Frasers Commercial Trust

Kim Eng on 28 Mar 2012

Catalysts abound. Frasers Commercial Trust (FCOT) is an office REIT backed by a strong sponsor and offers income stability through long-term master lease agreements. In our view, the positive rental reversion for its two key assets, China Square Central (CSC) and Central Park (CP), and the unlocking of value through a sale or redevelopment of KeyPoint are positive catalysts for the REIT.


Positive rental reversion a boon. When the existing master lease agreement for CSC expires on 29 March 2012, FCOT will take over direct management of the property. CSC will likely experience an immediate lift to its net property income as the positive rental reversion kicks in – 53% of total gross rental income expiring in FY Sep12F with the average passing rent at $6 psf vs current market rent at $6.3-8.0 psf. The completion of the Telok Ayer MRT station next year should also boost CSC’s signing rents this year and next.


Potential asset sale to unlock value. FCOT has been granted an outline planning permission (OPP) for the redevelopment of KeyPoint, which could be rezoned from commercial to mixed commercial and residential use. In our view, FCOT could sell the asset and use the proceeds to purchase its sponsor’s pipeline of assets, redeem the convertible perpetual preferred units (5.5% coupon), and/or reduce its debt. We would prefer FCOT to refrain from redeveloping KeyPoint to preempt the risk of reducing the building’s attractiveness as an instrument for stable income. KeyPoint could possibly be sold for $1,200-1,300 psf, above its purchase price of $1,186 psf.


Trading at steep discount to book. FCOT trades at a steep 40% discount to its NAV and offers an attractive DPU yield of 7.7% based on consensus. It does not have any major debt refinancing risk until FY Sep13, when S$500m Singapore-denominated loan and S$120m JPY loan are due. Its gearing level is not excessively high at 36.8%. The average borrowing rate of 4% could be reduced upon the successful refinancing of its AUD loan next year.