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Frasers Commercial Trust’s Latest Earnings: Up, Up and Away!

Frasers Commercial Trust (SGX: ND8U) released its fiscal third-quarter earnings (for the quarter ended 30 June 2015) yesterday evening and had delivered a strong set of results.

Before I dig into the numbers, here’s a brief introduction of the real estate investment trust for some context later on. Frasers Commercial Trust is in the business of owning “quality income-producing commercial properties.” It has five commercial buildings in its portfolio (located in Singapore and Australia) that have a collective value of around S$1.8 billion as of 30 June 2015.

With that, let’s dive into Frasers Commercial Trust’s latest earnings release.

Financial highlights

Frasers Commercial Trust saw a 17% year over year increase in its gross revenue for the quarter to S$34.7 million. Improved contributions from the REIT’s Singapore properties – in particular Alexandra Technopark, which ended its master lease agreement in August 2014 – had helped drive growth in the REIT’s top-line.

The improvement in revenue translated to a 6% growth in net property income (NPI) from S$22.9 million a year ago to S$24.3 milllion. Again, the most significant contributor to the increase is Alexandra Technopark.

Results from Frasers Commercial Trust’s properties in Australia had suffered due to the weakening of the Australian dollar against the Singapore dollar. This acted as a drag on Frasers Commercial Trust’s net property income.

On the bottom-line, Frasers Commercial Trust managed to deliver the goods with a 7.3% year over year increase in distributions per unit (DPU) from 2.19 Singapore cents to 2.35 cents. The REIT’s growth in DPU for the first nine months of its fiscal year ending 30 September 2015 (FY2015) is even more impressive at 14.3% year over year.

Frasers Commercial Trust's balance sheet details (21 July 2015)

Source: Frasers Commercial Trust’s earnings presentation

On the balance sheet front, the picture’s a little complicated. As you can observe from the table above, Frasers Commercial Trust’s financial health has both progressed as well as regressed in certain aspects over the past year.

The REIT’s gearing and level of borrowings have both declined and it has also managed to hedge more of its loans; these are good to see. But, the REIT had done so with more expensive debt (note the higher average borrowing rate) and also reduced its room for error with the lower interest coverage ratio.

Investors might want to note that Frasers Commercial Trust does not have any refinancing to do until FY2017 when S$180 million in loans come due.

Frasers Commercial Trust ended the fiscal third-quarter with a net asset value per unit of S$1.54, down slightly from S$1.56 a year ago.

Operational highlights and a future outlook

The REIT ended its fiscal third-quarter with a “healthy average occupancy rate of 95.1%” but, that’s lower than the occupancy rate of 98% that was enjoyed a year ago. The weighted average lease to expiry (WALE) for Frasers Commercial Trust’s portfolio is now at 3.4 years.

As I had discussed before, Frasers Commercial Trust has a few projects in its pipeline. Its deal to sell a long term lease to its sponsor build a hotel in China Square Central is ongoing. Similarly, the acquisition of 357 Collins Street, a commercial property in Australia, is also pending approval. There will be an extra general meeting held soon on 22 July 2015 for unitholders to vote on both deals.

There’s an important issue with regard to the Australian acquisition that bears watching by investors: Frasers Commercial Trust has yet to confirm the financing structure that will be used. The ratio of equity financing to debt financing (Frasers Centrepoint has already indicated that it’s considering a private placement to finance the acquisition) would have a noticeable impact on the future growth of the REIT’s DPU.

A higher proportion of equity financing in relation to debt financing (in other words, more new units being issued) may result in the REIT’s existing unitholders not being able to enjoy any growth in DPU arising from the acquisition of 357 Collins Street. But, the use of more borrowings may harm the REIT’s balance sheet. There’s a trade-off to be considered for the REIT’s Manager.

Foolish Summary   

All told, Frasers Commercial Trust’s latest results have been impressive. But, the growth in the REIT’s DPU is slowing down as compared to the first two quarters of FY2015. It would be interesting to see how the two pending deals will affect the trust in the coming years.

Investors might want to watch how the deals develop; for existing unitholders, the most important thing is still for Frasers Commercial Trust to grow its DPU sustainably over the long-term.

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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 does not own shares in the company mentioned above.