Resilient suburban mall metrics, BUY
FCT’s portfolio occupancy was stable at 97.2% in 1Q22 (versus 97.3% in 4Q21), while rental reversion, which improved from FY21, looks set to strengthen further as tenant sales gain traction into the coming quarters. Strong leasing momentum has helped to de-risk near-term expiries while tenant remixing efforts against high mall occupancies, should support rental upside. We continue to see suburban malls leading the retail sector recovery in Singapore’s long reopening phase, with stable operating metrics for FCT’s more sizeable suburban malls portfolio underpinning its DPU visibility. Our forecasts and DDM-based TP of SGD2.90 (COE: 6.2%, LTG: 2.0%) are unchanged. BUY.
Stable occupancy, de-risking FY22E expiries
Performance was mixed across its portfolio, as occupancy improved QoQ at Causeway Point (from 98.6% to 99.0%), Waterway Point (98.4% to 99.4%) and Hougang Mall (97.8% to 99.7%), while it dipped at Changi City Point (from 94.7% to 92.6%), and by 0.1-2.9 ppts for its three remaining smaller retail assets. Central Plaza’s office occupancy fell from 91.8% to 71.7% with the exit of an anchor tenant, but plans to reconfigure the space to draw service trade tenancies should deliver stronger rents. It has de-risked 36% of leases expiring in FY22, with 15-20% in advanced negotiations.
Expect rental reversion to improve in FY22E
Tenant sales continued to improve with easing of dining-in restrictions and seasonality, to 100-106% of pre-Covid levels, ahead of shopper traffic, which rose to 54-66% (versus 56-59% in 4Q21). We see both metrics being on a positive trajectory in FY22. Based on leases signed in 1Q22, FCT’s rental reversion was better than the -0.6% achieved for FY21, according to management. We expect reversions to be flattish in 1H22, but it should improve as tenant sales gain traction.
Strong balance sheet, eyeing AUM growth
Its balance sheet remains strong with gearing at 34.5% (from 33.3% at end Sep 21) and interest cover of 5.8x, which suggests a SGD1.5b debt headroom (at 45% limit). Management expects to increase its proportion of fixed rate borrowings from 54% currently, ahead of rising interest rates. While we expect FCT will look to boost yields on its enlarged portfolio in the near term, we see room for AUM growth from its sponsor ROFR’s pipeline assets, which should provide upside to DPUs.