Frasers Commercial Trust’s Latest Earnings: Solid Jump In Distributions Seen, But Can It Continue?

Frasers Commercial Trust (SGX: ND8U) announced its fiscal second-quarter results yesterday evening.

As a brief introduction, the real estate investment trust is currently an owner of three commercial properties in Singapore and two in Australia. These properties have a collective value of S$1.787 billion as at 31 March 2015.

With that, let’s dig into the trust’s latest set of numbers.

Financial highlights

For the fiscal second-quarter (three months ended 31 March 2015), unitholders have much to cheer about.

The trust ended the quarter with a 21.7% year over year increase in revenue to S$34.8 million. Alexandra Technopark has provided a big boost to the REIT’s top-line following the expiry of its master lease agreement on 25 August 2014; Frasers Commercial Trust can now directly recognise the revenue coming from the individual tenants in the property going forward.

But while the REIT does get to enjoy higher revenue, the management of more individual leases has also led to higher property expenses, in turn resulting in a smaller – though still very respectable – 14% jump in net property income for the quarter to S$24.7 million.

What matters at the end of the day for unitholders of the REIT though, is the growth in distributions per unit. On that front, Frasers Commercial Trust did not disappoint.

The REIT’s distribution to unitholders for the fiscal second-quarter improved 17.4% year over year to S$16.19 million. This led the distribution per unit (DPU) from the REIT to jump by an impressive 16.1% to 2.38 Singapore cents (from 2.05 cents seen a year ago).

Investors might want to note that the REIT has seen some broad-based improvement in its financial health when compared to a year ago.

Frasers Commercial Trust's balance sheet figures (31 March 2015)

Source: Frasers Commercial Trust’s earnings releases

As you can see in the table above, Frasers Commercial Trust has managed to reduce its borrowings and gearing ratio, and strengthened its interest coverage ratio. That said, the REIT’s borrowing costs have risen a little from 2.7% to 2.9%.

It’s also worth noting that the REIT does not have any debt coming due in FY15 (financial year ending 30 September 2015) and FY16.

Frasers Commercial Trust ended its fiscal second-quarter with a net asset value per unit of S$1.55, unchanged from a year ago.

Business highlights and future outlook

Looking at Frasers Commercial Trust’s portfolio, the trust has 68% of its asset value in Singapore with the rest in Australia. The largest property by asset value is China Square Central, which is about 32% of the REIT’s total asset value.

All of the trust’s Singapore properties saw an improvement in their net property income. However, both the Australian properties were hit by a weaker Australia dollar and thus recorded lower income.

The REIT ended the quarter with an occupancy rate of 96.5%, down from 97.5% a year ago.

It’s interesting to note that Frasers Commerical Trust reported in the earnings release that 34% of its leases have built-in step-up rents; this can help the REIT grow its gross revenue over time. Unfortunately, the 34% figure is a decrease from a year ago when 41% of the REIT’s leases had built-in rental escalations.

As for the future outlook, Frasers Commercial Trust pointed out that the demand for office space in Singapore’s central business district might still be healthy due to a limited pipeline of new supply over the next 12 months. However, the trust only expects rental growth in that area to be modest, maybe even flat. In Singapore’s business park market, the REIT thinks that vacancy rates may continue to head downwards.

The picture in Australia is a little gloomier with headwinds coming from a slowdown in growth in the Australian economy. Besides that, the REIT also cited research from Colliers International, stating that “the vacancy rate [in Premium office space is expected] to continue rising over the next 12 months, with ongoing downward pressure on net face rents and upward movement in incentives.”

Foolish Summary

Frasers Commercial Trust has managed to bump up its DPU for unitholders in the latest quarter.

But, the trust has also started to voice its concerns about the rental market in the near future for the countries it’s in. Investors should be cognizant of this risk before investing.

Frasers Commercial Trust is currently trading at S$1.53 per unit. At that price, the REIT has a price-to-book ratio of a shade below 1 (based on its latest net asset value per unit of S$1.55) and a distribution yield of 6% (based on its trailing DPU of 9.25 cents).

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim doesn’t own shares in any companies mentioned.