Improving suburban mall metrics, BUY
1H22 DPU rose 2.3% YoY and 0.8% HoH, driven by higher occupancy and
recovering rents. We expect tenants’ sales to gain traction in 2H22 as
restrictions ease and consumer sentiment improves. Strong leasing
momentum, tenant remixing and high mall occupancy should support
rental upside. We continue to see suburban malls anchoring Singapore’s
retail sector recovery during the reopening phase, with resilient operating
metrics for FCT’s 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.
Higher occupancy, leasing momentum
Portfolio occupancy climbed to 98.7% in 2Q22 (from 97.2% in 1Q22), with
all of its nine retail malls reporting stable or higher occupancy, and two
(Northpoint City North Wing and Hougang Mall) being fully occupied. We
see improvement at the Central Plaza office asset, where occupancy is
low at 77.3% (it fell from 91.8% in 4Q21) due to the exit of an anchor
tenant, but plans to reconfigure the space to draw service trade tenants
should raise occupancy and rents. FCT has further de-risked its leasing
expiries, with 15.0% of renewals in FY22E (from 22.8% in 1Q22).
Reversion turned positive, set to rise
Tenant sales continued to improve with easing of dining-in restrictions and
seasonality, to 104-113% of pre-Covid levels in 2Q22 (vs 100-106% in 1Q22),
ahead of shopper traffic, which rose to 66-69% (vs 54-66%). Rental
reversion turned positive to +1.7% for 1H22 (vs -0.6% for FY21), and should
strengthen with lower occupancy cost, at 16.2% (vs 17.5%). Management
sees limited near-term NPI impact from higher utility costs, as its hedged
contracts mostly expire from Feb 2023. We think that downside could be
offset by higher GTO contribution, atrium sales and carpark income.
Strong balance sheet, deal upside
Its balance sheet remains strong with gearing at 33.3% (from 34.5% at endDec 21) and interest cover maintained at 5.8x. FCT increased its fixedrate borrowings to 68% (from 54%), with a 50bps increase in interest rate
lowering DPU by c.1.4%. We see a c.SGD1.5b debt headroom (at 45% limit)
supporting acquisitions. While management is focused on lifting 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