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Frasers Commercial Trust Long Term Play in Office Rental

Frasers Commercial Trust Logo

While most REITs are announcing their 4Q2016 or FY2016 financial results, Frasers Commercial Trust is actually announcing their 1Q2017 financial results.

Net Property Income fell by estimated 1% due to lower occupancy for China Square Central and Central Park. We understand that China Square Central has started the development of a 16 storey hotel and the construction works will definitely affect occupancy at China Square Central. The income disruption is supplemented by S$0.9 million capital distribution. Development work is expected to be completed by mid-2019.

There are certainly many construction works going on for Frasers Commercial Trust with hotel development works at China Square Central and Alexandra Technopark performing asset enhancement works soon.

1Q2017
(S$’000)
1Q2016
(S$’000)
Change
Gross Revenue 39,679 39,623
Net Property Income 29,212 29,378 (1%)
Distributable Income 19,939 19,702 1%
Distribution Per Unit (“DPU”) (cents) 2.51 2.51

 

4Q2016
(S$’000)
4Q2015
(S$’000)
Change
Gross Revenue 39,330 37,220 6%
Net Property Income 29,289 27,387 7%
Distributable Income 19,485 18,822 4%
Distribution Per Unit (“DPU”) (cents) 2.45 2.52 (3%)

Despite the challenging environment, Frasers Commercial Trust still manages to achieve an increase in Distribution Per Unit (“DPU”) in Fy2016.

2016
(S$’000)
2015
(S$’000)
Change
Gross Revenue 156,497 142,187 10%
Net Property Income 115,614 101,868 13%
Distributable Income 77,607 67,805 14%
Annualized Distribution Per Unit (“DPU”) (cents) 9.82 9.71 1%

Dividend Yield

At a closing price of S$1.26 and an annualized DPU of 9.82 cents, this translates to a dividend yield of 7.79%.

Investment Risks

1. Lease Expiry for Hewlett-Packard

Hewlett-Packard Enterprise Singapore Pte Ltd is the key tenant at Alexandra Technopark. The lease expires in two phases, September 2017 and November 2017 which makes up 6.8% of Frasers Commercial Trust portfolio gross rental income.

Hewlett-Packard Singapore Pte Ltd makes up 10.7% of Frasers Commercial Trust portfolio gross rental income. There is currently no news of lease renewal but there is high chance they may move to their new facilities at Depot Road.

Distribution Per Unit (“DPU”) may fall in 1QFY2018 should Frasers Commercial Trust fail to find a replacement tenant.

2. Disruption at China Square Central

Lower occupancy is expect at China Square Central due to the hotel development works. Development work is expected to be completed by mid-2019.

Catalysts

1. Asset Enhancement Initiative at Alexandra Technopark

Alexandra Technopark is undergoing asset enhancement initiative. The works are expected to commence in mid-2017 and be completed around mid-2018. With better facilities, this will definitely attract more quality tenants.

2. Renewal of lease by Microsoft at Alexandra Technopark

Microsoft has renewed its lease at Alexandra Technopark till FY2022. Currently, this makes up 2.8% of Frasers Commercial Trust portfolio gross rental income. The lease renewal should ensure some form of gross income stability.

Summary

In the short term, we should be expecting the share price to remain depressed as there is a possibility distribution per unit may fall or remain stagnant over the next few quarters. I am keep a watch on HP lease renewal which may give Frasers Commercial Trust a boost.

For investors looking for a long term play, distribution per unit should increase or improve after mid of 2018 (Alexandra AEI) and further improve after mid of 2019 (completion of hotel at China Square Central).

From the above 1 year chart, the stock price should have some sort of support at S$1.24. A good entry for long term play shall be between S$1.20 to S$1.25. If stock price falls below S$1.20, it is definitely a good buy.

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