Is Frasers Commercial Trust A Good Investment Now?
Frasers Commercial Trust (FCOT) (SGX: ND8U) is a REIT that focuses primarily on commercial properties in Singapore and Australia. The REIT has a market capitalisation of S$1.14 billion. It is a REIT currently trading below its book value. Does this mean it is a great stock to buy now? We analysed the REIT for you.
With that, here are 7 things you need to know about Frasers Commercial Trust.
Stock Information
TICKER SYMBOL: SGX: ND8U
MARKET CAP: S$1.14 Billion
INDUSTRY: Real Estate Investment Trust
The Business
Frasers Commercial Trust is a REIT that focuses primarily on commercial properties which are located at the city fringe. Let’s look at its property profile to get a better understanding.
Property profile
The diagram below shows the six properties owned by Frasers Commercial Trust. Three of which are in Singapore and three in Australia. The top row shows images of its Singapore properties while the bottom shows those located in Australia.
Source: Frasers Commercial Trust 2Q FY17 earnings presentation
The diagram above sheds some light on FCOT’s Singapore properties which have an occupancy of 83%-93%. The properties also have a weighted average lease expiries (WALE) of 1.3 years each. WALE is a sign of stability for REITs as it provides investors with assurance that the properties will be leased in the future. However, for commercial REITs leases are usually signed with a 3-year lease. Which means every 3 years the REIT manager must ensure it can retain its tenants or must look for new ones.
One other interesting point is that FCOT’s properties are classified as Grade B commercial properties. This means that it doesn’t compete with the likes of Capital Commercial Trust or Keppel REIT both of which have mostly Grade A offices. By focusing on a slightly different segment within commercial properties FCOT is positioning itself differently here in Singapore.
Over in Australia, occupancy for the properties stood at between 85% -100%. The WALE is also much longer for all 3 properties. This is typical in Australia as commercial leases tend to be longer term in nature. The lease agreements in Australia also have built in rental escalations which provide both stability and growth for the REIT over the next couple of years.
A table below shows the top 10 tenants of Frasers Commercial Trust and when their lease expires.
Source: Frasers Commercial Trust 2Q FY17 earnings presentation
From the table, it should be noticed that the majority of the REIT’s rental income stream is concentrated to its top 10 tenants which account for 60.9% of its rental income. While this is a risk it can also be positive, in this case, its lease for the property in Australia extends until 2025 which gives the REIT some stability.
One other observation that can be made from the table is that the REIT has a very well diversified lease profile with neither Singapore or Australia contributing more revenue or profit.
In the recently ended quarter, FCOT reported a 2% increase in distribution to 2.51 cents. This followed a 3% increase in revenue and distributable income.
Key Opportunities
Built in rental escalations
Source: Frasers Commercial Trust 2Q FY17 earnings presentation
FCOT has built in rental escalations in its leases for 100% of its leases for 2 properties in Australia and 70% for another. This provides FCOT with an avenue for consistent growth over the lease periods for these properties. For its Singapore properties, FCOT also have built-in escalations but to a lower extent ranging from 10% to 37% of its leases.
Overall, in my opinion having built-in escalations provides the REIT a lot of stability to ensure that rental rates increase at least on par with inflation. It also provides the REIT with better cash flow which would allow it to make more stable distributions.
Grade B commercial is more resilient
FCOT’s properties are most grade B properties which tend to target a different customer base compared to grade A properties. This means that it isn’t competing with the likes of the luxury office market owners. Also, rental rates at grade B properties tend to be slightly more resilient.
Source: Frasers Commercial Trust 2Q FY17 earnings presentation
As seen from the diagram above, rental rates for Grade A offices come down 21% from its peak, comparatively Grade B offices only saw a 14% drop in rental rates. This is an important point difference in my opinion as one type of property offers more stability compared to another although they are both commercial properties.
Key Risks
Concentration Risk
In one of the tables above, I mentioned that FCOT gets over 60% of its revenue from its top 10 tenants. This is a risk if the REIT loses a significant client – such as the Commonwealth of Australia – its rental income will see a significant impact.
The same holds true for its other leases as well, one good example is its tenant at Alexandra Technopark; HP and HP Enterprise. The leases for these 2 companies end in September and November 2017. And in my opinion, there is a high probability they will not renew their leases. This is because they got a new premise on Depot Road. However, there are speculations that HP and HP Enterprise might want to expand their operations which mean they could also retain their current location in Alexandra Techno Park as they expand to Depot Road.
Economic Slowdown
While I mentioned that grade B property rental tend to be more resilient, they do drop if the economy is not doing well. This is a risk that FCOT faces, as seen from above, rents have dropped by 14% over the last 2 years. And this basically means, that if any of the leases are renewed with existing tenants or there are new tenants, the rental rate FCOT gets for its spaces will be lower.
In the longer term, this key risk should take care of itself if the property is well located and managed as demand for commercial space usually picks up when the economy grows. And well-maintained properties are the first-place companies look to lease.
Valuation
FCOT currently trades at a Price to book (P/B) ratio of 0.9 and spots a 6.3 %distribution yield for its investors. Both metrics are slightly higher to its five-year average of 0.8 P/B ratio and 6.7% distribution yield. One of the main peers of Frasers Commercial Trust is CapitaLand Commercial Trust (CCT) (SGX:C61U).
Investor Relations
Investor Relation Material:
Ms Wang Mei Ling
Frasers Centrepoint Asset Management (Commercial) Ltd
Tel: +65 6276 4882
Email: fcot@fraserscentrepoint.com
Mailing address:
438 Alexandra Road #02-00 Alexandra Point
Singapore 119958
Top Shareholders (31st September 2016)
- Citibank Nominees Singapore Pte Ltd 16.9%
- FCL Trust Holdings (Commercial) Pte Ltd 15.6%
- DBS Nominees (Private) Limited 14.6%
Financials
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The information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in Ketz’s personal capacity. It does not in any way represent those of his employer and other related entities. Ketz does not own any companies mentioned.
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