Company Review - Frasers Centrepoint Trust

 

Frasers Centrepoint Trust (FCT, SGX:J69U) is a retail focused S-REIT. Local readers would be familiar with some of their properties such as Causeway Point and Northpoint City North Wing. In this post, I will be looking at FCT's past, present and future, through a few segments.

1. Portfolio Overview

FCT currently owns 9 retail malls alongside an office building in Singapore. As part of her investment portfolio, she also owns a stake in Hektar REIT, a Malaysia REIT that also focuses on retail properties.

As seen above, Hektar REIT (associate) contributes just a small percentage to the overall portfolio. Hence, subsequent sections will focus on the Singapore Retail Segment, with the following NLA breakdown.

2. Portfolio Metrics

Of the malls in the portfolio now, half of them were recently acquired, leaving these 5 malls with historic Revenue and NPI for comparison. Most malls saw a drop in NPI of 5-10% with Changi City Point being the struggling outlier at 22% drop.

Retail portfolio occupancy stood at a healthy 96.1%, comparable to 96.5% in Sept 2019 (pre-COVID).

WALE stood at 1.52 years as at March 2021, with an average rental reversion of -0.7% YTD and an average lease duration of 3 years. Do note that FCT changed the reporting formula for rental reversion, it is now based on average rent of incoming vs expiring leases.

As of Sept 2020, approximately 90% of the leases included a step-up clause for an annual increment of 1-2%, down from approximately 98% in Sept 2019.

92.2% of occupied leases include a variable turnover rent component, where tenants pay 0.5-1% of sales as rent. This remains steady compared to 93.5% in the preceding year.

Finally, we take a look at the occupancy cost, which refers to gross rent over sales. This metric is provides some information on rent sustainability, as too high an occupancy cost means that rental is eating too much into the tenant sales.

Occupancy cost spiked in FY2020 to 19.2% due to COVID, and it remains to be seen whether this can be brought back down to the steady ratio pre-COVID.

3. Asset Recycling

FCT divested herself of Yew Tee Point earlier this year. Similar to the divestment of Anchorpoint, FCT divested the property at a higher price than acquisition ($219.9m vs $125.7m).

This is in line with her strategy of divesting non-core, small and/or underperforming assets, with the bonus of capital gains.

4. Financial Performance

As of March 2021,

Gearing at 35.2% 

Interest Coverage Ratio at 5.04x

Cost of Debt at 2.16%

NAV at $2.31

If 2H2021 performs just as well as 1H, DPU would have pretty much recovered to pre-COVID values. 

At the current price of $2.39, this gives an annualized yield of 5.02%, and a P/B ratio of 1.03.

5. Outlook

E-commerce is not a new issue. For years, investors have been concerned about how retail REITs can hold up against the rising popularity of e-commerce. On top of that, COVID has thrown a spanner in the works, potentially further accelerating the decline in popularity of physical retail spaces.

Cistri conducted an analysis (linked here) that detailed consumer's preference and behavior. I highly recommend looking in detail at their report if you're interested.

Cistri, July 2020

Here, we see that while the pandemic's impact is severe, consumer's preference seems to be unaffected in the long run.

Cistri, July 2020

Regarding the competition from e-commerce, it seems like the pandemic have not accelerated adoption in the long term.

With that being said, the e-commerce trend by itself is still something to be concerned about. Since 2013, sales productivity (sales per sq ft) has been dropping, on the back of stagnant sales and increasing floor space.

To address this, FCT has been proactive in rolling out digital platforms (eg. Makan Master, FRx) since 2018, allowing on-boarded tenants to extend their catchment on the digital space. 

On top of the e-commerce pressure, more and more tenants are requesting for leases that have a majority turnover rental income component (see FCT AR20, page 47). This is in contrast to the current situation, where FCT derives a majority of rental income through a fixed rent component (see table above).

As turnover rental income will fluctuate, it means that in the future, if turnover rent becomes more prevalent, FCT's income stability would be affected at least slightly.

However, having a stronger turnover rent component would probably make lease arrangements more sustainable and healthy. Check out this report from Cistri for more information.

6. Conclusion

Singapore's retail market and outlook still face some headwinds, with e-commerce in the long term and the pandemic in the short term. FCT's performance in the past few years have been holding up nicely, but it remains to be seen if the recovery will be dragged out, and if the performance after that can be sustainable.

The valuations now (P/B and Yield) look pretty attractive, but this is based off the assumption that FCT's manager can continue to grow FCT's portfolio. In terms of organic growth, the key would be to maintain and grow rental sustainably, by providing support and initiatives to boost tenant sales. Inorganically, FCT would likely be going for acquisitions such as the remaining portions of Waterway Point and Northpoint at an opportune time.

I hope this review is informative for readers! Thanks for reading all the way :) Consider subscribing with your email on the right sidebar for notifications!

Cheers,

InvestingNugget

Author's note:

At the time of writing, I am a shareholder of FCT. I have put in my best effort to ensure that the facts are accurate, but I do not guarantee it. Opinions are my own and do not constitute any recommendations.