• No financials disclosed in this operational update. FCT delivered a positive surprise – some malls outperformed our occupancy forecasts. Lease renewals on track despite industry leasing weakness.
• Maintain BUY, with DDM TP raised from S$2.79 to S$2.93 for lower beta and cost-of-equity assumptions. Beta lowered from 0.7 to 0.65 to reflect stability of assets. As a result, cost of equity drops from 6.75% to 6.38%. Stock catalysts expected from growth in catchments surrounding FCT’s malls and synergies after ARF acquisition.

+ Positives

+ Occupancy improved 0.1ppt to 3.7ppts QoQ in 8 out of 11 malls. 1Q21 retail portfolio occupancy improved QoQ from 94.9% to 96.4% (1Q20: 97.3%). Most of FCT malls are out of the woods, having recovered from the lows in 2020. The exceptions were Changi City Point (CCP) and Yew Tee Point. Occupancies were 5.1ppts and 3.0ppts lower YoY. Leasing at CCP remained challenging as not all employees in the business parks surrounding the mall had returned to the office. An absence of sales events at the Expo also cut footfall and vibrancy at CCP. Occupancy in the rest of the malls ranged from 94.1% to 98.7%. Over at Central Plaza, FCT’s only office asset, occupancy improved from 94.3% in June to 95.3% in 1Q21.

+ 25% of FY21 leases renewed in 1Q21. Despite a weaker leasing environment, FCT’s lease renewals were on track. While FCT did not disclose rental reversions for leases signed in the quarter,  it did say the reversions were a mixed bag, coming in flat on a portfolio basis. About 29.6% of leases by GRI remain for FY21. Expiries will mostly fall in 3Q/4Q21, which should give consumer spending and tenant confidence some time to recover.

– Negative

– No timeline for lifting of restrictions on atrium space. While atrium revenue accounts for a small fraction of FCT’s revenue, sales and promotions that are held there help to boost participating tenants’ sales, which have a bearing on gross turnover rents.

Outlook

Dominant malls likely will be prioritised. Portfolio occupancy had recovered to 96.4%, close to pre-COVID levels. We believe that the worst is over for FCT. Suburban retail remains in demand, supported by increased weekday catchments from hybrid work arrangements. FCT’s malls, which are located near household catchments and within 1-3 minutes from transportation nodes, are expected to benefit from both stay-home-workers’ shopping and the transient office crowd. We believe they will be among retailers’ top priorities when the latter review their consolidation plans. As such, we remain optimistic on FCT’s leasing.

Small businesses will be able to enjoy a 6-week “Notice of Negotiation” period with landlords under Singapore’s newly-introduced ReAlign Framework. The six weeks will run from 15 January to 26 February 2021. Tenants who wish to renegotiate their leases will have to submit notice of negotiation on their landlords. Long-term viability of tenants will be a key consideration. We think that FCT will try to retain tenants that complement its malls’ trade mix, while negotiating swift exits for struggling tenants. FCT’s manager shared that some tenants are still cautious, preferring to delay renewing until the last minute or preferring shorter leases. We understand that although lease terms are largely unchanged, the manager has offered short renewals to about 5% of mall tenants.

Focus on efficiency and unlocking value. FCT intends to: 1) optimise performance through economies of scale; 2) increase its malls’ value proposition by raising the utilisation of its eStore and food-ordering platform; 3) improve profitability by lowering cost of debt and increasing financial flexibility by unencumbering portfolio assets; 4) divest smaller malls; and 5) unlock value through AEI. It will look at acquisitions opportunistically, keeping its portfolio focused on Singapore and suburban retailing.

Maintain BUY, DDM TP raised from S$2.79 to S$2.93

We raise our TP after lowering cost of equity. The positioning of suburban malls has improved after COVID, supported by permanent hybrid work arrangements. FCT’s portfolio of necessity-driven malls once again demonstrated resilience and should trade at a lower beta, in our view. We lower our beta from 0.7 to 0.65 to reflect the stability of its assets. As a result, our cost of equity drops from 6.75% to 6.38%.

After raising occupancy assumptions and accounting for the divestment of Anchorpoint (completion expected on 22 March 2021), we lower FY21e/22e NPI by 1.6%/2.8%. FY21e/22e DPUs are 1.3%/0.5% higher due to lower debt assumptions. We assume that about 75% of its divestment proceeds from Bedok Point and Anchorpoint will be used to pare down debt. We also assume that few units would be issued for the portion of management fees payable in units due to the recovery in its share price. Catalysts for FCT are expected from growth in catchments surrounding its malls and synergies from an enlarged scale after its ARF acquisition.

Source: Phillip Capital Research - 25 Jan 2021