PhillipCapital Research analyst Darren Chan has kept his “accumulate” rating on Frasers Centrepoint Trust (FCT) as the REIT’s occupancy and tenant sales have already recovered to above its pre-pandemic levels.
However, Chan has lowered his target price to $2.38 from $2.64 previously as he increases his cost of equity from 6.41% to 7.08% on a higher risk-free rate assumption P/NAV of 0.98x.
“The P/NAV of 0.98x, which is trading near five-year lows at -1 standard deviation (s.d.) level, might seem cheap,” he says in his Sept 19 report. “However, we think this is fair given the rising interest rate environment. The yield spread has fallen from over 4% at the start of the year to 2.65%, and we expect this to fall even further as well.”
Despite the lower target price, Chan’s distribution per unit (DPU) estimates remain unchanged.
In his report, the analyst sees several positives for FCT. During the 1HFY2022 ended March, FCT’s rental reversions came in at a positive 1.7%. This is compared to the 0.6% seen in FY2021 and is expected to be similar for the rest of the year, he notes.
Portfolio tenant retention rate also remains healthy at 70%-80% of the total portfolio. At the same time, FCT’s retail portfolio equipped with a well-spread lease maturity profile with a weighted average lease expiry (WALE) of 1.85 years by net lettable area (NLA) or 1.78 years by gross rental income (GRI) and only 5.3% of expiring leases by GRI remain in 4QFY2022 for FY2022.
“Shorter tenancies allow for faster repricing in rent to cope with surging interest rates,” explains Chan.
Occupancy, however, dipped slightly from 97.8% in 2QFY2022 to 97.1% in 3QFY2022, but still above pre-Covid-19 levels of 96.5%. FCT is in advanced negotiations with replacement tenants to fill the space left by Filmgarde at Century Square, which caused the slight dip in occupancy, Chan explains.
Tenant sales in 3QFY2022 were up 23% y-o-y, and around 10% above pre-Covid-19 levels. Shopper traffic in 3QFY2022 was up 32% y-o-y, and around 80% of pre-Covid-19 levels.
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“We expect the impact from the further easing of community measures, especially the one where mask-wearing is no longer required in indoor settings except for certain situations, to further increase shopper traffic going forward,” says Chan.
Meanwhile, 69% of total borrowings by FCT are hedged to fixed interest rates and the tenor of the hedge is usually matched with the debt maturity profile. In total, the cost of debt is 2.4%, and green loans account for approximately 31.6% of total borrowings.
At present, FCT has an aggregate leverage of 33.9%, where every 50 basis points (bps) increase in Singapore Overnight Rate Average (SORA) is estimated to impact FCT’s DPU by around 1.3%.
Chan also notes how hybrid work arrangements should benefit FCT's malls, which are located near transportation nodes. “Commute-driven footfall and incidental spending should see an uptick, lifting tenant sales and gross turnover (GTO) revenue for FCT,” he adds.
Occupancy cost, at around 16%-17%, is at the five-year pre-Covid-19 average. Chan says that improving tenant sales should lower occupancy cost further, which may support FCT's ability to raise rents.
Utilities represent around 7% of property operating expenses and are fully hedged for FY2022.
The analyst shares that FCT’s energy contracts will expire in end-FY2022 and mid-FY2023 as well.
As at 10.26am, units in FCT are trading at 2 cents higher or 0.88% up at $2.28 with a distribution yield of 5.7%.
