I written about office real estate investment trust (REIT) Frasers Commercial Trust (FCOT) in the past and invested in it.
It is a good REIT with a management with good current track record.
The uncertainty surrounding it is that HP in the past commission Mapletree Industrial Trust to do a built to suit building before HP split into HP Enterprise and HP Singapore. There is uncertainty whether the 2 entities will move away from Alexandra Technopark.
Together, they form 17% of FCOT’s gross rental income.
This will impact FCOT this year and next year’s result.
In my article on tackling the uncertainties surrounding your REIT systematically, we address the potential impact of a few uncertainties surrounding FCOT, including this big one.
On 22nd Sep 2017, Frasers Commercial Announced that HP Enterprise will not be renewing the lease for Alexandra Technopark.
They are still in discussion with HP Singapore for their plans in Alexandra Technopark.
At the same time, the manager have secured commitment by a tenant for 13.4% of the space HP Enterprise will be vacating.
Personally, I wonder if the fault lies with HP for dilly dally and not able to decide if they want to stay or go. Usually, the manager would have carried out proactive inquiry whether the tenant would like to renew. I am sure FCOT did.
To only announce this near the date of expiry creates a problem for the landlord as they have a large vacant space to re-leased in the market.
However, I note that FCOT might have gotten wind that they will be vacating but refuse to say it out. As investors we just have to read between the lines.
In their most recent Q3 result, they again reiterated that HP is a major tenant responsible for 17% of gross rental, and that FCOT is engaged in proactive lease renewal.
The more they repeat it, the more its an open secret that they will be moving out.
We can take a look at the potential impact, based on the vacancy and what the management try to do, and the potential result. (this graphic was taken from my previous FCOT analysis)
How much of the vacancy can be re-leased?
The question on my mind have moved on from how much will be vacant to whether they will be able to re-leased to new tenant.
In subsequent articles on notes from the annual general meeting, FCOT have updated on asset enhancements to Alexandra Technopark. which should improve the appeal of the work place.
Based on the amount of cash and the lack of financial engineering in recent times, FCOT have the financial muscle to maintain 1 year of DPU at the same rate.
However, it is still challenging to find tenants for nearly 500,000 sq ft.
This will be the true test for FCOT’s management again.
The saving grace is that the signalling from Capitaland Commercial Trust‘s purchase of Asia Square Tower 2 seems to validate that the office market is improving.