Frasers Commercial Trust - CIMB Research 2016-10-20: Does all-time high distribution signal peak DPU?

FRASERS COMMERCIAL TRUST ND8U.SI

Frasers Commercial Trust - Does all-time high distribution signal peak DPU?

FY16 DPU of 9.82Scts (+1% yoy) was in line with our and consensus expectations, at 100% of our full-year forecast. 4Q16 DPU of 2.45Scts (-3% yoy) was at 25%.
FCOT achieved portfolio occupancy of 93% and a positive weighted average rental reversion of 6.6% in FY16. 21% of GRI is up for renewal in FY17.
Building in slight positive rental reversions plus a logical consolidation of HP, we see limited upside for FCOT.

FCOT achieved its highest DPU since listing in 2006. Its performance was boosted by the full-year contribution from 357 Collins Street and good performance of Alexandra Technopark (ATP), due to higher rents.
FY16 DPU included a capital distribution of 0.72 Scts/unit (S$2.2m) used to supplant the loss of income by certain retail units disrupted by construction works at China Square Central (CSC).
Portfolio value rose 1.8% on lower cap rates and higher market rents at Caroline Chisholm Centre and 357 Collins St.

The Singapore and Australia portfolios achieved 92.5% and 93.8% average occupancies respectively. CSC recorded lower occupancy of 88.9% (FY15: 96.2%) due to ongoing construction works though occupancy at its office tower remained high at 99.4%.
Occupancies at 55 Market Street and ATP were stable at 92% and 94.8% respectively.
In Australia, Caroline Chisholm Centre and 357 Collins St. were fully occupied.
Occupancy at Central Park was 80.2%, as a result of the challenging Perth market.

The Singapore properties continued to achieve positive rental reversions through FY16.
CSC recorded +5.4% rental reversion, 55 Market Street +6.3% and ATP +7.3%. With Grade B CBD Core spot rents at S$7.50 psf vs. average expiring rents of S$6.90-7.20 psf, we expect flattish to slightly positive rental reversions for FY17F.
In Australia, Central Park recorded -4.2% rental reversion for a small space (1.4% of the property’s NLA) while 357 Collins St. enjoyed +6.2%.

Occupying 47.6% of ATP, Hewlett-Packard (HP) accounts for 17.5% of GRI and 52% of ATP’s rental income. Some 5.5% and 12% of GRI, up for renewal in FY17 and FY18, respectively, are attributable to HP. The HP lease expiring in FY17 expires in Sep 17’.
Hence, any effects would be felt in FY18. The HP lease expiring in FY18 ends in Nov 17’. In our numbers, we have assumed a partial-renewal of the HP lease and assumed frictional vacancies at ATP, resulting in FY17F ave. occupancy of 85% (prev. 87%).

We moderate our forward occupancy and rental reversion assumptions, resulting in cuts for FY17-18F DPU. We also introduce our FY19F numbers and roll-forward our valuations, resulting in a lower DDM-TP (S$1.40).
Building in flattish to slightly positive rental reversions, plus a logical consolidation of HP, we believe that FY16 was a peak in terms of DPU (3-year view). Hence, we downgrade FCOT from Add to Hold.
We have not factored in further capital distributions, which would be the upside risk to our estimates.

YEO Zhi Bin CIMB Research | LOCK Mun Yee CIMB Research | http://research.itradecimb.com/ 2016-10-20

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