The Positives
+ Retail portfolio occupancy is almost full at 99.9% (+1.5ppts YoY; +0.2ppts QoQ). Management guided that rental reversions for the quarter were above FY23’s +4.7%, and we expect this positive rental reversion trend to continue for the 20.3% of leases (by GRI) that expire in FY24.
+ Gearing improved from 39.3% to 37.2%, after using the proceeds from the divestments of Changi City Point and interest in Hektar REIT to pay off some debt. The all-in cost of debt increased 20bps QoQ to 4.3%, and the proportion of fixed-interest rate borrowings stands at 63.4%. Green loans now account for 72.5% of total borrowings. FCT has no debt expiring in FY24.
The Negative
- Tenant sales were down 0.7% YoY in 1Q24 due to several key anchor tenants undergoing renovations, and from a higher base in 2023. Excluding this, it was up 1.1% and was 18% above pre-COVID levels. Portfolio shopper traffic was 3.1% higher YoY, and F&B continues to be the key demand driver. Occupancy cost remains healthy at 15.5%.
The Positives
+ Retail portfolio occupancy nearly full at 99.7% (+2.2ppts YoY; +1.0ppts QoQ). Excluding Tampines 1 which is undergoing AEI, occupancy at all nine malls came in at 99% or higher. Rental reversions for the retail portfolio were +4.7% for FY23; and we expect similar rental reversions for FY24e, when 29.3% of leases by GRI will be expiring.
+ Tenants’ sales and shopper traffic continued to grow 7.3% and 24.7% YoY respectively for FY23 indicating robust demand. FY23 tenants’ sales averaged c.17% above pre-COVID levels. Improving tenants’ sales should lower occupancy costs further (currently at 15.6% and 6-year lows), and this should support FCT’s ability to raise rents.
+ Retail portfolio valuation increased by S$52.7 million, or 0.6%, to S$8.74bn with unchanged cap rates. This suggests that suburban retail malls in Singapore continue to exhibit resilience despite rising interest rates. The below-historical-average and low retail supply of 1.21mn sq ft through to 2025 makes up only 2.4% of the current private retail stock, and this is expected to support valuations and rental rates going forward.
+ No refinancing risks in FY24. After S$353.5mn, or 16%, of total debt that was originally due in FY24 has been refinanced to FY29, there are no more refinancing requirements in FY24.
63% of total debt has been hedged to fixed rate, and the YTD all-in cost of debt increased 10bps QoQ to 3.8%. We expect the all-in cost of debt to increase to above 4% in FY24e. ICR remains healthy at 3.47x. Gearing, currently at 39.3%, is expected to drop to 36.1% on a pro forma basis assuming the net proceeds from the divestment of Changi City Point and interest in Hektar REIT are used to repay certain debts.
The Negative
- Higher operating costs from higher energy and water prices, as well as higher manpower costs, will likely eat into NPI margins in FY24e. We expect NPI margins to drop from 71.8% in FY23 to 70.6% in FY24e.
The Positives
+ Retail portfolio occupancy remained high at 98.7% (+1.6ppts YoY; -0.5ppts QoQ). The lower occupancy QoQ was largely due to a 6.4ppt drop in occupancy at Changi City Point from 99% to 92.6%. This was mainly transitionary vacancies as FCT looks to reposition the mall by bringing in popular brands such as Coach. Excluding Tampines 1 which is undergoing AEI, occupancy at the eight malls came in at 92.6% or higher, with six malls having an occupancy of 98.6% or higher. The recently acquired NEX, in which FCT holds a 25.5% stake, has a committed occupancy of 100%. Only 4.2% of leases by GRI are up for renewal for the rest of this financial year.
+ Tenant sales and shopper traffic continued to grow 5% and 16% YoY respectively in 3Q23 indicating robust demand. YTD tenants’ sales averaged c.16% above pre-COVID levels. Trade sectors that performed well were F&B, fashion and accessories, electronics, and beauty. Essential trades like supermarkets and healthcare are still performing well above pre-COVID levels but are growing at a slower pace from the higher base in 2022.
The Negative
- Gearing increased from 39.6% to 40.2%, and the proportion of fixed interest rate borrowings decreased from 76.4% as at 1H23 to 63.0%. The YTD all-in cost of debt increased 10bps QoQ to 3.7% after refinancing all loans due in FY23. FCT has collaborated with OCBC on its green loan offering with carbon credits and the proceeds from this loan will be used to refinance debt that is expiring in FY24. Green loans account for c.49.8% of total borrowings (Mar23: 37.9%).
Outlook
Improving tenant sales should lower occupancy costs further (currently below 16% and 5-year lows), and this should support FCT’s ability to raise rents. Inorganic growth opportunities include the acquisition of the sponsor’s pipeline of assets such as the 24.5% effective interest in NEX and Northpoint City South Wing.
AEI works have commenced at Tampines 1 in 2Q23 and is on schedule for completion in 3Q24. The mall continues to operate as works are staged and more than 90% of AEI spaces have been pre-committed to date.
Maintain ACCUMULATE, DDM TP unchanged at S$2.35
Catalysts include stronger than forecast reversions and accretive acquisitions. Risks include a slowdown in retail sales. The current share price implies a FY23e DPU yield of 5.6%.
The Positives
+ Retail portfolio occupancy improved 0.8%-point QoQ to 99.2%, mainly due to the backfilling of the anchor cinema space at Century Square, taking its occupancy from 88.7% to 96.8%. Occupancy at all nine malls came in at above 96.8%, with five malls having an occupancy of 99% or higher. 1H23 rental reversions for the retail portfolio were +1.9%, up from +1.5% in FY22. After starting FY23 with 27.6% of leases (by GRI) expiring in the year, 11.4% remain for the rest of this financial year. As a reflection of the strong underlying demand, about 16.2% of leases (by GRI) have been renewed in 1HFY23, with 11.4% yet to be renewed by this FY.
+ Tenant sales and shopper traffic grew 9.2% and 35.3% YoY, indicating resilient retail sales. However, we expect tenant sales growth to moderate going forward due to the increase in Goods and Services Tax rate and a slowdown in consumer spending.
The Negative
- Gearing increased from 33.9% to 39.6%, due to the increase in bank borrowings to finance the acquisitions of the effective 25.5% stake in NEX and the additional 10% stake in Waterway Point which were completed in February 2023. However, the proportion of fixed interest rate borrowings increased from 73.2% as at 1Q23 to 76.4%, and the all-in cost of debt increased only 10bps QoQ to 3.6%. FCT indicated that it has secured financing to refinance all borrowings due in FY23 (17.7% of total), which we think is likely at above 4%.
The Positives
+ Retail portfolio occupancy improved 0.9% QoQ to 98.4%, aided by Century Square (+1.9%), Changi City Point (+4.1%), White Sands (+1.9%) and Hougang Mall (+1.6%). Leases signed in the quarter were at positive rental reversions. Occupancy at eight of their nine malls came in at above 97.8%. Leasing negotiations are ongoing to backfill the anchor space (~8% NLA) at Century Square left by Filmgarde.
+ Tenant sales and shopper traffic grew 13.4% and 38.3% YoY, averaging 116% and 82% of pre-pandemic levels for the quarter, respectively. However, we expect tenant sales growth to moderate to single digits going forward due to the increase in Goods and Services Tax and a slowdown in consumer spending.
The Negative
- High cost of debt. All in cost of debt for 1Q23 increased 50bps QoQ to 3.5%. FCT’s 73% of debt hedged to fixed rate (Sep 22: 71%) is on the lower end compared to most peers. About 46% of debt matures in FY23-FY24 and is likely to be refinanced at above 4%.
The Acquisition
Outlook
FCT announced a S$38mn asset enhancement initiative (AEI) for Tampines 1 where NLA from lower yielding floors will be transferred to B1, L1 and L2 as well as an additional c.8000 sq ft of NLA from various bonus GFA schemes. Management estimated a ROI of 8% on the back of higher rents and asset valuation gains. FCT’s operating metrics continues to improve, but its short debt maturity and low interest hedge ratio will offset these gains going forward.
Maintain ACCUMULATE, TP lowered from S$2.38 to S$2.31
FY23e-FY25e DPU estimates are trimmed by 6-8% after factoring the NEX acquisition and higher borrowing costs. The current share price implies a FY23e DPU yield of 5.5%.
Investment Thesis
Outlook
On good footing to command rental growth. Hybrid work arrangements should benefit FCT's malls, which are located near transportation nodes. Commute-driven footfall and incidental spending should see an uptick, lifting tenant sales and GTO revenue for FCT. Occupancy cost, at c.16-17%, is at the 5-year pre-pandemic average. Improving tenant sales should lower occupancy cost further, which may support FCT's ability to raise rents. Utilities represent c.7% of property operating expense and are fully hedged for FY22. Energy contracts will expire in end-FY22 and mid-FY23.
Maintain ACCUMULATE, TP lowered from S$2.71 to S$2.38
No change in DPU estimates. Our DDM-TP is lowered from S$2.71 to S$2.38 as we increase our cost of equity from 6.41% to 7.08% on a higher risk-free rate assumption. P/NAV of 0.98x, which is trading near 5-year lows at -1 standard deviation level, might seem cheap. However, we think this is fair given the rising interest rate environment. The yield spread (dividend yield – 2 years Singapore government bond yield) has fallen from over 4% at the start of the year to 2.65%, and we expect this to fall even further as well. The current share price implies a FY22e DPU yield of 5.7%.
The Positives
+ Retail reversions turned positive. 1H22 reversions came in at +1.7% (FY21 -0.6%), ranging from 0.4-8.8%, positive across all malls except Changi City Point (CCP). CCP's reversions came in at -3.6%, improving from FY21's -9.8%. The removal of capacity limits and 100% workplace capacity effective from 26 April 2022 should boost tenant confidence and demand for CCP as more footfall befalls the neighbouring Expo and business parks. This bodes well for the 24% of GRI expiring at CCP in FY22.
+ Occupancy and tenant sales above pre-pandemic levels. Retail occupancy improved from 97.2% to 97.8%, surpassing pre-pandemic occupancy of 96.5%. Tenant sales were above the pre-pandemic level for five consecutive months ended Mar22. We expect the impact from larger dine-in group size of 10 and return of atrium sales to be captured in 2H22 earnings.
+ NPI Margin Improved YoY in 1H22, from 72.4% to 74.1%. This was largely attributed to cost savings from digitalisation of security functions and better contract prices due to FCT's larger scale post-ARF acquisition. We could see better NPI margin for 2H22 as relaxation of Safe Management Measures (SMM) in Apr22 should lift revenue on the back of returning atrium sales, higher gross turnover (GTO) and carpark income, while removal of SMM-related cost and energy hedges in place for FY22 should keep OPEX stable.
The Negative
- Backfilling of Central Plaza still underway. Occupancy gained 5.6ppts from 71.7% to 77.3% at Central Plaza. The backfilling of three floors of space (c.20% of NLA) which was returned by an anchor tenant in 1Q22 is in progress. We understand that FCT is in advanced negotiations with a mini anchor tenant. Strategies for leasing up the space include subdividing the space and leasing to quasi-retail tenants, both strategies should yield higher rents compared to the rents charged to the anchor tenant. As such, we expect to see positive reversions for this space.
Outlook
On good footing to command rental growth. Hybrid work arrangements should benefit FCT's malls, which are located near transportation nodes. Commute-driven footfall and incidental spending should see an uptick, lifting tenant sales and GTO revenue for FCT. Occupancy cost, at 16.2%, is at the 5-year pre-pandemic average. Improving tenant sales should lower occupancy cost further, which may support FCT's ability to raise rents.
Utilities represent c.7% of property operating expense and are fully hedged for FY22. Energy contracts will expire in end-FY22 and mid-FY23.
Downgrade from BUY to ACCUMULATE, TP raised from S$2.64 to S$2.71
No change in FY22e DPU estimate. FY23e-26e DPUs have been raised by 1.0-1.3% on better rental growth outlook and NPI margin. DDM-based TP raised S$2.64 to S$2.71 on higher DPU estimates and lower cost of equity of 6.41% assumption (previous 6.48%). The current share price implies FY22e DPU yields of 5.2%.
The Positives
+ Retail occupancy of 97.2% surpassed FY19 levels (96.5%). 1Q22 occupancy was 2.1ppts higher YoY (1Q21: 95.2%), with six out of nine malls achieving occupancies between 97-100%. Laggards in the portfolio are Century Square (91.1%), Changi City Point (92.6%) and White Sands (92.5%). Changi City Point is located near business parks and the Singapore Expo. Tenant demand for the asset was weaker as it was impacted by lower footfall due to remote working and absence of trade shows and events. 2021 was a major renewal year for Century Square and Tiong Bahru Plaza as both assets underwent AEI and repositioning three years ago. The unfortunate timing of lumpy expiries during the pandemic has led to slower absorption of space.
+ Healthy leasing momentum - 14.4% of GRI de-risked. Lease expiries by GRI for FY22 reduced from 37.2% to 22.8%. As at end-Jan 22, half or remaining FY22 expiries (c.11%) have been committed or are under advanced negotiation. While no reversion number was disclosed, we understand that the reversions have improved from FY21's -0.6%.
+ November and December's tenant sales reached 101% and 106% of pre-pandemic levels due to increase in dine-in group size from two to five pax and festivities, benefitting F&B and jewellery and watch tenants.
The Negatives
- Occupancy at Central Plaza fell from 91.8% to 71.7% following the exit of an anchor tenant occupying a few lower floors. Anchor tenants are usually offered more favourable rates. As such, FCT could see positive reversions should the space be subdivided out and leased to multiple tenants. FCT is also exploring leasing the space out to quasi-retail tenants such as clinics and services as Central Plaza is connected to Tiong Bahru Plaza via a linkway on the second floor. Either strategy should yield higher rents compared to the rents charged to the anchor tenant. However, the multi-tenant lease strategy may result in a longer void period required to lease all the available floors.
Outlook
Return to normalcy to provide more even recovery among tenants. While tenant sales have recovered to pre-pandemic levels, recovery varies among and within trade sectors. For instance, kiosk and easy-takeaway F&B tenants located along the walkways to the MRTs may see a pick-up in sales due to incidental spending from more employees returning to the office. Fashion and other sit-down F&B tenants may benefit from the larger group sizes and resumption of events.
Maintain BUY, TP lowered from S$2.83 to S$2.64
FY22e-265e DPUs have been lowered by 3.0-5.3% on the anticipated rising cost of borrowing. Our DDM-based TP dips from S$2.83 to S$2.64 on lower DPU estimates and higher cost of equity of 6.48% assumption (previous 6.38%). The current share price implies FY22e DPU yields of 5.7%.
Catalysts include asset-enhancement initiatives, acquisitions from its sponsor’s pipeline of assets, or acquiring or partnering companies with only one mall in their portfolios. The cost of implementing and maintaining loyalty programmes or omnichannel retailing is higher for single-mall owners, which may present acquisition opportunities.
The Positives
+ NPI margin back at pre-pandemic levels. FY21 NPI margins improved YoY from 67.5% to 72.3% due to cost-containment initiatives and lower marketing cost due to absence of atrium events. Historical NPI margins have tracked between 70%-72%. FCT was able to trim operating cost through various initiatives such as employing central security office to reduce manpower costs. The absence of atrium sales also reduced marketing expense. As restrictions on use of atrium space is lifted, increased marketing cost should be offset by returning atrium revenues, keeping NPI margins stable.
+ Retail occupancy up 0.9ppt YoY to 97.3%. Occupancy has normalised to pre-pandemic levels, up from FCT’s low of 94.6% a year ago. Occupancy improved across six out of nine of FCT’s malls. FCT has begun renewal discussions the 35.7% of GRI expiring in FY22. c.25% of these leases are currently in advanced stages of negotiation or in the documentation phase.
The Negatives
- Retail reversions landed in the red. Full year reversions were -0.6%, weighed down by negative reversions at Changi City Point, Century Square and Tampines 1 which came in at -9.8%, -2.8% and -0.1% respectively. Changi City Point was affected by weaker demand as the asset is located near business parks and the Singapore Expo and impacted by lower footfall due to the WHF and absence of trade show and events. FY21 expiries for Century Square were high at c.40% as many tenants were signed after the mall was repositioned three years ago. The unfortunate timing of lumpy expiries during the pandemic has led to a slower absorption of space. The remaining six out of nine malls registered positive reversions ranging 0.3% to 2.5%. FCT’s only office asset, Central Plaza, also registered positive reversions of 1.9%. As retail leases typically include rental step-ups during the lease term. Reversions on average incoming vs average outgoing rents were +2.1%, implying rental growth over the next three years.
- Slight decline in portfolio valuation. Portfolio valuation dipped S$8mn or 0.1% of AUM YoY. Causeway point registered a $S7mn increase in valuation, 1.1% above its pre-pandemic valuation. Decline in valuation was attributed to two assets – Changi City Point and Yishun 10 Retail podium – due to the pandemic situation. Yishun 10 houses cinema operator Golden Village. Capacity constrains in cinema halls have also reduced the footfall for the asset and could have resulted in weaker leasing. Valuations for the remaining six out of nine malls were unchanged, keeping their pre-pandemic valuations.
- July and September tenant sale dipped to 93% and 98% of 2019 levels due to restrictions on group size and in-restaurant dining. We note that FCT’s tenant sales underperform the RSI (ex MV) in periods of tightened restrictions as consumers tend towards e-commerce and avoid crowded places.
Outlook
Stronger demand from F&B retailers. FCT noted strong leasing demand from F&B retailers, stemming from new-to-market brands and expansions. However, care has been taken so as not to crowd the malls with too many F&B offerings in the interest of preserving the retail diversity and preventing cannibalisation amongst F&B tenants. Apart from F&B, FCT has also received interest from fashion retailers and grocers. Consolidation and relocation amongst tenants are par for the course, but FCT has dealt with such circumstances opportunistically. For instance, the exit of a mini-anchor tenants at Waterway Point allowed FCT to relocate Toys R Us to the second floor, creating a kids’ zone, while Toys R Us’ vacated space was taken up by Don Don Donki, creating a value zone.
Healthy occupancy cost points to sustainability of rents. Occupancy cost measures tenants’ cost of maintaining a physical store relative to the amount of revenue generated by the store. It has trended between 15.7% to 17.0% from FY16-19 but spiked to 19% in FY20. Occupancy cost dipped to 17.5% in FY21, implying a more sustainable level of rents to further rental growth as reopening progresses.
Maintain BUY, TP lowered from S$2.87 to S$2.83
We lower our FY22e-25e DPU by 5.8%-6.6% to factor in a more conservative pace of rental growth. We reiterate our BUY recommendation. We believe suburban mall will remain relevant and resilient due to their proximity to household catchments and the resilience of necessity-driven spending. Current price implies FY22e/23e DPU yield of 5.5%/5.7%.
Demand for space in dominant mall remains healthy while sustained reopening visibility should support leasing and rental growth, in our view. FCT’s portfolio of well-located suburban malls are expected to draw a disproportionate share of leasing demand.
Catalysts include asset-enhancement initiatives, acquisitions from its sponsor’s pipeline of assets, increasing its stake in Waterway Point, or acquiring or partnering companies with only one mall in their portfolios. The cost of implementing and maintaining loyalty programmes or omnichannel retailing is higher for single-mall owners, which may present acquisition opportunities.
+ Positives
+ Occupancy improved 0.1ppt to 3.7ppts QoQ in 8 out of 11 malls. 1Q21 retail portfolio occupancy improved QoQ from 94.9% to 96.4% (1Q20: 97.3%). Most of FCT malls are out of the woods, having recovered from the lows in 2020. The exceptions were Changi City Point (CCP) and Yew Tee Point. Occupancies were 5.1ppts and 3.0ppts lower YoY. Leasing at CCP remained challenging as not all employees in the business parks surrounding the mall had returned to the office. An absence of sales events at the Expo also cut footfall and vibrancy at CCP. Occupancy in the rest of the malls ranged from 94.1% to 98.7%. Over at Central Plaza, FCT’s only office asset, occupancy improved from 94.3% in June to 95.3% in 1Q21.
+ 25% of FY21 leases renewed in 1Q21. Despite a weaker leasing environment, FCT’s lease renewals were on track. While FCT did not disclose rental reversions for leases signed in the quarter, it did say the reversions were a mixed bag, coming in flat on a portfolio basis. About 29.6% of leases by GRI remain for FY21. Expiries will mostly fall in 3Q/4Q21, which should give consumer spending and tenant confidence some time to recover.
- Negative
- No timeline for lifting of restrictions on atrium space. While atrium revenue accounts for a small fraction of FCT’s revenue, sales and promotions that are held there help to boost participating tenants’ sales, which have a bearing on gross turnover rents.
Outlook
Dominant malls likely will be prioritised. Portfolio occupancy had recovered to 96.4%, close to pre-COVID levels. We believe that the worst is over for FCT. Suburban retail remains in demand, supported by increased weekday catchments from hybrid work arrangements. FCT’s malls, which are located near household catchments and within 1-3 minutes from transportation nodes, are expected to benefit from both stay-home-workers’ shopping and the transient office crowd. We believe they will be among retailers’ top priorities when the latter review their consolidation plans. As such, we remain optimistic on FCT’s leasing.
Small businesses will be able to enjoy a 6-week “Notice of Negotiation” period with landlords under Singapore’s newly-introduced ReAlign Framework. The six weeks will run from 15 January to 26 February 2021. Tenants who wish to renegotiate their leases will have to submit notice of negotiation on their landlords. Long-term viability of tenants will be a key consideration. We think that FCT will try to retain tenants that complement its malls’ trade mix, while negotiating swift exits for struggling tenants. FCT’s manager shared that some tenants are still cautious, preferring to delay renewing until the last minute or preferring shorter leases. We understand that although lease terms are largely unchanged, the manager has offered short renewals to about 5% of mall tenants.
Focus on efficiency and unlocking value. FCT intends to: 1) optimise performance through economies of scale; 2) increase its malls’ value proposition by raising the utilisation of its eStore and food-ordering platform; 3) improve profitability by lowering cost of debt and increasing financial flexibility by unencumbering portfolio assets; 4) divest smaller malls; and 5) unlock value through AEI. It will look at acquisitions opportunistically, keeping its portfolio focused on Singapore and suburban retailing.
Maintain BUY, DDM TP raised from S$2.79 to S$2.93
We raise our TP after lowering cost of equity. The positioning of suburban malls has improved after COVID, supported by permanent hybrid work arrangements. FCT’s portfolio of necessity-driven malls once again demonstrated resilience and should trade at a lower beta, in our view. We lower our beta from 0.7 to 0.65 to reflect the stability of its assets. As a result, our cost of equity drops from 6.75% to 6.38%.
After raising occupancy assumptions and accounting for the divestment of Anchorpoint (completion expected on 22 March 2021), we lower FY21e/22e NPI by 1.6%/2.8%. FY21e/22e DPUs are 1.3%/0.5% higher due to lower debt assumptions. We assume that about 75% of its divestment proceeds from Bedok Point and Anchorpoint will be used to pare down debt. We also assume that few units would be issued for the portion of management fees payable in units due to the recovery in its share price. Catalysts for FCT are expected from growth in catchments surrounding its malls and synergies from an enlarged scale after its ARF acquisition.
