Frasers Commercial Trust (SGX: ND8U) has been one of the most consistent real estate investment trusts (REITs) in terms of growing its distribution per unit (DPU).
The trust, which has a stake in six properties, has seen its DPU rise 71% in just eight years between FY2010 and FY2018. Impressively, it has managed to sustain or grow its DPU every year since then, except for FY2018 when its DPU fell 1% from the previous year. FY2018 was the only exception largely due to its largest property, Alexandra Technopark, undergoing asset enhancement works at the time.
However, I believe 2018 was an anomaly. And although I appreciate that the REIT is currently relying partially on capital distribution to bump up its DPU, I believe the longer-term future looks rosy.
Asset enhancement works bearing fruit
Although Alexandra Technopark contributed 16% lower year-on-year net property income in the quarter ended 30 June 2019, its fortunes look to be turning a corner.
Management highlighted that since January 2019, around 410,000 square feet of lease commitments have been secured, including 387,000 square feet of new leases.
In June, the REIT also secured tech giant, Google Asia Pacific, as a new tenant at Alexandra Technopark. Google will take up around 344,100 square feet of space, representing 33.3% of the current total net lettable area of the property for a term of five years, beginning in 2020.
With all the new lease commitments signed, committed occupancy rate at Alexandra Technopark increased from 68.6% on 31 December 2018 to 93.7% as of 30 June 2019.
Built-in rent escalations
Besides the likely uplift in rental income in Alexandra Technopark, the REIT is also well-placed for an organic increase in rental income in the other five of its properties. Around 47% of its current leases by gross rental income have annual rent escalations. The chart below shows the percentage of its portfolio’s gross rental income have rental escalations each year.
Source: Frasers Commercial Trust FY19 Q3 Earnings Results Presentation
The built-in rent escalations will provide the REIT with a visible source of organic rental income growth.
Financial flexibility for acquisitions
Frasers Commercial Trust is also in a great position to capitalise on market opportunities for growth. It has a gearing of 29.3%, one of the lowest among Singapore REITs and well below the 45% regulatory limit.
In addition, it has a fairly low average borrowing rate of 2.96%, with 90.2% of its borrowings on fixed rates. These two factors will enable the REIT to make debt-funded acquisitions to drive its DPU further in the future.
The Foolish bottom line
Despite the challenges Frasers Commercial Trust has faced in FY2018 and the first nine months of FY2019, the REIT looks to be turning the corner. Besides the organic growth drivers, Frasers Commercial Trust can also grow through strategic acquisitions.
At the time of writing, units of Frasers Commercial Trust trade at S$1.64 each, which translates to an annualised yield of 5.8% and a price-to-book ratio of 1.08.
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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 contributor Jeremy Chia doesn’t own shares in any companies mentioned.