• 1Q17 gross revenue and DPU at 23.6% and 24.5% of our estimates (excl. acquisitions).
• Stabilisation of tenant sales (excl.Northpoint North Wing, NPNW), up 0.2% YoY.
• Slower rental reversions at 1% (FY17: 5.1%), dragged down by Bedok Point.
• Maintain Neutral with an unchanged DDM-derived target price of S$2.14.

The Positives

+ Portfolio tenant sales (excl NPNW) stabilised and up 0.2% yoy (vs 1-year trough of -6.9% YoY in 2Q17): Tenant sales have seen a gradual improvement since 2Q17. Nonetheless, the improvement has been slightly slower than the overall recovery in the general retail sales index since June 2017 (July-Nov average excl. motor +2.9%).

+ Slight improvement in portfolio occupancy to 92.6%, supported by gradual resumption of occupancies at NPNW post-AEI: Occupancy at NPNW improved to 87% from 82% the prior quarter. The continued resumption in trading occupancy at NPNW is expected to drive revenue growth for FY18.

The Negatives

– Slowing rental reversions at 1% (FY17: 5.1%) primarily dragged down by Bedok Point. Should this level of rental reversion level sustain throughout FY18, it will represent the weakest since listing.

– Slow pick-up in improvements for underperforming malls: Changi City Point was a surprising underperformer with occupancy languishing at 86% (vs 88.5% at Sept 17) despite the opening of the Downtown Line 3 on 21 Oct 2017. Bedok mall remains weak with flat occupancy at 85%, although it only accounts for 3% of FY17 NPI.

– Increase in financing costs due to drawing down of longer-term MTN: Financing costs jumped 19.4% YoY to S$4.9mn. This is likely due to the associated costs for the drawdown of longer-dated S$70mn MTN (due 2024) in the quarter. Weighted average debt expiry is up qoq from 2.34y to 2.7y and the average cost of debt edges up slightly qoq to 2.4%.

Outlook

Despite an improving retail outlook, rental reversions could remain in the low single digits as higher occupancy costs impede further significant hikes in rents. Ramp up in occupancies for NPNW is expected to drive FY18 revenue but this is likely mitigated by the gradual reduction in management fees taken in units (FY17: 70%) vs our forecasted FY18e of 25%.

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