicesurprise. We continue to like its resilient suburban retail exposure.
We raise DPUs and DDM-based target price (discount rate:7.9%) to factor ininterest cost savings on refinancing. Maintain Outperform, with other catalysts expectedfrom stronger contributions from Causeway Point’sAEI and Northpoint.
What Happened
FCT has issuedtwo new MTNs (S$70m at 2.3% due 2015 and S$30m at 2.85% due 2017). Proceeds will be used for therefinancing of existing short-term borrowings, AEI, investments and working capital.
What We Think
We expect part of the proceeds to be channelled tothe refinancing of its S$75m MTN due in FY12. We expect refinancing savings,given a fairly high interest cost of 4.8%. We have been highlighting this catalyst for some time though the good rates secured still came in as a slight surprise. Further positives werea slight lengthening of debt maturity. Savings are,however,small at 2% of FY13 DPU, given the small size of the loan (14%of total borrowings).
Meanwhile, we expecttheremaining S$25m to be used for thefunding of an impending rights issue by Hektar REIT. FCT owns 31% ofHektar REIT(trading at consensus forward DPU yields of 7.3%), which recently obtained approval for arights issue to fund the acquisition of two retail assets in Malaysia.
What You Should Do
The overall impact is marginal,given the small size of the loan. Maintain Outperform for FCT’s suburban retail exposure. We see catalysts from stronger-than-expected contributions from Causeway Point’sAEI and Northpoint.
Retail REITs – DBSV
Staying on top of the game
• Stronger earnings growth from 2H12 as AEI works bear fruit
• Healthy pre-commitment rates with strong tenant mix to continue to drive strong organic growth
• Top pick – CMT for its strong earning visibility
Better performance from 2H. Competition for the consumer dollar over the last two years has prompted landlords to undertake refurbishment and repositioning initiatives to remain competitive and relevant to changing consumer taste. As the malls move towards the tail end of their development schedule, we believe the gradual completion of AEI, coupled with the positive rental reversions, should support strong FY13 DPU growth of 6% y-o-y for the retail reits vs the other reit sectors. More importantly, we note that malls that have post AEI works are able to achieve higher average annual rental growth of at least 8% vs the average reversionary rental reversion of 2-3% p.a.
Reaping the benefits of AEI works. Supporting our positive outlook is the strong earnings growth of 15-16% q-o-q for FCT’s 2Q results upon the completion of Causeway Point’s AEI works (Phase 1) in Dec 2011. CMT’s JCube, which opened in April this year, was almost 100% occupied and we should expect higher contribution from 2Q onwards. Our recent visit to Causeway Point and JCube malls also reaffirmed the REIT managers’ asset enhancement execution ability. We were impressed with the mix of tenants that the malls have brought in and the higher foot traffic they attract.
Attractive tenant mix supports healthy rental reversion and pre-commitments. We are pleased that reit managers have traded up the mall’s tenant mix featuring new-to-market brands and concept stores. Meanwhile, some of these malls will also see higher F&B components upon the completion of the AEI works. We like this strategy because popular F&B joints are high yielding tenants, much like fashion retailers. They also double as crowd pullers. This would enable landlords to drive rental reversion and occupancies in the longer term. Apart from that, leasing activities have been healthy resulting in strong leasing pre-commitments of >70%, way ahead of the AEI completion dates.
Stock picks. We continue to like the retail reits for its visible earning drivers and low earning volatility, backed by the more resilient nature of nondiscretionary consumption. Within this space, we like CMT (BUY, TP S$2.05) for its strong earning visibility. We expect the AEI works that are completing progressively to underpin earning growth, while proceeds from its recent divestment of Hougang Plaza could be deployed to higher yielding sources.
Retail REITs – BT
Retail Reits doing well in inflationary environment
INFLATIONARY pressures and escalating retail rents seem to have benefited retail focused real estate investment trusts (Reits) and business trusts over recent months.
Six Singapore-listed Reits which have been categorised to have a retail focus by Bloomberg – namely Lippo Mapletree Indonesia Retail, CapitaRetail China Trust, Starhill Global Reit, Frasers Centrepoint, Fortune Reit and CapitaMall Trust – yielded an average price return of around 13 per cent since the onset of 2012, which is almost on par with the year-to-date return of the Straits Times Index (STI), even before factoring in their compelling distribution returns.
Notably, Reits tend to offer dividend yields superior to that of other equity peers due to the sector's distribution of at least 90 per cent of their cash flow income to unit-holders in return for tax concessions from the government.
For instance, distribution yields for the six Reits averaged an attractive 6.1 per cent, and ranged from 5.2 per cent for CapitaMall Trust and Fraser Centrepoint to 6.6 per cent for CapitaRetail China Trust, Starhill Global Reit and Lippo MapleTree Indonesia Retail, according to data from Bloomberg.
FCT – OCBC
LAUDABLE SET OF 2Q RESULTS
•2QFY12 results above expectations
•Positive performance to continue
•In search of growth opportunities
2QFY12 DPU at all-time high
Frasers Centrepoint Trust (FCT) delivered a strong set of 2QFY12 results that were ahead our expectations. NPI and distributable income were up 30.4% and 30.6% YoY to S$26.2m and S$21.3m respectively, driven by positive rental reversions of 7.2-12.5% (11% on average), full-quarter contribution from Bedok Point, and strong uplift from Causeway Point (CWP). In addition, DPU rose by 20.8% YoY to a record high of 2.50 S cents, notwithstanding a distributable amount of S$0.7m being retained for the quarter. As a result, 1HFY12 NPI came in at S$51.1m (+31.9% YoY), forming 53.4% of our fullyear forecast, while DPU hit 4.70 S cents (+16.9% YoY), meeting 50.2% of our DPU assumption. This exceeds our expectations, considering that a total of S$2.3m (or ~0.28 S cents) retained thus far may be distributed in the coming quarters.
Temporary dip in occupancy; set to improve
As at 31 Mar, FCT's portfolio occupancy was at 93.5%. This represents a 10.6ppt improvement from 82.9% seen a year ago, but a 4.0ppt decline from 97.5% in the prior quarter. According to management, the fall was attributable to a temporary closure of the food court at Northpoint due to tenant changeover and the commencement of scheduled refurbishment works at levels 5 and 7 of CWP. When the food court reopens in May and the asset enhancement initiatives (AEIs) at CWP complete in Dec, we expect the occupancy at the respective malls to improve substantially.
Maintain BUY
For 2HFY12, FCT anticipates its positive performance to be sustained, as it continues to benefit from positive rental reversions and stronger performance at its malls. While management now reveals that the injection of Changi City Point may not happen in the near future, it is exploring other ways to optimize yields, such as AEIs and joint developments with its sponsor. We note that FCT's aggregate leverage is at a strong 30.9%. This positions the REIT well to pursue its growth plans. Maintain BUY with a revised fair value of S$1.74 (S$1.68 previously) after factoring in the 2Q results.
FCT – DMG
All time new high
2QFY12 DPU in line with expectations. Frasers Centrepoint Trust (FCT) reported a strong 2QFY12 DPU of 2.50S¢ (+20.8% YoY). Together with 1QDPU of 2.20S¢, 1H12 results translates to 50.5% of our FY12 DPU estimate. Revenue for 2QFY12 grew to S$36.7m (+27.4% YoY) while net property income rose to S$26.2m (+30.4% YoY). These strong growths are mainly attributed to additional contributions from Causeway Point (CWP) and the acquisitions at Bedok Point. In the subsequent quarters, we expect FCT to register stronger numbers on the back of 1) increased contributions from CWP as average occupancy and rental rates continue to pick up from its lows during the initial stage of AEI, 2) new contributions from Bedok Point and 3) positive rental reversions in suburban malls to continue. Given FCT’s well positioned malls, together with its defensive play, we maintain our BUY call on FCT with an unchanged DDM based (COE: 8.8%, terminal growth: 2.0%) TP of S$1.77. With FCT currently trading at 4.7% spread vs the historical mean of 4.0%, our TP represents a spread of 3.9% posting a potential upside of 13.8%
Suburban malls concentrating in high shopper traffic area. Going forward, we expect market confidence for rental rates in suburban malls to remain as international brands continue to take up space in malls with high shopper traffic. Currently, all five of FCT’s malls are located in high population catchment areas with an expected average shopper traffic of 33m/year for 2 of its larger malls (Causeway point & Northpoint) and 8m/year for its smaller malls (Bedok Point, YewTee Point & Anchorpoint).
Additional contributions from Causeway point and Bedok point. In the subsequent months, we expect FCT’s DPU to continue to grow on the back of additional contributions from both CWP and Bedok Point. Currently, works at CWP are on track for full completion by December 2012, while Bedok Point continues to grow strongly; contributing S$3.05m (+6.3% QoQ) to the group’s 2QFY12 revenue.
Respectable growth expected in 2012. As the outlook for suburban malls remains strong, together with respectable DPU growth for the rest of the year, we continue to maintain our BUY rating with a TP of S$1.77.