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Mixed Quarter For Frasers Commercial Trust

frasers commercial trust Frasers Commercial Trust (SGX: ND8U) announced its full year earnings for financial year 2014 yesterday evening and delivered a mixed bag of results.

The basic numbers

For the 12 months ended 30 Sep 2013, the real estate investment trust saw an 11% year-on-year decline in gross revenue to S$118m. This led to an 11% fall in net property income to S$91m.

On the other hand, distributable income to ordinary unitholders had jumped 19% to S$51.4m while distributions per unit (DPU) increased 17% to 7.83 Singapore cents.

FCT’s property portfolio consists of five commercial buildings located in Singapore and Australia as shown below:

Property Valuation Location
China Square Central S$573m Singapore
55 Market Street S$133m Singapore
Alexandra Technopark S$465m Singapore
Central Park S$408m Australia
Caroline Chisholm Centre S$232m Australia
Total Value as of 30 Sep 2013 S$1.81b S$1.81b

The REIT’s gross revenue had fell on the back of a weaker Australian dollar and the loss of rental income from properties it had sold, despite seeing higher rents from Caroline Chisholm Centre after becoming a 100% owner of the property back in Apr 2012.

Property operating expenses, consisting of items such as property taxes, utility bills, and management fees among others, had declined roughly in-line with gross revenue. That accounted for the drop in net property income.

Distributable income had risen mainly due to two factors. The first was the redemption and conversion of 330.3m convertible perpetual preferred units. FCT has the obligation to hand over its distributable income to the owners of the preferred units before owners of the ordinary units can have their slice of the pie.

With 330.3m preferred units retired, owners of the ordinary units now have a larger chunk of distributable income to themselves.

The next factor concerns a 51% decline in interest expenses from S$44.3m to S$21.7m.

So, while the current increase in DPU is great for unitholders, it wasn’t achieved through an improvement in rents or portfolio growth. Sustained growth in distributions can only be achieved if gross revenue and net property income are growing – that’s something investors should keep an eye on.

Operational highlights and the balance sheet

FCT had achieved a high average occupancy rate of 97.9% in its properties. There were positive rental reversions – the adjustment of rents to market conditions either on the expiry of leases or at predetermined dates – in four of its properties for the financial year as shown below:

Property Rental Reversion
China Square Central 7.4%
55 Market Street 11%
Alexandra Technopark 18.7%
Central Park 26.1%

It’s always important for REIT investors to keep an eye on the balance sheet as they are generally highly-leveraged entities. On that front, there were mixed signals coming from FCT’s balance sheet changes compared to a year ago.

The positive signals include a decrease in gross borrowings from S$860m to S$701m, an improvement in interest cover from 3.3 times to 4.5 times, and a lower average cost of debt (i.e. interest rates) from 3.5% to 2.7%.

The sole blemish was a slight uptick in gearing from 36.8% to 37.7%.

The debt-maturity profile for the REIT also looks evenly-spaced out as shown below. Without a large concentration of debt to be repaid in any one year, this lessens refinancing-risks for investors.

Debt Amount Maturity Date
S$128m Financial Year 2014
S$388m Financial Year 2015
S$185m Financial Year 2017 and beyond

What’s next for Frasers Commercial Trust

In Singapore, the REIT has been seeing stabilised Grade A and Grade B office rents that are “poised to grow.” In particular, demand for office spaces “is expected to remain steady across active sectors including professional services, energy and commodities, insurance, and IT.”

In Australia, the situation is similar, with FCT citing Colliers International’s forecast for stable rents in the country’s central business districts.

Valuation

The market seems to like where FCT is going with this full-year earnings release. Its units have gone up 0.8% to S$1.29 at the time of writing (10:45am, 24 Oct 2013) compared to the Straits Times Index’s (SGX: ^STI) relatively flat returns of 0.03% to 3,206 points.

At that price, FCT is valued at 0.8 times book value and carries a distribution yield of 6% based on its recently declared full-year pay-out.

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