10 things I learned from the 2018 Frasers Commercial Trust AGM

Frasers Commercial Trust (FCOT) (SGX: N28U) is an office REIT that owns six properties located in Singapore and Australia. As of 30 September 2017, its portfolio was valued at S$2.1 billion.

In Dec 2017, FCOT entered a 50:50 joint venture with its sponsor, Frasers Centrepoint Limited (FCL) to purchase Farnborough Business Park for £174.6 million (approximately S$314.8 million). The property is a 46.5-hectare freehold business park comprising 14 commercial buildings with a total net lettable area of 555,000 square feet located west of London, UK. The acquisition is expected to be completed January 2018.

Since its IPO, FCOT had an investment mandate to invest in Asia Pacific. I attended FCOT’s AGM to understand its entry into Europe and to evaluate its performance over the past financial year.

Here are 10 things I learned from the 2018 Frasers Commercial Trust AGM.

1. Gross revenue remained flat at S$156.6 million but net property income (NPI) fell 1.6% to S$113.8 million. Wang Mei Ling, Senior Manager of Investor Relations, explained the slight drop was due to higher maintenance expenses at Caroline Chisolm Centre and lower occupancy rates at Central Park, Alexandra Technopark, and China Square Central.

2. Distributable income rose 1.3% to S$78.6 million but distribution per unit (DPU) remained flat at 9.82 cents. The stagnant DPU was due the increase in the number of units issued in FY2017. Assuming DPU remains flat for another year, FCOT’s current yield is 6.5% based on FCOT’s last traded share price as at 25 January 2018.

3. Gearing ratio as at 30 September 2017 is at 34.7% — comfortably below the 45% regulatory limit. CEO Jack Lam later shared that FCOT tries to keep its gearing below 40% to keep a buffer. Average cost of debt is 3.06%, and 81% of FCOT’s borrowings are at fixed interest rates.

4. Average committed occupancy rate for the portfolio as at 30 September 2017 is 85.9% and the weighted average lease expiry is 3.4 years. The occupancy rate was dragged down by FCOT’s Singapore assets which had a committed occupancy rate of 77.8%. This was mainly due to the ongoing renovations at China Square Central and the expiry of Hewlett-Packard’s leases at Alexandra Technopark. CEO Jack Lam revealed that they have since secured over 70,000 square feet in new leases at Alexandra Technopark and have a healthy number of ongoing enquiries from prospective tenants. He said FCOT will continue to market the property and do its best to normalize occupancy levels as soon as possible.

5. Alexandra Technopark is currently undergoing an S$45 million asset enhancement initiative (AEI) to create a more business park-like environment for tenants. The management aims to position the property as a niche between office business parks and light industrial space. The CEO said the business park amenities will help Alexandra Technopark differentiate itself from typical industrial buildings while offering a lower rent than business parks.

6. The CEO explained that FCOT expanded its investment mandate to Europe (with an initial focus on the UK) due to three factors. Firstly, growth in Singapore/Australia may be limited at times due to market cycles and the addition of a new market gives FCOT more opportunities for growth. Next, the entry into Europe improves FCOT’s strategic alignment with its sponsor FCL: Europe is FCL’s third largest market after Singapore and Australia. Lastly, FCOT’s right of first refusal acquisition pipeline from FCL has now increased to more than S$4 billion (twice FCOT’s current portfolio) with the inclusion of the sponsor’s UK business park assets.

7. The UK business park sector is expected to add more resilience to FCOT’s portfolio. Farnborough Business Park has a long weighted average lease expiry of 8.3 years and 84% of its leases only expire in FY2022 and beyond. It also enjoys a 98.1% occupancy rate and tenant retention rate of 89%. According to the CEO, its initial property yield is around 6.25%.

8. Farnborough Business Park is expected to be DPU-accretive for FCOT. The property will be funded through debt and S$98.5 million in private placement. Based on FY2017 figures, the acquisition will improve FCOT’s NPI and DPU by 8.7% and 1.6% respectively, while gearing will increase slightly by 1.1 percentage points to 35.8%.

9. A unitholder was concerned about FCOT’s entry into the UK due to Brexit and asked what the management’s views were on the issue. The CEO replied that the management had taken Brexit into long consideration and is optimistic that the UK will remain a resilient and stable market in the long term. They also view that the risks of a ‘hard Brexit’ have already been priced in. As for Farnborough Business Park, he highlighted that the property has very strong fundamentals – its WALE of 8.3 years is many years beyond Brexit. He added that while the move to the UK was a significant one for FCOT, it is not a big move in terms of financial impact as FCOT’s interest in the asset accounts for around 7% of its portfolio.

10. Another unitholder commented that the office rental market in Singapore seems to have picked up and wanted to know the management’s view of the sector. The CEO began by explaining that rental reversions alone are not a great indicator of market trends as the data can be skewed depending on the price of the previous lease and when it was signed, and there’s a limited sample size as only a portion of leases get renewed in a year. He agreed that the office rental market is seeing some improvement – especially Grade A offices – after a four-year downturn. However, the effect hasn’t yet run down to Grade B offices like 55 Market Street and China Square Central. He shared that the Grade B market usually lags Grade A in a market cycle, and views that the positive sentiment will eventually work its way down.

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Photo © Alan Hunt