SINGAPORE (July 19): DBS has maintained its “buy” call for Frasers Centrepoint Trust (FCT), with a target price of $2.29. This comes as the REIT recently declared a DPU of 3.04 cents on the back of its 3QFY16 results.

(See Frasers Centrepoint Trust posts steady 3Q DPU of 3.04 cents)

Here are three reasons why DBS is optimistic on the REIT:

1. Ability to maintain stable DPUs

Unlike many of its peers who are expected to face declining DPUs over the next couple of years, FCT offers investors a steady DPU profile by paying the majority of its management fees in cash. This enables the REIT to temporarily increase payment of fees in units to sustain DPU, the report noted.

2. Significant reduction in interest rate hedge

FCT has capitalised on the low interest rate environment by significantly reducing the percentage of borrowings hedged into fixed rates from 74% to 59%. The recent refinancing of 18.7% of its total debt due July has also left the REIT with no material debt obligations for the rest of FY16.

As such, the research house estimates the REIT’s current cost of borrowings to be lower than the latest reported cost of 2.26% before the refinancing, leading to more interest savings for the REIT.

2. Near-monopolistic retail presence in the North

Taken together, Northpoint and Causeway Point contributed 70% of FCT’s Net Property Income in the previous quarter. Causeway Point, FCT’s largest asset, achieved a promising 9.4% reversion for rentals renewed at 12 stores, or 8% of the mall’s NLA.

Given its low occupancy cost and near-monopolistic position in Woodlands, the research house believes that the strong rental reversion at Causeway Point will support earnings and should cushion any pressures from declining portfolio occupancy rates. It may even bring more earnings surprise on the upside in the next 12-18 months, the report noted.

The research house is also “excited” about the planned asset enhancement initiative and integration of the Northpoint asset with the extension wing currently being built by Frasers Centrepoint. The research house sees Northpoint as a key growth driver in the medium term on the back of a fast growing population, coupled with a low retail density in the northern region of Singapore. This puts FCT in a strong negotiating position with potential tenants.

However, the research house has also identified higher interest rates, and falling NPI margins as key risks for the REIT.

As at 10am, FCT was down 0.9% at $2.15 a unit.