Analysts from CGS-CIMB and Maybank Securities are optimistic about Frasers Centrepoint Trust (FCT) as the REIT’s portfolio saw resilient operating metrics – including its portfolio occupancy – during its business update for the 1QFY2022 ended December.
CGS-CIMB analysts Eing Kar Mei and Lock Mun Yee have maintained ‘add’ on FCT, with a lower target price of $2.73 from $2.92, as they raise their cost of equity (COE) assumption to reflect the rising rate environment.
During the REIT’s management briefing, Eing and Lock note that management sounded “more optimistic” as Singapore moves towards normalisation.
“FCT expects shopper traffic and tenant sales to improve further as more workers return to the office. Leasing negotiation and rental reversions have been encouraging so far,” note the analysts.
“Wellness, health and jewellery trade categories continued to do well in 1QFY2022 while sales of home furnishing, IT, electronics and supermarket slowed down due to the high base last year,” they add. “Space demand from F&B operators was strong and they generally are surviving well despite the dine-in limits, as they pivot towards the omnichannel platform.”
During the quarter, the REIT saw good leasing momentum, while its malls’ strategic locations underpin stable income.
Of the nine retail malls in FCT’s portfolio, six of them demonstrated resilient performance with stable occupancies (-0.1% pts to +1% pts q-o-q) in 1QFY2022.
“Century Square, Changi City Point (CCP) and White Sands have relatively weaker occupancies (-0.7% pts to -2.9% pts q-o-q), partly due to higher renewal cycle concentration after asset enhancement initiatives (AEI) at Century Square while CCP was affected by the lack of office crowd,” say the analysts. “FCT is proactively managing these malls, focusing on tenant re-mixing, space re-sizing and spreading out lease expiries.
On the vacated anchor space at Central Plaza, CGS-CIMB’s Eing and Lock estimate that the reconfigured space should improve rental yield once the space is leased out, as anchor tenants usually pay lower rental rates.
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In addition, cinema operator Filmgarde will be moving out of FCT’s Century Square in 2HFY2022 but the impact should be minimal as cinema operators account for less than 2% of FCT’s total income, add the analysts.
To this end, Eing and Lock say they continue to “like” FCT for its “pure exposure to suburban malls”, which they believe should enable it to outperform peers.
As of 1QFY2022, 54% of FCT’s debt is hedged to fixed interest rates. “In view of the rising interest rate environment, FCT intends to further increase its fixed rate debt proportion,” Eing and Lock say.
“Based on its internal estimates, if FCT were to hedge the remaining debt into fixed rate, every 10 basis point hike in interest rates would reduce its distribution per unit (DPU) by 0.5%,” the analysts add.
Maybank analyst Chua Su Tye has also kept ‘buy’ rating on FCT with an unchanged target price of $2.90. “We continue to see suburban malls leading the retail sector recovery in Singapore’s long reopening phase, with stable operating metrics for FCT’s more sizeable suburban malls portfolio underpinning its DPU visibility,” Chua explains.
Chua notes that FCT’s balance sheet remains strong with gearing at 34.5% (from 33.3% at end-Sep 2021) and interest cover of 5.8 times, which suggests a $1.5 billion debt headroom (at 45% limit). “Management expects to increase its proportion of fixed rate borrowings from 54% currently, ahead of rising interest rates,” he adds.
“While we expect FCT will look to boost yields on its enlarged portfolio in the near term, we see room for assets under management (AUM) growth from its sponsor right of first refusal (ROFR)’s pipeline assets, which should provide upside to DPUs,” Chua says.
To this end, Chua estimates FCT’s DPU to recover by 38% y-o-y in FY2021 after rental rebates were recognised in FY2020.
At 12:31pm, units in FCT are trading at $2.27.
