SINGAPORE (April 26): DBS Vickers Securities continues to rate Frasers Centrepoint Trust (FCT) at “buy” with an unchanged target price of $2.20, commending the retail REIT’s stable 2Q DPU of 3.04 cents despite the lack of contributions over the quarter from Northpoint, which is currently undergoing an asset enhancement initiative (AEI).

(See also: Frasers Centrepoint Trust reports flat 2Q DPU of 3.04 cents)

In a Thursday report, lead analyst Derek Tan notes how FCT enjoys a near-monopoly of shopping malls in the north, with Northpoint and Causeway Point together contributing about 70% of its net property income (NPI).

“FCT is in a strong negotiating position with tenants who want a presence in the north where the group has close to 75% market share of retail malls,” says the analyst.

“While it is still several months away until Northpoint completes its AEI in September 2017, we believe strong rental reversion at Causeway Point will support earnings and cushion any pressure from any decline in occupancy rates,” he adds.

Tan estimates the average occupancy for Northpoint to fall within the 72-75% range for FY17 upon completion of its 18-month AEI.  

He also observes that Changi City Point saw “significant advancement” over the last quarter, which he believes was mainly due to introduction of new tenants which are “effective traffic pullers, in addition to easier access for shoppers with the cessation of SMRT’s road closure in front of the mall.

Additionally, Tan highlights a significant reduction in the trust’s cost of debt of late, with its management reducing the percentage of borrowings hedged into fixed rates from 70% to below 60% in mid-2016.

This has led OCBC to reduce its cost of debt assumptions to account for lower interest expenses in the near term.

“We remain excited about the planned AEI and integration of the Northpoint asset with the extension wing currently being built by the sponsor. With an enlarged footprint, we see Northpoint as a key driver in accelerating growth in the medium term,” says the analyst.