SINGAPORE (Sept 3): Units in Frasers Centrepoint Trust (FCT) have already surged more than 26% so far this year. But market watchers remain bullish on the retail REIT as it stands on the cusp of a re-rating.

For the latest 3Q19 ended June, FCT saw its income available for distribution rise 12.4% to $31.8 million, even as net property income dipped 1.1% to $34.6 million on the back of higher property expenses.

The higher expense arose from the absence of property tax refund which occurred in the same period a year ago.

FCT’s bottomline during the quarter was boosted by an $8.3 million fair value gain on the acquisition of an associate, as well as a $5.5 million increase in share of associates’ results from operations.

Meanwhile, gross revenue increased 1.6% to $49.1 million on revenue improvements from Northpoint City North Wing and Changi City Point.

Portfolio occupancy also increased by 2.8 percentage points to 96.8% in 3Q19.

See: Frasers Centrepoint Trust 3Q19 DPU falls 1.7% to 3 cents

Moving ahead, FCT is slated for an inclusion into the much-followed EPRA/NAREIT Developed Asia Index following its fulfilment of all the criteria needed for its qualification.

“Of the 41 REITs listed in Singapore, only 14 are part of EPRA/NAREIT Index, indicating that FCT’s visibility on investors’ radars should improve substantially after the inclusion,” says CGS-CIMB Research’s lead analyst Eing Kar Mei in a report on Aug 29.

In addition, analysts say the REIT is well placed to deliver accretive yield returns on its new strategic acquisitions. In particular, FCT looks poised to benefit from its acquisition of a one-third stake in Waterway Point from its sponsor Frasers Property for $441 million.

FCT’s management had noted that the acquisition is expected to achieve greater income diversification for its portfolio and add another 200 tenants to its tenant base.

It also expressed interest to purchase the remaining 66% stake should the shareholders decide to sell.

To be sure, the acquisition does tick all the right boxes. Directly connected to Punggol MRT and LRT stations, the mall has a catchment population. Tenant sales and shopper traffic have grown 10% and 3.9% year-on-year, respectively.

See: FCT set to acquire one-third stake in DPU-accretive Waterway Point from sponsor, announces equity fundraising [Subscribers only]

Moving forward, this trend is expected to continue, albeit at a slower pace in the upcoming years.

But market watchers say this bodes well for positive rental reversions, which is forecast to be between 3-5% in the near future.

In addition, the substantial 74.8% stake acquired by FCT and Frasers Property in Real Estate Asia Retail Fund Limited (PREAFL) also fit perfectly into FCT’s positioning as a suburban mall-focused operator.

Experts note that quality malls under PREAFL are also hard to come by at reasonable prices, giving FCT an edge over its competitors.

Apart from new acquisitions, the stable performance from the existing malls under FCT’s belt should not be ignored.

Positive rental reversions can be expected from Causeway Point as the mall seeks to complete the underground pedestrian link by December, while stable performances are in sight for Yew Tee Point and Anchorpoint as the REIT balances occupancy rates with rental income.

FCT is also in a stable financial position, with sufficient headroom for debt.

The REIT has plans to issue 184 million new units through a private placement and non-renounceable preferential offering at issue prices of $2.27-$2.30, indicating a maximum proceed amount of $423 million, which will be used partly to pare down existing debts.

While recent acquisitions had raised FCT’s gearing from 23.5% to 32.6%, it still remains one of the lowest geared REITs in the sector, and experts predict debt headroom of $300 million for future acquisitions.

CGS-CIMB is maintaining its “add” call on FCT with a higher target price of $2.90, as the brokerage remains bullish on the REIT’s growth phase driven by both acquisitions and an index inclusion.

“We like both acquisitions as the acquired malls fit into FCT’s current portfolio and solidify FCT’s position as a pure play Singapore suburban mall focused operator. More importantly, the acquisitions provide FCT with a new growth trajectory while the fund-raising activity has qualified FCT for potential inclusion in the EPRA/NAREIT Index.,” says Eing.

And while RHB Group Research acknowledges that the REIT’s acquisitions are accretive and its earnings profile is stable, analyst Vijay Natarajan deems FCT’s valuations unattractive.

As such, the research house maintaining its “neutral” call on FCT, but is raising its target price by 30 cents to $2.55.

“The stock is trading at 1.2x P/BV (near +2SD levels), with a yield of 5.2%,” says Natarajan, who notes that key risks include fast-changing consumer trends, e-commerce growth and rising competition from new malls.

“We revise our FY19-21F DPU by 1-2% factoring in the recent acquisition and adjusting for debt costs,” he adds.

As at 2.42pm, units in Frasers Centrepoint Trust are trading 1 cent lower at $2.77.

According to CGS-CIMB valuations, this is about 23 times FY19F earnings with a dividend yield of 4.7%.