The Positives
+ Portfolio occupancy inched up slightly to 94%, an improvement from 92% in FY17. This is mainly driven by improved occupancy at NPNW post AEI. Only weakness in occupancy came from Bedok Point which dipped to 77.8% from 85% at FY17. Portfolio occupancy cost now stands at just under 16%. Over the past 4 FYs, this has ranged between 15.3%-16.6%.
+ Positive rental reversion of 9.1% in 2Q18, driven by Causeway Point (CWP). This was mainly attributed to the lease renewal of an anchor tenant which drove an 18.9% positive reversion at CWP. Lease was last signed 5 years ago. Overall, 1H18 average reversions came in at 3.9%, decent in current challenging environment, but lowest when measured against the 5.1%-15% full-year range since FY07.
+ Financing costs stable. All-in borrowing cost is at 2.4%, up 10bps from FY17, despite having only 56% of debt hedged on fixed rate. Management expressed being comfortable with the current level of hedging. Average hedged level across all S-REITs is c.76%.
The Negatives
– Overall portfolio tenant sales down 1.2% yoy, excluding NPNW. No impact on CWP’s tenant sales was observed since the opening of Northpoint City in Dec 2017, despite being only two MRT stations apart. CWP, biggest mall in FCT’s portfolio contributing c.47% of FY17 revenue, saw tenant sales come in flat YoY.
Outlook
Completion of asset enhancement works at NPNW in Dec 17 will continue to be the main earnings catalyst for FY18, as the mall ramps up occupancy. We also expect a gradual normalisation of the percentage of management fees to be paid in units towards 20%. Only major risk to DPU is a sharp rise in interest rates given that 44% of debt is on floating rate.
Maintain NEUTRAL with an unchanged target price of S$2.14.
This translates to an FY18e yield of 5.7% and P/NAV of 1.06. This is in line with average post GFC yields of 5.7%.
Figures 1 and 2: FCT trades at below post-GFC average yield and close to average P/NAV
Dehong covers primarily the REITs and property developer sector. He has close to 7 years experience in equities related dealing and research roles.
He graduated with a Masters of Science in Applied Finance from SMU and Bachelors of Accountancy from NTU.
