+ Strong rental reversions for FY17 despite a tough operating environment: Overall portfolio achieved +5.1% rental reversions. Portfolio occupancy also improved QoQ from 87.1% to 92%, following the completion of AEI on NPNW. FCT was able to build on its previously low occupancy cost of 15.7% in FY16 to drive rental reversions upwards despite lower tenant sales this year.
+ Catalysts for better upcoming performances in NPNW and CCP: Management expressed optimism at achieving 100% occupancy for NPNW post AEI before Chinese New Year in 2018. Committed occupancy is presently at 95%. CCP also looks set to benefit from the Oct 21 Opening of the Downtown Line 3, with the mall directly integrated with the Expo station. Along with CWP, these 3 malls make up 84% of FY17 portfolio valuation.
+ Cap rate compression drove portfolio NAV increase of 9c/share to S$2.02: In line with the trend across most REIT sectors this year, cap rate compressions of 25-60bps across the portfolio drove up net asset value YoY.
– Rising occupancy costs may make it harder to sustain future rental reversions unless tenant sales improve: Tenant sales fell mid-single digit YoY for FY17 excluding NPNW (including: c.-7.5%). With tenant sales failing to keep pace with rental reversions, portfolio occupancy cost crept up from 15.7% in FY16 to just below 18% currently. We estimate occupancy costs could actually be closer to 17%, without the impact of AEI. Sustaining or improving rental reversions in FY18 could be harder to achieve unless tenant sales improve. For tenant sales, F&B/Services did well, Supermarkets stable (for now) (despite Amazon’s entry into grocery sales in Singapore), and Fashion was the laggard.
– Bedok Point (BP) still struggling: Recall that BP has been struggling for the past 3 FYs after the opening of the neighbouring Bedok Mall. Management has been trying to readjust tenant mix, but expects occupancy at BP to remain sluggish. Nonetheless, BP is a small constituent of overall portfolio and only made up 2.8% of FY17 NPI, with FY17 occupancy at 85.2%.
Higher occupancy costs, coupled with the challenging retail background could mean increasing difficulty to sustain rental reversions unless sales pick up. We expect any upside in rental income to be partially mitigated by a lower proportion of management fees taken in units in upcoming quarters (FY17:70% vs normalised year FY15: 20%). We have projected a 3.4% improvement in DPU in FY18e driven by possible acquisitions, and improved performances in CWP, NPNW, and CCP.
Maintain NEUTRAL with unchanged target price of S$2.14.
This translates to an FY18e yield of 5.8% and P/NAV of 1.06, as we roll forward our estimates to FY18 onwards. At current 5.4% yield (-1s.d. post GFC levels), we opine that the positives are in the price, and given the headwinds in the retail sector, prefer to see a pick-up in brick-and-mortar sales before revisiting our recommendation.
Figures 1 and 2: FCT trades at below post-GFC average yield and close to average P/NAV
Figure 3: Peer comparison table