Capital Retained, Prefer Mapletree Commercial Trust

• Frasers Centrepoint Trust (SGX:J69U)’s 2Q20 DPU was down 48.7% y-o-y as management has retained 50% of its distributable income. Occupancies were weaker at Changi City Point, while rental reversion was healthy at +5.2%.
• We lowered DPUs by 1-11% due to lower income as a result of rental rebates, and see limited visibility after its 3Q20. Its suburban retail growth strategy is intact, but we expect rental growth to moderate on its assets with the slowing retail sales, while upside catalysts from further acquisitions are not yet visible, given Singapore’s tight retail cap rates.
• Lowering DDM-based Target Price to SGD2.30 (COE: 7.6%, LTG: 2.0%).
• We prefer Mapletree Commercial Trust (SGX:N2IU) (BUY, Target Price SGD2.15, see report: Mapletree Commercial Trust - Maybank Kim Eng 2020-04-24: Managing Risks) for higher dividend yield, and better DPU visibility.

Lower Occupancies, Rental Reversion +5.2%

• Frasers Centrepoint Trust's Revenue increased 0.9% y-o-y in 2Q20 as rental at all properties grew except for Changi City Point and Anchor Point. But NPI dipped 1.3% y-o-y due to the absence of earlier property tax write-backs.
• Portfolio occupancy fell q-o-q from 97.3% to 96.1%, mainly due to weaker occupancies at Changi City Point (95.8% to 91.8%) with two non-renewals and a pre-termination. Rental reversion was strong at +5.2%, led by Yew Tee Point (+6.5%), Causeway Point (+6.0%) and Waterway Point (+6.0%).
• Portfolio shopper traffic, up in Jan, fell 9.0% y-o-y in Mar with its larger malls reporting double-digit declines due to the stricter social distancing measures. Tenant sales from Dec 2019 to Feb 2020 fell 4.0% y-o-y, mainly due to Causeway Point and Changi City Point.
• Management expects a more challenging outlook for its rental reversions, and as lease negotiations stretch longer.

Tenant Support Package May Need to be Upped

• We have factored in its sponsor’s SGD45m support package for retail tenants (SGD17m attributed to Frasers Centrepoint Trust), which implies a month’s rental rebate to affected tenants. These tenants may receive additional support as Frasers Centrepoint Trust has yet to pass on 85% of the property tax as announced by the government on 27 March, and can draw down on security deposits as an offset.
• An additional month of rental waiver could reduce our revised FY20 DPUs by a further 9%.

Low Leverage But Deal Visibility Is Weak

• Frasers Centrepoint Trust's gearing would fall from 37.4% to 33.3% as of end-Mar 2020 after repaying its SGD90m MTN. It has an interest coverage ratio of 6.4x and SGD0.9-1.4b debt headroom (based on 45-50% leverage limits).
• Management is still interested in acquiring the remaining 12% stake in PGIM. But other than this, we believe acquisition visibility is low due to the tight retail cap rates in Singapore.

Source: Maybank Kim Eng Research - 24 Apr 2020