What else was new during the reporting quarter?

Stake in PGIM Real Estate AsiaRetail Fund Limited (PGIM ARF). FCT had in April 2019 acquired a 17.13% stake in PGIM ARF, Singapore’s largest non-listed retail mall fund (which holds assets such as Liang Court and White Sands – see figures 2 and 3 for more details), for S$342.5mn. It will be fully funded by a bridge loan at a cost of c.2.4%. Pro-forma FY18 gearing post-acquisition will be at 36% (FY18A: 28.6%). The Manager intends to pare down with a combination of term loan and/or equity. Expected DPU accretion of 0.31%/1.89%/3.56% with a LTV ratio of 60%/80%/100%, respectively. Its Sponsor, Frasers Property Limited (FPL), had also acquired a 17.8% stake in PGIM ARF, with plans to increase its stake to 47.82%.

The Positives

+ Uplift in NPI due to lower property tax expenses. Property expenses were lower on the whole mainly due to the lower property tax expenses, which was a result of the tax refund concessions on vacancy.

+ Weighted average debt maturity extended beyond 2 years. FCT had refinanced S$120mn of its 2019 debt on 10 April 2019. Weighted average debt maturity is extended to 2.4 years from 1.6 years (as at 31 March 2019). It was communicated in the previous quarter that FCT had also secured commitments for the $70mn of secured bank borrowings (due FY2020).

The Negatives

– Occupancy levels took a hit. Occupancy at FCT’s two largest malls, CWP and NPNW, declined QoQ. CWP reported the lowest occupancy level (of 97.4%) in 25 quarters, mainly due to the exit of three tenants related to Newstead Technologies, which filed for liquidation in Oct 2018. Replacement tenants have since been secured and occupancy is expected to normalise in 3Q19.

Outlook

FCT’s stake in PGIM AFR further entrenches FCT’s presence in the suburban retail space and dangles a possible DPU accretion of up to 3.56% (assuming 100% LTV ratio). The proposed acquisition of a further 1.67% stake in PGIM ARF (announced on 21 March 2019) for $33.5 million is also pending completion.

FCT’s biggest asset, CWP, stands to gain tremendously from the transformation of Woodlands Regional Centre, which will anchor itself as the largest economic hub in the North region. In addition, the Manager shared that daily foot traffic at CCP had increased despite the opening of Changi Jewel in mid-April. CCP holds a disparate trade mix from Jewel (and other malls in the East), comprising more outlet stores.

Separately, it was announced that Mr Richard Ng had been appointed the CEO-Designate of the Manager of FCT, succeeding Dr. Chew Tuan Chiong.

Maintain NEUTRAL with higher TP of S$2.31 (prev. S$2.21).

We raise our target price to reflect a lower cost of equity as well as to adjust for the acquisition of stake in PGIM AFR. We believe there is further upside to FCT’s valuation, with growth catalysts stemming from its ROFR pipeline (particularly, the 33.3% stake in Waterway Point), heightened positioning of CWP, and FCT’s capability to tap on the renewed strength in fringe retail rents (Figure 4).

Source: Phillip Capital Research - 25 Apr 2019