Acquisitions pipeline: Sponsor + third party. While there is still a dislocation between the capital and physical markets (stock trading at 7.3% yield versus cap rates of 5-6%), management reaffirms that the acquisition pipeline of four malls from its sponsor, FNN, is still intact. Of these, Northpoint 2 and YewTee Point are ready for acquisition. They total 157,500 sq ft NLA and could cost about S$300 mn (or about S$1,900/sq ft). These will add 28% to FCT’s current asset size of S$1.063 bn and 25% to its current NLA of 639,500 sq ft. Bedok Mall is still under construction while management expects The Centrepoint (392,100 sq ft NLA), while physically ready, to face stiff competition with new malls along prime Orchard Road. FCT is also open to third party acquisitions. Acquisitions would likely be accompanied with fund raising to keep gearing at an optimal 35-40% level.

Credit markets improving. FCT’s next refinancing need will be the S$260 mn CMBS in July 2011. Investors are now concerned about the seemingly large quantum of debt expiring in 2011. Management believes this quantum is not abnormally large, especially as major REITs have also paid down some debt from equity funding, and should be easily absorbed by capital markets as they normalise. Credit and debt capital markets have improved, with credit spreads having fallen by 80-100 bp from 300-375 bp in early 2009 when major REITs rushed to refinance. Management expects the refinancing overhang to be removed and REITs should re-rate based on defensible NAVs.

Low liquidity, write-downs? Concerns about stock’s low liquidity and free float should improve as the REIT grows bigger and as sponsor FNN’s stake gets diluted with asset injections. Based on September 2008 book valuations and year-to-June 2009 NPI, these properties are trading at relatively high 5.9-6.8% yields, indicating low risk of write-downs.

Management believes improving credit and debt capital markets should help re-rate the REIT sector. Stock’s low liquidity and free float should improve with acquisition growth and as FNN’s 51% stake gets diluted. FCT has low risk of asset write-downs given relatively high 6% yields on book valuations. Trading at an attractive 7.3% yield. Maintain our DDM-based target price of S$1.18 (6.5% yield).