SINGAPORE (Jan 24): CIMB is maintaining its "hold" on Frasers Commercial Trust with $1.55 target price as the research house adjusts its FY18-20 DPU estimates to include new contributions from its UK acquisition.

In 1Q18, FCOT recorded an 11% y-o-y decline in gross revenue to $35.3 million and 15% y-o-y decline in NPI to $24.9 million due to lower occupancy at Alexandra Technopark (ATP), China Square Central (CSC) and Central Park in Perth and a weaker Aussie dollar.

But with 100% of management fees paid in units, distribution income slipped 2% y-o-y to $19.5 million while DPU retraced 4% y-o-y to 2.4 cents.

Average committed portfolio occupancy rate remained largely stable at 86.6% in 1Q18 while average passing rents were unchanged on a quarterly basis as HP Singapore extended part of its lease for another 2-13 months from Dec 1, 2017.

Overall, FCOT has another 24.3% of gross rental income to be renewed for the remainder of FY18, with another 19.4% expiring in FY19.

"We anticipate continued income pressure at ATP in the near term as 173,710 sf of HP Singapore’s lease is expected to expire between 2Q and 4QFY18," says lead analyst Lock Mun Yee.

Meanwhile, a $45 million asset enhancement initiative is underway to rejuvenate ATP and should enhance the rental competitiveness of this property when completed.

CSC is also undergoing a $38 million enhancement programme to reposition the retail podium to focus on F&B, wellness and services. Retail NLA is expected to be increased to 75,000 sf when completed. WeWork has committed to take up 28,700 sf of office space at CSC, in phases starting from 2H18.

FCOT has also expanded its investment mandate to Europe and has a right of first refusal of over $4 billion of its sponsor’s assets for future acquisition. As a start, FCOT has acquired a 50% stake in Farnborough Business Park in the UK, for £87.5 million ($161.5 million).

As at 1Q18, FCOT’s gearing stands at 34.8% with average debt maturity of 2.3 years. About 81% of its gross borrowings are on fixed rates. Assuming the UK acquisition is funded totally by debt, gearing could rise to 39.2%.

As at 4.27pm, units in FCOT are down 1 cent at $1.51.