• 2H23/FY23 DPU of 6.02/12.15 Singapore cents was 1.2%/0.6% lower YoY, but in line with our expectations and formed 49%/100% of our FY23e forecast. Retail portfolio occupancy increased 2.2ppts YoY to 99.7% (3Q23: 98.7%).
• FY23 tenants’ sales and shopper traffic improved 7.3% and 24.7% YoY respectively. YTD tenants’ sales averaged c.17% above pre-COVID levels. Retail portfolio valuation rose 0.6% YoY to S$8.74bn with unchanged cap rates.
• Maintain ACCUMULATE, DDM TP lowered from S$2.35 to S$2.29 as we roll forward our forecasts. We have reduced both FY24e and FY25e DPU forecasts by 5% after accounting for the divestments of Changi City Point and FCT’s stake in Hektar REIT. We expect positive rental reversions to remain intact for FY24e, supported by the low occupancy cost of 15.6% and tenants’ sales growth. The current share price implies a FY24e DPU yield of 5.9%.

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.