Analysts from OCBC Investment Research (OIR), CGS-CIMB Research and Maybank Securities have maintained their “buy” call on Frasers Centerpoint Trust after its 3QFY2022 results ended June.
OIR was the only brokerage among the three that has cut its fair value estimate from $2.73 to $2.55. Meanwhile, Maybank and CGS-CIMB held their target prices steady at $2.80 and $2.75 respectively.
On July 26, FCT reported that its tenants’ sales for its 3QFY2022 ended June increased by 23% over the same quarter last year. On average, the sales have even reached a level 10% higher than pre-pandemic levels.
Shopper traffic, meanwhile, was up 32% y-o-y for the same quarter, and was around 79% pre-pandemic levels, says FCT in its 3Q quarterly business update.
Tenant sales jumped 23% y-o-y, led by Tampines 1 and Waterway Point, to 11%-14% above pre-Covid levels, compared to 4%13% in 2QFY2022.
CGS-CIMB’s Lock Mun Yee noted that tenants in the services, supermarkets, beauty & health, entertainment & leisure categories experienced stronger sales, driven by further reopening and pick-up in social activities.
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“We think tenant sales at above pandemic levels could be partly driven by inflationary cost given that inflation was at 3.6% and 4.4% in May and June 2022 respectively, excluding which, tenant sales would still have punched above 2019 levels.”
Overall, as at June 30, the REIT’s retail portfolio was 97.1% occupied, slightly lower than the last quarter, largely due to a pre-termination by an anchor tenant at Century Square, notes the team at OCBC.
This caused the property’s occupancy to sink 10.4 percentage points q-o-q to 83%. The OCBC team adds that FCT is in advanced negotiations with prospective tenants to backfill the vacant space.
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The lower occupancy at Century Square was partially mitigated by a healthy uplift at Changi City Point (+3.4 percentage points q-o-q to 98.1%), with the boost likely coming from employees returning to the workplace at Changi Business Park, continues the team.
Maybank’s Chua Su Tye also noted that leasing momentum is strong, and FCT has renewed the bulk of its FY2022 expiring leases with just 5.3% remaining, compared to 15% in 2QFY2022).
In terms of debt sensitivities, FCT has what it calls “prudent” hedging moves in place: 69% of its borrowings are on fixed rates.
Concerns over rising energy prices, similar to higher interest rates, have weighed down sentiment towards some REITs.
FCT notes that while there’s an increase in the power costs incurred by its portfolio, there’s hedging which only progressively expire over the coming three quarters.
Maybank’s Chua is also of the view that FCT’s rental reversion will stay positive, and could improve moving forward.
Rental reversion turned positive at +1.7% in 1HFY2022, compared to -0.6% for the whole of FY2021, and management expects this to be maintained, he says.
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“We see scope for rents to rise with lower occupancy cost, with limited near-term net property income (NPI) impact from higher utility costs, as its hedged contracts mostly expire from Feburary 2023.”
Chua always thinks that the downside could be offset by higher gross turnover contribution, atrium sales and carpark income.
Borrowing costs rise
Despite the promising 3Q results, the OCBC team points out that FCT’s aggregate leverage increased 0.6 percentage points q-o-q to 33.9%, but this is a “healthy level” according to them.
“It has hedged 69% of its borrowings, but its average all-in cost of debt increased 0.2 percentage points q-o-q to 2.4%,” it notes
According to FCT, every 50 basis points rise in the Swap Offer Rate (SOR) or Singapore Overnight Rate Average (SORA) would negatively impact its DPU by about 0.17 cents, or about 1.4% of OIR’s FY2022 DPU forecast.
It has 21%, 25.8% and 27.9% of its debt maturing in FY2023, FY2024 and FY2025, respectively, and thus could be hit with higher debt costs upon refinancing. As such, the OCBC team has lowered its FY2023 DPU forecast by 1.2%.
Acquisitions
Moving forward, Maybank’s Chua sees that FCT’s balance sheet remains strong, with a debt headroom of about $600,000 million to $1.2 billion to support acquisitions.
While FCT is focused on lifting yields for its assets, we see room for AUM growth, as it eyes its sponsor’s pipeline properties and third-party deals, which should provide upside to DPUs.
CGS-CIMB’s Lock also agrees with this view, commenting that “we continue to like FCT for its pure exposure to suburban malls which should enable it to outperform peers.”
As of 2.04 pm, shares of FCT were trading at $2.32, with a FY2022 P/NTA ratio of 1 and a dividend yield of 5%.
