Frasers Centrepoint Trust - UOB Kay Hian 2020-07-27: Relative Stability In 3QFY20 Amidst Prolonged COVID-19 Pandemic


Frasers Centrepoint Trust - Relative Stability In 3QFY20 Amidst Prolonged COVID-19 Pandemic

  • Frasers Centrepoint Trust's portfolio occupancy eased marginally by 1.5ppt q-o-q and 2.2ppt y-o-y to 94.6% despite the onslaught of COVID-19 pandemic. Shopper traffic rebounded after the commencement of Phase 2 of Safe Re-opening, and recovered to 61.1% of last year’s level in Jul 20.
  • Recovery is slowly but surely taking root. Its focus on suburban retail malls and necessity spending, including F&B, enables Frasers Centrepoint Trust to weather a prolonged COVID-19 pandemic.
  • Maintain BUY. Target price: S$2.90.

Frasers Centrepoint Trust's 3QFY20 business update:

Maintained positive rental reversion.

  • Management disclosed that rental reversion is flattish in 3QFY20 (less than 1%). The resiliency was attributed to the good location of Frasers Centrepoint Trust’s suburban malls that are well connected to MRT stations and have a strong catchment of residential population. Frasers Centrepoint Trust has only 4.8% of expiring leases by NLA to be renewed in 4QFY20.

Occupancy relatively stable despite onslaught of COVID-19 pandemic.

  • Frasers Centrepoint Trust’s portfolio occupancy eased marginally by 1.5ppt q-o-q and 2.2ppt y-o-y to 94.6%. Occupancy declines were more significant at Bedok Point (-3.7ppt q-o-q) and Yew Tee Point (-2.6ppt q-o-q) as these smaller malls lacked strong anchor tenants. Waterway Point (-1.9ppt q-o-q), Causeway Point (-1.2ppt q-o-q), Changi City Point (-1ppt q-o-q) and Northpoint City (-0.8ppt q-o-q) also experienced slight easing in occupancies.
  • Management acknowledged that the leasing market conditions have weakened. Tenants are monitoring the uncertainties arising from COVID-19 pandemic before committing to new leases.

Shopper traffic recovered to 60th percentile.

  • Management noted that shopper traffic started declining since safe distancing measures were tightened and posted a steep drop at the onset of the Circuit Breaker period (7 Apr 20 to 1 Jun 20), before bottoming out in May (-68.3% y-o-y). Shopper traffic rebounded after the commencement of Phase 2 of Safe Re-opening and recovered to the 61.1% of last year’s level in Jul 20 (week starting 12 Jul 20).
  • Management attributed the gap vs normalcy to safe distancing and traffic density measures imposed that have limited the capacity of retail malls.

Strong balance sheet with low gearing.

  • Frasers Centrepoint Trust has secured S$200m of notes issued in May 20 and S$200m of committed revolving credit facilities, a total of S$400m in debt capital. Aggregate leverage remains low at 35% as of Jun 20.

More retailers open for business.

  • More than 95% of its tenants have re-opened and resumed business since the start of Phase Two of Safe Re-opening on 19 Jun 20. Cinemas have re-opened on 13 Jul 20. Previously, only 30-40% of the tenants (mainly from essential trade sectors) were opened during the Circuit Breaker period and Phase One of Safe Re-opening.

Focused on necessity spending at suburban malls.

  • The acquisitions of a 40% stake in Waterway Point and 36.9% stake in PGIM ARF have reinforced Frasers Centrepoint Trust’s strength in suburban retail malls. Frasers Centrepoint Trust was included in the FTSE EPRA/NAREIT Global Real Estate Index Series (Global Developed Index) since 23 Sep 19.

Measures to support tenants.

  • Frasers Centrepoint Trust has already disbursed S$25m of landlord rental waivers (net of property tax rebates and cash grants). It has fulfilled its obligations under the COVID- 19 (Temporary Measures) (Amendments) Act to provide eligible tenants with two months of rental waivers.
  • Frasers Centrepoint Trust will also fully pass on the property tax rebates and cash grants provided by the government to its tenants. Further assistance to tenants would be based on a targeted approach on a case-by-case basis.

Building scale and dominance in suburban retail malls.

  • Frasers Centrepoint Trust has exercised its rights of pre-emption under the by-laws of PGIM Real Estate AsiaRetail Fund (ARF) to acquire 12.07% of ARF for S$197.2m. The acquisition was completed on 6 Jul 20 and increased Frasers Centrepoint Trust’s interest in ARF from 24.82% to 36.89%. The acquisition is fully funded by debt. Pro-forma gearing of Frasers Centrepoint Trust post acquisition was 36.2% as at 30 Sep 19 (previously 32.9%).

Returning cash previously retained back to unitholders.

  • Management indicated intention to return cash of S$18m retained in 2QFY20 to unitholders in 4QFY20.

Valuations & Recommendation

Jonathan Koh CFA UOB Kay Hian Research | Loke Peihao UOB Kay Hian | https://research.uobkayhian.com/ 2020-07-27
SGX Stock Analyst Report BUY MAINTAIN BUY 2.90 UP 2.850