Not sitting idle
- No financials were provided in FCT’s 1Q business update. However, 1QFY9/24 retail reversions tracked above FY23’s 4.7%, management said.
- Reiterate Add and TP of S$2.52. FCT is our top pick of the sector.
Portfolio performance remains robust
While no reversions were disclosed for the 9% of leases by gross rental income renewed in 1QFY9/24, management said in an analyst call that 1QFY24 reversions were better than the 4.7% recorded in FY23 and tracking above the 1.0%/3.1% qoq/yoy growth in suburban rents in 4QCY23. Frasers Centrepoint Trust’s (FCT) 1QFY24 tenant sales were down 0.7% yoy. Excluding tenants undergoing renovation, tenant sales was but up 1.1% yoy, at 118% of pre-Covid levels. Retail occupancy, excluding Tampines 1 (which is undergoing asset enhancement works), remained high at 99.9% (+0.2% pt qoq) as at 1QFY24.
More value to be unlocked at NEX
Management revealed in the analyst call its value-unlocking plans for NEX, which include rightsizing its proportion of anchor and mini-anchor tenants from the current 50% to c.40% (in line with the tenant composition of other malls within its portfolio), as well as converting c.6k sq m of carpark gross floor area (GFA) into retail space and potentially unlocking additional GFA by tapping the Community/Sports Facilities Scheme (CSFS). Leases with anchor and mini-anchor tenants typically attract lower rents as these tenants lease more space, hence subdividing the units and leasing to smaller tenants would likely result in rental uplifts, in our view. We estimate that the conversion of the 6,000 sq m of carpark GFA could increase the net lettable area (NLA) at NEX by c.6.7%, translating into a 0.7% FY25F DPU uplift, based on FCT’s current 25.5% stake in NEX.
Stepping up capital management
In 1QFY24, FCT refinanced all loans maturing in FY24F with the green loans secured in Jul 23. With that, its average cost of debt crept up to 4.3% for 1QFY24 (4QFY23: 4.1%) while average debt maturity lengthened to 2.8 years (4QFY23: 2.3 years), and the proportion of green loans to total loans increased from 55.6% in 4QFY23 to 72.5% in 1QFY24. Post 1QFY24, management entered into interest rate hedges, which would bring the fixed hedge from 63.4% as at 1QFY24 to c.72% post-quarter. There is no change in management’s FY24F cost of debt guidance of c.4%. Gearing fell from 39.3% in 4QFY23 to 37.2% as at 1QFY24, post repayment of loans from Changi City Point divestment proceeds, slightly above the pro-forma gearing of 36.1% as additional loans were drawn down for working capital purposes.
Reiterate Add; FCT is our top pick in the sector
We leave our FY24F-26F estimates and DDM-based TP of S$2.52 unchanged. We remain positive on the resilient demand for space at FCT’s suburban malls. Re-rating catalysts: stronger-than-forecasted reversions and acquisition of the remaining stakes in Waterway Point and NEX. Downside risks: a slowdown in consumer spending, which may lower gross turnover rents and weaken tenant sentiment/leasing, impacting FCT’s ability to command positive rental reversions.
