Listed in March 2006, Frasers Commercial Trust (FCOT) owns a portfolio of office buildings and business park properties located in Singapore, Australia, and the UK. As at 30 September 2018, FCOT has six properties in its portfolio with a total appraised value of S$2.1 billion.
In this article, I’ll revisit its fundamentals, give an update on its latest financial results, and discuss its plans for growth in the future. I’ll also assess its current valuation with a handful of valuation metrics. Here are 13 things to know about Frasers Commercial Trust before you invest.
1. Gross revenue at China Square Central fell 11.2% year-on-year to S$23.3 million. This is due to a fall in occupancy rate to 79.8% from 94.4% a year ago due to renovation works for its retail podium in Q1 2018. The project is estimated to cost S$38 million and will increase lettable area by 22% to 78,000 square feet upon completion in 2H 2019.
2. Gross revenue at Alexandra Technopark fell 25.3% year-on-year to S$38.7 million. This is due to non-renewal of leases by Hewlett Packard since September 2017. In 2018, the property underwent a major asset enhancement initiative (AEI) to transform it into a modern business campus with wellness and lifestyle amenities. In total, the AEI cost S$45 million and was completed in June 2018.
3. FCOT completed the disposal of 55 Market Street for S$216.8 million in August 2018. The sale price is S$144.3 million higher than its original purchase price of S$72.5 million in 2016, and S$77.8 million above its net book value of S$139.0 million as at 30 September 2017. From this transaction, FCOT net S$75.7 million in disposal gains which it used to pay off a portion of its existing debt. The higher debt headroom now allows FCOT greater financial flexibility to pursue potential AEIs and future acquisitions when they arise in the future. Prior to its disposal, 55MS had contributed S$5-6 million in gross revenue annually.
4. Gross revenue at Central Park, Perth fell by 16.1% year-on-year to S$23.4 million. This is due to a prolonged decline in occupancy rates since 2013. Fortunately, its major tenant, Rio Tinto, has signed a 12-year lease agreement starting from 2018 to 2030. Rio Tinto, a global mining conglomerate, is now FCOT’s second largest income contributor, contributing as much as 9% of gross rental income. The new long-term lease agreement adds income stability to FCOT but increases its tenant concentration risk.
5. Gross revenue at Caroline Chisholm Centre, Canberra fell 4.3% year-on-year to S$21.3 million. This was caused by the weakening of the Australian dollar against the Singapore dollar in FY2018. Presently, the property is leased to the Australian government for a lease term of 18 years expiring in July 2025. The Australian government is FCOT’s largest tenant, accounting for 16.4% of FCOT’s gross rental income.
6. Gross revenue at 357 Collins Street, Melbourne fell 3.0% year-to-year to S$21.8 million. Its decline was also caused by a slight drop in occupancy rate to 95% from 100% a year ago and a weaker Australian dollar.
7. In January 2018, FCOT completed the acquisition of a 50% stake in Farnborough Business Park, UK for S$161.5 million. It is a freehold business park property comprising nine office buildings, one office-industrial building, two cafes, and two car showrooms. The business park has a pool of 35 quality tenants and has a 98.1% occupancy rate as at 30 September 2018. In FY2018, Farnborough Business Park contributed S$4.96 million in net property income to FCOT. Moving ahead, the management expects the property to generate long-term stable income as 85.8% of its leases will only start to expire in FY2023 and beyond.
8. FCOT’s gross revenue dropped 14.8% year-on-year to S$133.31 million. This is due to a fall in revenues recorded by all its properties and the removal of 55 Market Street from the portfolio. Despite the drop in revenue, FCOT increased its distributable income by 5.2% to S$82.73 million. FCOT was able to do this due to capital returns, which were sourced from the sale of hotel development rights at China Square Central, and the return of capital from a Australian subsidiary and a UK joint venture.
9. Distribution per unit (DPU) fell marginally by 2.2% year-on-year to 9.60 cents. In the absence of the capital returns, however, FCOT would have recorded a much lower DPU if it solely relied on income derived from its properties in FY2018.
10. Gearing ratio as at 30 September 2018 has lowered to 28.3%, a reduction from 34.7% in FY2017. This is because FCOT reduced a portion of its debt using the gains from its disposal of 55 Market Street. FCOT has an average borrowing cost of 3.02% p.a., an interest coverage ratio of 4.2 times, and a weighted average term to maturity of 2.8 years. As at 30 September 2018, 81.2% of FCOT’s gross borrowings are based on fixed interest rates
11. Frasers Property Limited is the sponsor and the largest unitholder of FCOT (25.5% stake) as at 28 November 2018. A good acquisition would be a potential growth driver a REIT, and FCOT has the rights of first refusal to acquire commercial properties worth in excess of S$4 billion from Frasers Property. They include:
|Frasers Tower||1B Homebush Bay Drive||Winnersh Triangle|
|Alexandra Point||2 Southbank Boulevard||Chineham Park|
|51 Cuppage Road||1D Homebush Bay Drive||Watchmoor Park|
|Valley Point||Rhodes Corporate Park (Building F)||Farnborough Business Park (50% remaining stake)|
As at 4 January 2019, FCOT is trading at S$1.37 a unit.
12. Dividend yield: If FCOT maintains its DPU at 9.60 cents, its dividend yield is 7.01%. In comparison, office REITs like Mapletree Commercial Trust and CapitaLand Commercial Trust have current yields of 5.07% and 4.81% respectively. (To view the dividend yield of all S-REITs, you can check Singapore REIT data.)
13. P/B ratio: As at 30 September 2018, FCOT has net assets of S$1.61 an unit. Thus, its current P/B ratio is 0.85, which is near its five-year average of 0.88.
The fifth perspective
In short, FCOT remains a mixed-bag. Its strength lies in having a solid balance sheet with a low gearing ratio, a strong sponsor with $4 billion in ROFR properties, and long-term leases with key tenants.
However, it’s dragged down by a prolonged decline in occupancy rates at Central Park. Future performance is greatly dependent on FCOT’s ability to boost revenue and secure quality tenants at Alexandra Technopark and China Square Central (once its AEI is completed).
In terms of valuation, FCOT’s gross dividend yield and P/B ratio are close to their five-year averages; it is neither undervalued nor expensive at the moment.
Thanks for the analysis.