Improving outlook
? FCT’s portfolio demonstrated resilient occupancy qoq. Rental reversion improved in 1QFY9/22 vs. FY21 as leasing traction remained strong.
? Collaboration with mall owners is one way to expand its portfolio locally.
? Reiterate Add. We expect FCT’s operating metrics to outperform its peers’.
A more optimistic 1QFY22 briefing
Management sounded more optimistic during the briefing as Singapore moves towards normalisation. FCT expects shopper traffic and tenant sales to improve further as more workers return to office. Leasing negotiation and rental reversions have been encouraging so far. Wellness, health and jewellery trade categories continued to do well in 1QFY22 while sales of home furnishing, IT, electronics and supermarket slowed down due to the high base last year. Space demand from F&B operators was strong and they generally are surviving well despite the dine-in limits, as they pivot towards the omnichannel platform.
Good leasing momentum; good locations underpin stable income
Rental reversion in 1QFY22 was better than the portfolio rental reversion of -0.6% in FY21. FCT has de-risked about 50% of the lease expiries this year so far. Six out of the nine retail malls in FCT’s portfolio demonstrated resilient performance with stable occupancies (-0.1% pts to +1% pts qoq) in 1QFY22. Century Square (CQ), Changi City Point (CCP) and White Sands (WS) have relatively weaker occupancies (-0.7% pts to -2.9% pts qoq), partly due to higher renewal cycle concentration after AEI at CQ while CCP was affected by the lack of office crowd. FCT is proactively managing these malls, focusing on tenant re-mixing, space re-sizing and spreading out lease expiries. Management is confident that its malls will deliver stable income given the quality, strategic locations of its malls and the limited retail supply. FCT is looking to reconfigure the vacated anchor space at Central Plaza. As anchor tenants usually pay lower rental rates, the reconfigured space should improve rental yield if leased out. Filmgarde, a cinema operator is moving out of CQ in 2H22 but the impact should be minimal as cinema operators account for less than 2% of FCT’s total income.
Maintaining its status as a pure suburban mall operator; ADD
As of 1QFY22, 54% of FCT’s debt is hedged to fixed interest rates. In view of the rising interest rate environment, FCT intends to further increase its fixed rate debt proportion. Based on its internal estimates, if FCT were to hedge the remaining debt into fixed rate, every 10bp hike in interest rates would reduce its DPU by 0.5%. FCT is comfortable with its current gearing of 34.5% and raising it further for acquisitions. Wisteria Mall and Jcube in Singapore were sold recently but these two malls do not fit into FCT’s investment focus on prime suburban malls. On this front, FCT is engaging the prime suburban malls’ owners for potential collaborations. We reduce our DDM-based TP as we raise our COE assumption to reflect the rising interest rate environment. We continue to like FCT for its pure exposure to suburban malls which should enable it to outperform peers. Upside/down risks: accretive acquisitions/weaker-than-expected rental reversion.