• No financials provided in this business update. Retail portfolio occupancy increased 1.6ppts YoY to 98.7% (1H23: 99.2%).
• Tenant sales and shopper traffic improved 5% and 16% YoY respectively. YTD tenant sales averaged c.16% above pre-COVID levels.
• Maintain ACCUMULATE, DDM TP unchanged at S$2.35. Catalysts include stronger than forecast rental reversions and accretive acquisitions. The current share price implies a FY23e DPU yield of 5.6%.

The Positives

+ Retail portfolio occupancy remained high at 98.7% (+1.6ppts YoY; -0.5ppts QoQ). The lower occupancy QoQ was largely due to a 6.4ppt drop in occupancy at Changi City Point from 99% to 92.6%. This was mainly transitionary vacancies as FCT looks to reposition the mall by bringing in popular brands such as Coach. Excluding Tampines 1 which is undergoing AEI, occupancy at the eight malls came in at 92.6% or higher, with six malls having an occupancy of 98.6% or higher. The recently acquired NEX, in which FCT holds a 25.5% stake, has a committed occupancy of 100%. Only 4.2% of leases by GRI are up for renewal for the rest of this financial year.

+ Tenant sales and shopper traffic continued to grow 5% and 16% YoY respectively in 3Q23 indicating robust demand. YTD tenants’ sales averaged c.16% above pre-COVID levels. Trade sectors that performed well were F&B, fashion and accessories, electronics, and beauty. Essential trades like supermarkets and healthcare are still performing well above pre-COVID levels but are growing at a slower pace from the higher base in 2022.

The Negative

– Gearing increased from 39.6% to 40.2%, and the proportion of fixed interest rate borrowings decreased from 76.4% as at 1H23 to 63.0%. The YTD all-in cost of debt increased 10bps QoQ to 3.7% after refinancing all loans due in FY23. FCT has collaborated with OCBC on its green loan offering with carbon credits and the proceeds from this loan will be used to refinance debt that is expiring in FY24. Green loans account for c.49.8% of total borrowings (Mar23: 37.9%).

Outlook

Improving tenant sales should lower occupancy costs further (currently below 16% and 5-year lows), and this should support FCT’s ability to raise rents. Inorganic growth opportunities include the acquisition of the sponsor’s pipeline of assets such as the 24.5% effective interest in NEX and Northpoint City South Wing.

AEI works have commenced at Tampines 1 in 2Q23 and is on schedule for completion in 3Q24. The mall continues to operate as works are staged and more than 90% of AEI spaces have been pre-committed to date.

Maintain ACCUMULATE, DDM TP unchanged at S$2.35

Catalysts include stronger than forecast reversions and accretive acquisitions. Risks include a slowdown in retail sales. The current share price implies a FY23e DPU yield of 5.6%.

Source: Phillip Capital Research - 27 Jul 2023