The Positives
+ Overall portfolio occupancy stable at 94.7%. Occupancy at NPNW filling up fast post-AEI, from 86.8% in 1Q18 (last quarter under AEI) to 96.5% in 4Q18. CCP also reported its strongest occupancy, at 93.8%, in 17 quarters. Improvement in occupancy at these two malls helped to offset the YoY drop in occupancy at all other malls.
+ Increased percentage of debt hedged while keeping all-in cost of debt in check. FCT had increased its proportion of debt on fixed interest rates to 64% (3Q18: 55%) while keeping all-in cost of debt largely in check, at 2.6%
The Negatives
– Rental reversion tapering off for CWP and NPNW. Overall portfolio reversion of +3.2% and NPNW’s reversion of +2.8% the lowest since FCT’s inception in 2007, with Causeway Point (CWP) (+6.4%) reporting its lowest reversion rate in seven years (excl FY15). Reversion rates at NPNW will be capped once it stabilises.
– Lukewarm same-store sales growth. Tenant sales in FY18 ticked up 3.6% YOY – excluding NPNW however, tenant sales would have only been marginally positive. On the same note, occupancy cost inched up to 16.8% YTD in Aug 2018 – this figure has crept up steadily over the past three years from 15.3% in FY15, in part due to NPNW’s AEI. We opine that tenant sales would need to catch up fast enough to ensure sustainable rental growth.
– Lower NPI margin due to one-off property expenses. NPI margin was lower at 68% in 4Q18 (72% in the previous three quarters) mainly due to higher property tax for NPNW, higher professional fees, and ad-hoc repair works. However the Manager has clarified that these expenses are one-off in nature
Outlook
There could be possibility for upside in rental reversions for CWP (FCT’s biggest contributor by NPI; 48% of FY18 NPI) following the S$15mn AEI (underground pedestrian link) that will take place from end-Feb to Dec 2019. While there will be a temporary dip in occupancy during this period, the underpass will bring about improved connectivity and expand the catchment area for CWP. The addition of a strong international brand name – Sephora– to CWP (in 4Q18) will also help to pull in footfall and potentially improve tenant sales, and is testament to the Manager’s ability to attract quality tenants.
Maintain NEUTRAL with higher TP of S$2.21 (prev S$2.15)
Our target price translates to a FY19e yield of 5.4% and a P/NAV of 1.09. Our target price has been adjusted upwards to account for revisions in our assumptions on rental rates and finance costs.
