It's been quite a while since I've last been to AGM which I think was for FCT last year during around the same time. The venue was the same at Alexandra Point which seemed very familiar to me by now. The AGM started at 10am in the morning, and I made my way slowly there taking mrt and walking breezily from the Labrador station.
This is one of the better AGM I have been to because the question and answer was honest, direct and related. There isn't quite any silly questions you would listen when you attend to the other AGM. I will be summarizing the whole AGM incident to those who are interested so here we go.
The first question was asked by none other than myself. I went through the report quite a bit on the past couple of days and there was no really burning questions but I still proceed to ask anyway.
Q: My first question was pertaining to the way they have presented the NPI vs NPI on a cash basis (AR page 26). As you can see the NPI on a cash basis for FY2014 was higher than FY2013 and I found out that this is due to the effects of accounting treatment where they recognized the income on a straight line basis so I went to ask what is it exactly since I find it pretty unique.
A: The CEO responded by saying that they have been reporting this way over the past few quarters as they want to track the NPI on a cashflow basis. What happened was the income was smoothed out by the rental upward revision by recognizing them on a straight line basis so rather than we have a lumpy NPI, this gets smooth out over the quarters.
Q: My next question was pertaining to the AU properties, which makes up 33% of the overall portfolio and subsequent questions from others later were also revolving the AU properties, so I shall just consolidate them at one go. The questions were pertaining to the future projection, cap rates, economy, hedging and acquisition of AU properties.
A: For future projection and economy, the CEO concedes that the market is currently soft, especially for commodities cities and that there may be potential vacancies due to increase in supply in certain areas. However, the management is looking actively for potential acquisition in areas such as Sydney, Melbourne and Brisbane because the NPI yield is extremely attractive and they would make a suitable accretive acquisition. For SG properties, they concede that they are not able to find attractive yield at this point in time.
On hedging, the management have hedged by using the borrowings in AU denominated currency which provides a natural hedge against the currency itself. In other words, if AUD depreciates, the NPI would suffer but they will be offset by a lower interest expense and a realized exchange gain. I thought that was a smart move and is something maybe the AHT management can learn something from.
Q: There were concerns relating to the expiring of the tax concession in Mar 2015 which Mr. Tharman has yet to announce. If the concession is not extended, then Reits which hold foreign properties would not enjoy tax discounts and this will severely impact the underlying income of the DPU.
A: One of the legal person stepped up to confirm that it is indeed a risk and all they can do is to wait for further news. However, the concession would only impact future foreign properties acquisition and not current, so it will not impact the two assets they currently have in their portfolio. To me, I feel this is still a big risk but there are other Reits which may be in more danger, think AHT, LMIRT and Ascott. Woof!!!
Q: There was another person who asked about the potential divestment of the 55 Market Street, which only makes up a very minor portion of the overall portfolio. Is the management intending to divest this and focus on properties which yield higher?
A: The Chairman took this question and confirm that this is in amongst one of their agenda list to do and when the right time comes, they will divest this asset at a right price.
Final Thoughts
I really like everything about FCOT at the moment after going through all the numbers.
I thought the management has taken ample steps to ensure that there will be sufficient earnings step-up visibility that increases shareholder's value over time yet at the same mitigate the risk by doing things like refinancing all loans requirements till FY2017 and hedging currency risk appropriately, etc.
Moving forward over the next 2-3 years, it is unlikely that we will see any big activity movement as the step up rental play will still be sufficient to drive the earnings and DPU upward. In fact, I like that the management has plans to focus on organic growth through asset enhancement rather than acquisition, which most other Reits do through raising funds and buy.
The below graph says it all about their future plans. Sufficient step-up rents, no refinancing of loans until FY2017 and average cost of debt at 2.7%.
At current price, it may seem a little overstretched but this is definitely a keep for me for the next few years. They will be announcing their Q1 FY15 results shortly. You can bet that earnings and DPU will keep going up on that.
I am still thinking of whether to go for tomorrow FCT AGM at the same place. If I do, I'll do a summary like the one I did here. The food there was well organized as well. I managed to eat a free lunch today :)
Thanks for reading and cheers to those vested as I am.
