• No financials are provided in this business update. Retail occupancy improved 1.2% YoY to 98.4%. Tenant sales and shopper traffic improved 13.4% and 38.3% YoY respectively.
• Frasers Centrepoint Trust and its sponsor, Frasers Property, announced the joint acquisition of 50% interest in NEX at an agreed property value of S$2,077.8 million on a 100% basis, in line with appraised value.
• Maintain ACCUMULATE, DDM TP (COE 6.90%) lowered from S$2.38 to S$2.31. We trim our FY23e-FY25e DPU estimates by 6-8% after factoring in the NEX acquisition and higher borrowing costs. The current share price implies a FY23e DPU yield of 5.5%.

The Positives

+ Retail portfolio occupancy improved 0.9% QoQ to 98.4%, aided by Century Square (+1.9%), Changi City Point (+4.1%), White Sands (+1.9%) and Hougang Mall (+1.6%). Leases signed in the quarter were at positive rental reversions. Occupancy at eight of their nine malls came in at above 97.8%. Leasing negotiations are ongoing to backfill the anchor space (~8% NLA) at Century Square left by Filmgarde.

+ Tenant sales and shopper traffic grew 13.4% and 38.3% YoY, averaging 116% and 82% of pre-pandemic levels for the quarter, respectively. However, we expect tenant sales growth to moderate to single digits going forward due to the increase in Goods and Services Tax and a slowdown in consumer spending. 

The Negative

– High cost of debt. All in cost of debt for 1Q23 increased 50bps QoQ to 3.5%. FCT’s 73% of debt hedged to fixed rate (Sep 22: 71%) is on the lower end compared to most peers. About 46% of debt matures in FY23-FY24 and is likely to be refinanced at above 4%.

The Acquisition

• FCT and its sponsor, Frasers Property, announced the joint acquisition of a 50% stake in NEX. Post-acquisition, FCT will hold a 25.5% interest while Frasers Property will hold a 24.5% interest.
• The purchase consideration for FCT’s 25.5% stake, estimated to be S$340mn based on the adjusted net asset value of the trust of S$1,305mn, is in line with its latest valuation of S$2,077mn. FCT will fund this by taking on a 3-year debt with an estimated all in interest cost of 4.3%.
• The deal is 0.52% DPU accretive on a pro-forma basis assuming full debt funding, with a post-acquisition gearing of 38.5%.
• We think NEX is a good strategic fit for FCT’s portfolio as it is one of the largest suburban retail malls in Singapore with excellent connectivity to public transport. It also has a committed occupancy of 99.9% and a remaining lease period of 85 years.

Outlook

FCT announced a S$38mn asset enhancement initiative (AEI) for Tampines 1 where NLA from lower yielding floors will be transferred to B1, L1 and L2 as well as an additional c.8000 sq ft of NLA from various bonus GFA schemes. Management estimated a ROI of 8% on the back of higher rents and asset valuation gains. FCT’s operating metrics continues to improve, but its short debt maturity and low interest hedge ratio will offset these gains going forward.

Maintain ACCUMULATE, TP lowered from S$2.38 to S$2.31

FY23e-FY25e DPU estimates are trimmed by 6-8% after factoring the NEX acquisition and higher borrowing costs. The current share price implies a FY23e DPU yield of 5.5%.

Source: Phillip Capital Research - 3 Feb 2023