• Frasers Centrepoint Trust (SGX:J69U)’s 3QFY20 (Sep) business update shows signs of revival in shoppers’ traffic with 95% of its tenants now back in operation. However, occupancy pressure was visible with all its malls registering a slight q-o-q occupancy decline.
• While COVID- 9 has posed severe headwinds for the retail sector, we expect Frasers Centrepoint Trust’s suburban malls will fare relatively better as its key malls are well supported by a huge catchment population. Among retail REITs, Frasers Centrepoint Trust remains our preferred large cap pick.

Acquisition of Remaining PGIM ARF Stake Likely in Near-term

• In June, Frasers Centrepoint Trust announced the acquisition of an additional 12.1% stake in PGIM Real Estate Asia Retail Fund (PGIM ARF) for SGD197.2m, taking its stake to 36.9%. The acquisition was fully funded by debt and is mildly accretive.
• As its sponsor owns the remaining 63.1% stake, we estimate Frasers Centrepoint Trust will acquire the remaining stake over the next 6-12 months, which will enable tax transparency and thus enhancing yields.
• While Frasers Centrepoint Trust's gearing remains comfortable at 35% the potential acquisition is likely to be a combination of equity and debt with sponsors’ stake valued at SGD1.0bn, based on the latest NAV.

Portfolio Occupancy Declined for the Second Consecutive Quarter

• Portfolio occupancy declined for the second consecutive quarter to 94.6% (-1.5ppt q-o-q, -2.2ppt y-o-y) with occupancy pressures seen across all its malls, mainly due to non-renewals. While Frasers Centrepoint Trust continues to see good demand for its big malls (especially from the food & beverage sector) Frasers Centrepoint Trust stated that when signing new leases, it is trying to strike a balance in getting the right tenant mix and optimal rents.
• Management noted there is increased pressure on rents but YTD rental reversions remained positive. For 3Q, rental reversions were largely flattish compared to mid-single-digit growth seen in previous quarters.
• Looking ahead, we expect occupancy to remain in the low 90% levels, with flattish to slightly negative rental reversions.

COVID-19 Tenant Assistance Measures

• Frasers Centrepoint Trust mentioned that it has already provided two months of rental waivers for eligible tenants as mandated by the COVID-19 bill. YTD it has offered SGD25m in rent rebates to tenants from its side and it has also released one month of security deposits to offset rents.
• Management noted that further support measures to tenants will be targeted in nature and it still has 0.8 months of rental rebates from property tax rebates it needs to pass through. Shoppers’ traffic at its malls has picked up considerably since June but it is still down 39% y-o-y while tenants’ sales for the quarter declined 30-40% y-o-y.

Earnings Changes

• We revise up our FY20-22F DPU by 3%-5% factoring in the additional stake in PGIM malls and tweaking our occupancy assumptions. Keep NEUTRAL with a Target Price raised to SGD2.16 from SGD2.07, 10% downside and 5% yield.

Source: RHB Invest Research - 27 Jul 2020