Frasers Commercial Trust (FCOT) - RHB Invest 2017-09-25: Non-Renewal Of HP Enterprise Leases

Frasers Commercial Trust - RHB Invest 2017-09-25: Non-Renewal Of HPE Leases FRASERS COMMERCIAL TRUST ND8U.SI

Frasers Commercial Trust - Non-Renewal Of HPE Leases

  • The non-renewal of the bulk of HPE leases was largely anticipated and does not come as a surprise. The key question remains as to how quickly Frasers Commercial Trust (FCOT) would be able to mitigate the drop in rental income (~6.6% of total gross rent). 
  • Management has signed new leases for about 13.4% of the vacated space. Additionally, it is also embarking on a SGD45m AEI to better reposition the asset. 
  • Alexandra Technopark (ATP) has another expiry of HPS leases (~11% of total gross rent) in November, the bulk of which we also expect would unlikely be renewed. 
  • While the non-renewal of leases remains an overhang on the stock, the improving office demand, high yield (7% FY17F) and strong management capabilities acts as a mitigating factor. 
  • Maintain NEUTRAL with an unchanged SGD1.40 TP (0% downside).

What’s New? 

HPE to vacate the bulk-of its space in ATP. 

  • Frasers Commercial Trust (FCOT) announced that one of its key tenants, Hewlett Packard Enterprise Singapore Pte Ltd (HPE), would be vacating 178,843 sq ft of space upon the lease expiry in Sep/Nov 2017. 
  • HPE currently occupies a total of 191,846 sq ft in Alexandra Technopark (ATP). The space to be vacated by HPE constitutes approximately 17.1% of the total NLA of ATP and 6.6% of FCOT’s total gross rental income for the month ended Jun 2017.

Our View 

Potential 6% drop in FY18F DPU. 

  • In our earnings model, we have not factored in any significant drop in occupancy for ATP. Thus the non-renewal of HPE leases would negatively impact our DPU estimates. 
  • Based on our initial estimates, FY18F DPU is likely to see a 4-6% drop. 
  • FCOT has so far filled about 24,000 sq ft (c.13.4% of vacated space). We understand that the average rent paid by HPE (~SGD4 psf) is similar to that of the current market rate. 
  • With the bottoming of office supply and demand seeing a pick-up, we believe management should be able to fill the space in next few months.

A chunkier HPS lease expires in Nov 2017. 

  • FCOT is still in discussion with another tenant, Hewlett-Packard Singapore Pte Ltd (HPS), which currently occupies a bigger 304,920 sq ft of space at ATP. The lease is expiring in Nov 2017 and constitutes approximately 11.1% of FCOT’s total gross rental income for the month ended Jun 2017. 
  • We believe there is a good possibility that the bulk of the leases would unlikely be renewed with HPS moving a majority of its operations to its purpose-built facility at 1A Depot Close.

Embarking on SGD45m worth of asset enhancements. 

  • The asset enhancement initiative (AEI) includes a new entrance gateway, revamping the facades, upgrading of the common-space and additional covered walkways. The revamped property would also have better amenities such as a new food court, food and beverage outlets, clinic, landscaped roof garden and other facilities to be located at the Central Plaza. The AEI, which commenced in mid-2017, is expected to be completed by mid-2018. 
  • We view the AEI as a step in right-direction and would help enhance the yields of the property, which is currently under a competitive environment.

Maintain NEUTRAL. 

  • We are likely to adjust our earnings after getting more clarity on the lease renewals during its full-year results announcement on 20 Oct 2017. 
  • We also believe management would be using some of the gains from its recent divestment proceeds to offset a portion of the shortfall during the interim period. While the lease expiries remains an overhang to the bottoming of office supply, a high dividend yield and capable management team are likely to buffer the impact. 
  • FCOT is currently trading at a FY17F yield of 7% and P/BV of 0.92x.

Vijay Natarajan RHB Invest | http://www.rhbinvest.com.sg/ 2017-09-25
RHB Invest SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 1.400 Same 1.400