• Occupancy of 96.4% at pre-pandemic levels. Signed 11.8% of NLA in the quarter despite general tenant caution.
• 3Q21 tenant sales 6-19% below pre-COVID levels, due to Phase 2 Heightened Alert. Still, resilience from 45% of its tenants in essential trades lowers rental-rebate burden.
• Maintain BUY with DDM TP (COE 6.38%) lowered from S$2.88 to S$2.87. FY21e DPU dips 7.5% after accounting for S$25k or 6.4% of revenue in rental rebates. FY21e/22e DPU yields of 5.1%/5.8%. Catalysts expected from growth in mall catchment, asset enhancement and M&A/collaboration opportunities.

+ Positives

+ Retail occupancy up 0.3ppt/1.8ppts QoQ/YoY to 96.4%. Occupancy has normalised to pre-pandemic levels, up from FCT’s low of 94.6% a year ago. Changes were -4.8ppts to +7.3ppts for its 10 assets due to tenant churns and lumpy expiries at Century Square. Occupancy in three malls increased. Across its malls, occupancy was 91.6-99.7%.

+ 11.8% of NLA signed in 3Q21. FCT is on track in renewals, de-risking 80% of its leases expiring in FY21. Only 8.2% of its lease expiries remain, half with mini-anchor tenants. These  are in advanced stages of negotiation. The 20,000 sq ft of space vacated by H&M at Waterway Point in 2Q21 has been 75% backfilled. It will be leased to nine tenants, with positive reversions in total. Notable tenants added YTD include Don Don Donki, Gram Café, Tai Cheong Bakery, Playdress, At Tea, Dyson and Swee Choon Dim Sum Restaurant. Such new tenants are expected to refresh its retail offerings and pull in crowds for its various malls. No reversions have been disclosed but we understand that they were less negative than a year ago. For reference, 1H21 reversions averaged -0.7%.

– Negatives

– Tenant sales 6-19% below pre-COVID due to Phase 2 Heightened Alert. Tenant sales were 94%, 88% and 81% of pre-COVID levels in April, May and June respectively (Figure 1). These were in line with the RSI, ex-motor vehicles. FCT’s top five trade categories of F&B, Beauty and Health, Fashion, Services and Supermarkets contributed 75% to its tenant sales. Their decline was more muted in 3Q21, in the single digits. The performance of 45% of its tenants in essential services such as supermarkets was resilient. FCT does not expect to provide rental rebates to this group. Some booked better sales during Phase 2 Heightened Alert due to their product offering and ability to capture takeaway orders.

Outlook

Tenants still cautious on leasing, but hint of confidence. Tenants continue to sit on the sidelines, only committing to leases on the eve of their expiries. FCT is open to flexible lease structures with higher risk-sharing and have offered extensions and short-term leases to struggling tenants. However, 95% of the permanent leases it has signed are on the traditional base-plus structure. We think this indicates its retailers’ confidence in sustaining and improving their sales, as they have not opted for higher risk-sharing of profits.

Targeted rebates. FCT will continue to offer operational and promotional support to its tenants, dishing out rebates on a targeted basis. Tenant sales since July 2020 have tracked between -20% and +10% of pre-pandemic levels. FCT will offer rental support to those whose sales declines exceed a certain threshold. Thresholds vary across the trade sectors. Trading for 45% of its tenants in essential services was resilient and will likely not qualify for rental rebates. Still, we pencil in S$25k or 6.4% of revenue in rebates, equivalent to 0.35 month of rebates for 55% of its retail tenants over May-August 2021

Maintain BUY, TP lowered from S$2.88 to S$2.87

FY21e DPU dips 7.5% after accounting for the S$25k rental rebates. We maintain BUY and our preference for suburban retail assets due to their proximity to household catchments and the resilience of necessity-driven spending. FCT trades at 5.1%/5.8% FY21e/22e yields.

Sustained reopening visibility will support leasing and rental growth, in our view. FCT’s portfolio of well-located suburban malls are expected to draw a disproportionate share of leasing demand.

Catalysts include asset-enhancement initiatives, acquisitions from its sponsor’s pipeline of assets, increasing its stake in Waterway Point, or acquiring or partnering companies with only one mall in their portfolios. The cost of implementing and maintaining loyalty programmes or omnichannel retailing is higher for single-mall owners, which may present acquisition opportunities.

Source: Phillip Capital Research - 26 Jul 2021