My Personal Analysis Of Frasers Commercial Trust

Frasers Commercial Trust (“FCOT”) currently makes up 2% of my stock portfolio. I cannot remember how long I have held this REIT but I have bought it in my early days of investing. I have been hesitating to increase my holdings of FCOT because China Square Central and Alexandra Technopark are both undergoing Asset Enhancement Initiative (“AEI”). Another reason was Hewlett Packard vacating Alexandra Technopark, which has a pretty big impact on its rental income since HP used to be one of its top ten tenants. With AEI at Alexandra Technopark completing in 2H2018 and China Square Central in 2H2019, it is probably time for me to take a look at the current performance of Frasers Commercial Trust (“FCOT”).

Portfolio

Frasers Commercial Trust primarily office/business space/business park properties in Singapore, Australia and the UK. China Square Central and Alexandra Technopark makes up the two largest percentage of Frasers Commercial Trust’s portfolio in terms of asset value. Frasers Commercial Trust has divested 55 Market Street in July 2018. Now you can see why I refrain from increasing my holdings in Frasers Commercial Trust over the past few months because two of its major assets are under going AEI.

Distribution (“DPU”) History

I must applaud Frasers Commercial Trust as you can see below, it is able to grow its Distribution Per Unit (“DPU”) over the years. I am expecting DPU in FY18 to be impacted due to HP vacating Alexandra Technopark and its AEI works at China Square.

Frasers Commercial Trust has managed to pay out 2.40 cents for 1QFY18, 2QFY18 and 3QFY18 respectively. If they payout 2.40 cents for 4QFY18, this will amount to a total of 9.6 cents in FY18 versus 9.82 cents in FY17 which is a merely 2.24% drop in annual DPU.

Current Dividend Yield

At the current share price of 1.41 and a historical dividend yield of 9.82 cents, this translate to a current dividend yield of 6.96%.

Worst case, if Frasers Commercial Trust FY18 total distribution per unit fall to 9.60 cents as per what I guessed, the dividend yield will be 6.80%.

Debt

The gearing ratio as at 30 June 2018 is 35.4% with a well-spread debt maturity profile. Frasers Commercial Trust had refinanced A$135 million debt due in FY18 to FY22. 100 % of its assets are unencumbered.

Top 10 Tenants

With HP gone, investors like me may be interested who are the top ten tenants so that we know the risks involved in investing in Frasers Commercial Trust. As you can see below, Commonwealth of Australia become its top tenant, contributing 15.9% in terms of gross rental income. The lease expires in 2025 which is still 7 years from now. I consider this manageable.

The second largest tenant is Rio Tinto Limited which is in the mining/resources industry with lease expiry till 2030. Mining/resources industry seems like a risky business and thus I have done a quick look at Rio Tinto Limited because if the company goes busted, this affects Frasers Commercial Trust as well. I have found Rio Tinto Limited to be an established mining company which have a long history all the way back to 1873. This has assured me that this is a stable tenant with a low probability of defaulting on its rental.

Summary

At the current share price of S$1.41 and my forecast of the distribution per unit of 9.60 cents, the yield is 6.80% which is deemed attractive to me. The completion of Asset Enhancement Initiative works at Alexandra Technopark acts as near term catalyst for this REIT. In the longer term, we have to wait for the completion of construction works at China Square Central in 2H2019 before rental contribution comes back from China Square Central which can be the catalyst to drive the future DPU higher.

While we wait, the Australian and UK assets have provided some form of income stability due to their long lease expiry.

As such, I shall be nibbling at Frasers Commercial Trust over the next few months slowly should the price is right (S$1.41 or below) while waiting for the catalysts to actualize.