• 33.3% of ATP goes to Google

• Major overhang lifted

• Still top pick in office sub-sector

Good things come to those who wait

Last evening, Frasers Commercial Trust (FCOT) announced that it has entered into a lease agreement with Google Asia Pacific Pte. Ltd. (Google) for the latter to take up space at Alexandra Technopark (ATP). The total leased area will be ~344,100 sqft, or ~33.3% of ATP’s total NLA. As of 25 June, this will bring ATP’s committed occupancy rate to 93.7%.

We note that Google will be signing a 5-year term starting from 1QCY20. While the average gross rent was not announced, channel checks suggest that rates could lie modestly north of $4 psf, which would indeed be in-line with recent signing rents, despite the significant amount of space leased.

Focus turns to acquisitions

In our Apr’19 report, we presented our thesis that FCOT’s unchanged committed occupancy of 60% in 2QFY19 (vs. that of 1QFY19) despite an improved product offering post-AEI, lower-than-peers asking rents and tight occupancies in the area was likely the result of advanced negotiations with Google. We maintain our DPU assumption of 9.60 S-cents for FY19, but increase that of FY20 slightly by 1.5% to 9.85 S cents due to a less-than full FY contribution, as well as a small cash NPI contribution following Google’s fit out period. We expect more pronounced NPI/DPU contribution to be seen after FY20.

In our view, this  announcement would help to address concerns about the sustainability of capital contributions required to bolster DPU post-FY19. Also, this places FCOT in a favourable position in rent negotiations as it backfills the ~77.8k sqft of space that Microsoft will be pre-terminating at ATP on Jan 2020.

With this longstanding issue now in the rear mirror, we believe FCOT will now be able to focus on acquisitions abroad, supported by a healthy gearing of 29.1% (as of 2QFY19). In the near-term, we also believe that the newly opened Capri by Fraser in China Square will aid in footfall once 18 Cross Street retail podium is completed in 2H2019.

Incorporating adjustments following last evening’s announcement, our fair value estimate rises from S$1.58 to S$1.69.

Source: OCBC Research - 26 Jun 2019