Frasers Commercial Trust might need to wait for revamps to pay off: analysts

It finished the revamp of Alexandra Technopark, but concerns over HP leaving the property and lack of growth remain.

Frasers Commercial Trust’s net property income (NPI) for Q4 2018 fell 19.2% to $21.61m as portfolio gross revenue was crushed by lower occupancy rates for the Singapore properties and the weaker.

DBS Equity Research analyst Mervin Song noted that over the past 18 months, FCOT’s share price has lagged other office REITs such as CapitaLand Commercial Trust (CCT) and Keppel REIT (KREIT) arising from concerns over the impact of HP vacating Alexandra Technopark (ATP) and lack of growth.

“To address these issues, FCOT has announced various strategies which should result in FCOT’s share price closing the c.2% yield differential between FCOT and its large-cap peers closer to the historical average spread of c.1%,” Song added.

The analyst noted that due to forward renewals achieved over the quarter, 13.1% and 10.6% of leases are now due to expire in FY2019 and FY2020, down from 16.1% and 11.3% at the end of the third quarter of 2018. The forward renewals were largely done at China Square Central (CSC) and ATP.

CGS-CIMB analyst Lock Mun Yee also observed that after ATP’s asset enhancement initiative (AEI), leasing activity has picked up and committed occupancy rose to 70.2% at the end of the fourth quarter vs. 64.2% at the end of the third quarter. “Demand came from trade sectors such as pharma, multi-media, shipping and business services,” she said.

However, income from this property could remain volatile over FY2019 as its tenant HP has a remaining 93,000 sqft of leases expiring on December 18. “This will continue to drag earnings outlook,” Lock said.

Song also expressed a slightly bearish outlook towards ATP and brought down his occupancy forecast from 71% to 64%. “This underperformance we believe is attributed to the fact that AEI was still ongoing earlier in the year, making it difficult for prospective tenants to visualize the new product at ATP,” he said.

“With the AEI now largely completed, prospective tenants are able to view the new lobbies and amenities. Hence, we expect committed occupancies to improve over the next few quarters,” he added.

However, OCBC Investment Research analyst Joseph Ng is more bullish towards FCOT’s outlook, noting that management said that leasing has gained momentum, and space can now be better marketed. “We are optimistic that the manager should be able to backfill the current and planned vacancies well in 2HFY2019. At a normalised stage, ATP should see a wide variety of tenants across trade sectors, thereby mitigating concentration risk,” he said.

Meanwhile, the AEI at CSC remains on track for completion in mid-2019, with the new 304-room Capri by Fraser hotel completing earlier, in March 2019, Lock said. Co-working space operator JustCo has committed to lease around 34,500 sqft of retail podium space, bringing pre-commitment rate for the podium to 40%.

“In tandem with the improving Singapore office leasing market, FCOT is starting to see positive rental reversions at this property,” she added.

Outside these two properties, the analysts have also noticed that FCOT was able to pare its debt and make room for more acquisitions. Lock noted that gearing was low at 28.3% at end-4QFY2018. “This provides the trust with balance sheet capacity to tap inorganic growth opportunities. With the reduction in debt, there are no major refinancing needs until FY2020,” she said.

Ng concurred with Lock and said, “As we have highlighted previously, we believe that the ample debt headroom would allow FCOT to continue growing its portfolio accretively.”