Frasers Centrepoint Trust – Nearly-full portfolio occupancy

 

 

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%.

Frasers Centrepoint Trust – The “NEX” acquisition

 

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%.

Frasers Centrepoint Trust – Retail recovery offset by macroeconomic headwinds

 

 

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%.

Frasers Centrepoint Trust – Suburban malls continue to outperform

 

 

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%.

Frasers Centrepoint Trust – Healthy demand for space at suburban malls

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.

Frasers Centrepoint Trust – Early recovery for suburban malls

 

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.

Frasers Centrepoint Trust – Portfolio optimisation & reconstitution to drive growth

 

+ 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.

Frasers Centrepoint Trust – In sweet spot despite headwinds

 

+ Positive

+ High occupancy of 94.9% maintained; rental reversions of 4.2%. Portfolio occupancy fell YoY from 96.5% to 94.9% but was up from 3Q20’s 94.6%. Rental reversions in FY20 were positive, mainly thanks to 9M20’s +5.2% reversions. No rental reversions were disclosed on the 24% of leases signed in 4Q20. Calculating backwards, we deduce that the reversions were mildly positive. This was commendable, given a softer leasing environment.

+ Tenant sales recovered to pre-COVID levels. Tenant sales and footfalls stabilised in the last three months, averaging 3.6% and 38.2% below 2019 levels respectively. The discrepancy between footfalls and tenant sales was largely due to an absence of transient footfalls as people worked from home. Shoppers were also more efficient with their trips to the malls, purchasing more items at one go to minimise the inconvenience of going through contract-tracing and crowd-control measures. As Singapore prepares for Phase 3 reopening, tenant sales are expected to be stable. A recovery in discretionary spending is expected to compensate for reduced spending due to working from home.

 

- Negative

- Impacted by COVID-19, FY20 NPI and DPU fell 20.4% and 25.1% respectively, mainly attributed to S$27.4mn in tenant rebates and decline in other revenue. Other revenue fell 24.9% YoY due to lower carpark and marketing revenue. This was in tandem with lower footfalls and an absence of atrium revenue during Phase 2 due to social distancing.  The revenue decline was partially offset by a 13.6% dip in energy expenses as parts of its malls were closed. Details on social-distancing requirements in Phase 3 reopening have not been disclosed and may continue to weigh on atrium revenue.

 

Outlook

Differentiated strategy under Re-align Framework. Traditional leases are for three years with annual escalations. Rents comprise fixed rents and a variable portion tied to gross turnover (GTO). The fixed-rent component typically makes up the bulk of the rent. While landlords strive to negotiate leases on the traditional model, harder-hit tenants are struggling to return to profitability. FCT has classified its tenants into three categories, with a differentiated leasing strategy for each.

  1. 3-year leases for tenants less affected, such as those in essential services
  2. Shorter leases of six months with lower fixed rents and higher GTO-based rents, for tenants affected by COVID-19 but have been recovering since Phase 2. The leases will come with a clause to allow FCT to recover the space upon one month’s notice if the tenants do not do well or if FCT has opportunities to bring in other tenants
  3. Discussions for exiting its malls with tenants still struggling financially. FCT will remarket the space.

The Re-align Framework was passed by Parliament on 3 November to allow small and micro businesses with a significant fall in revenue to terminate contracts without penalty if they are unable to renegotiate new terms. This allows both tenants and landlords to bite the bullet and go on to engage new tenants for the space. If necessary, repayment plans will be negotiated for the tenants to repay any arrears.  Tenants will have to reinstate their premises before returning them to their landlords. FCT shared that 20-30% of its tenants have experienced a 20% drop in sales.

Dominant malls will be prioritised. FCT’s portfolio of heartland malls are located 1-3 minutes from transportation nodes. We believe they will be among retailers’ top priorities when they review their consolidation plans.

Focus on efficiency and unlocking value. With the completion of its acquisition of ARF’s [not listed] assets, FCT will be focusing on consolidating mall management at all its malls. It will also be leveraging its scale to get better contract terms from third parties. On top of that, it will be exploring opportunities to add value to its malls during this period of weaker demand, potentially through asset enhancements and reconfiguration of its tenant mix.

 

Upgrade to BUY with unchanged TP of S$2.79

Upgrade to BUY from ACCUMULATE with catalysts for a re-rating expected from growth in catchment surrounding FCT’s and synergies from enlarged scale post ARF acquisition. Our DDM TP is unchanged at S$2.79. We remain confident of the resilience of necessity-driven suburban malls.

Frasers Centrepoint Trust – 80% boost in suburban retail NLA

 

What’s new?

FCT announced the proposed acquisition of the remaining 63.1% stake in AsiaRetail Fund Limited (ARF) from Sponsor, Frasers Property Limited (FPL). The purchase consideration of $1,057.4mn is equivalent to the NAV of ARF. PGIM ARF holds 5 suburban retail malls (Tiong Bahru Plaza, White Sands, Hougang Mall, Century Square and Tampines 1) and one office property (Central Plaza). The transaction will bring FCT’s stake in ARF to 100% - effectively onboarding all ARF’s assets into the FCT portfolio. This is the final step in FCT’s strategy to get full control and attain tax transparency on the assets. For reference, ARF paid $12.7mn in corporate taxes in FY2019. The acquisition will be partially funded through the issuance of 628mn new units (representing 56.1% of the total number of existing units).

FCT will also be divesting Bedok Point for $108.0mn. The divestment price represents a 2.5% yield and allows FCT to reconstitute the portfolio by acquiring higher-yielding assets with larger scale. Proceeds will be used to pare down debt. The transactions are subject to a shareholder vote at the EGM slated for 28 September 2020.

 

What do we think?

Acquisition will increase FCT’s exposure to the resilient suburban mall asset class. July’s tenant sales have recovered between 97% to 99% of last year’s levels. The essential and recurrent spending that occurs at suburban malls makes suburban malls a resilient asset class, evident during the circuit breaker and subsequent recovery period. The transactions will increase FCT’s suburban NLA by 79% and lower the concentration risk (from 30% to 22%) from any single asset. The growth in AUM and market capitalisation (from 12th largest to 8th largest SREIT) will also increase FCT’s scale and visibility among the SREITs. Unitholders will benefit from tax savings on the ARF assets upon LLP conversion.

 

Maintain ACCUMULATE with and higher TP of $2.79 (prev. $2.69).

We adjust our forecast to incorporate the acquisition of ARF and disposal of Bedok Point. We previously forecasted 7.7% of FY20 distributable earnings to be retained in FY20 and disbursed in FY21. Given the sustained recovery, we forecast the FCT will be able to disburse all of FY20’s distributable earnings – as such FY21e DPU was lowered by 1.4% while FY20e DPU was raised by 12.3%. FY22e to FY24e DPU was increased by 2.9% to 3.7% due to the accretive acquisition of the remaining 63.1% stake in ARF and subsequent divestment of Bedok Point. DPU yield for FY20e/FY21e stands at 4.2%/5.2%.

Frasers Centrepoint Trust – The road to recovery

 

The Positives

+ Only 4.8% of NLA left for renewal in FY20. Of the 32.7% of NLA up for renewal in FY20, 4.8% of NLA remain for the year. Rental reversions for 3Q20 were positive, although actual numbers were not disclosed. While the leasing environment is expected to remain weak, the management shared that there has been some demand from F&B tenants.

+ Shopper traffic for the second week of July improved to 61.1% of last years’ levels, from 48.2% as of end-June. The lower traffic in July was largely due to the safe distancing and traffic density measures which are still in place. 95% of tenants are presently trading. Recovery in shopper traffic was less pronounced at Changi City Point (CCP), which relies more on the office crowd from Changi Business Park, as well as Anchorpoint and Bedok Point which had housed fewer essential services (i.e. supermarkets) as compared to heartland malls in areas with live-in catchment (Causeway Point, Northpoint, Waterway Point).

 

The Negatives

- Portfolio occupancy fell by 1.5ppts QoQ and 2.2ppts YoY to 94.6%. Occupancy weakened across all malls, led by Bedok Point -3.7ppts, Yew Tee Point -2.6ppts and CWP -1.2ppts.

 

Outlook

FCT had disbursed c.$25mn out-of-pocket rental rebates YTD and have fulfilled the mandated 2 months’ worth of rental waivers under the Rental Relief Framework (for SMEs) for qualifying commercial tenants. FCT retained $18mn in distributable income YTD for cashflow purposes.

 

Maintain ACCUMULATE with and higher TP of $2.69 (prev. $2.61).

We tweak our forecast to incorporate the additional 12.07% stake in PGIM ARF which was completed on 6 July 2020 as well as the loan facilities which were drawn down. We continue to favour FCT for its portfolio of necessity-spending driven suburban malls, and see both organic (catchment growth) and inorganic (acquisition of PGIM ARF asset) growth for FCT. DPU yield for FY20e/FY21e stands at 4.1%/5.9%.

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