Frasers Centrepoint Trust (“FCT”) is a leading developer-sponsored retail real estate investment trust (“REIT”) with total assets of approximately S$6.2 billion. FCT is also one of the largest suburban retail mall owners in Singapore. Its Singapore retail portfolio comprises nine retail malls located in the suburban regions of Singapore. These malls include Causeway Point, Northpoint City North Wing (including Yishun 10 Retail Podium), Changi City Point, Waterway Point (40%-interest), Tiong Bahru Plaza, White Sands, Hougang Mall, Century Square and Tampines 1. These retail malls are near homes and within minutes to transportation amenities.
The Singapore retail portfolio has approximately 2.1 million square feet of net lettable area with over 1,500 leases with a strong focus on necessity spending, food & beverage and essential services. FCT’s retail malls enjoy stable and recurring shopper footfall supported by commuter traffic and residential population in the catchment areas. FCT also owns an office building Central Plaza (integrated with Tiong Bahru Plaza as part of the mixed development) in Singapore and holds a 31.15% stake in Hektar Real Estate Investment Trust, a retail-focused REIT in Malaysia listed on the Main Market of Bursa Malaysia Securities Berhad.
FCT is an index constituent of several benchmark indices including the FTSE EPRA/ NAREIT Global Real Estate Index Series (Global Developed Index), the FTSE ST Real Estate investment Trust Index, the MSCI Singapore Small Cap Index and the SGX iEdge S-REIT Leaders Index.
Listed on the Main Board of the Singapore Exchange Securities Trading Limited since 5 July 2006, FCT is managed by Frasers Centrepoint Asset Management Ltd., a real estate management company and a wholly-owned subsidiary of Frasers Property Limited.
Key Metrics
Distribution Per Unit (“DPU”)
Based on the announcement on 10 May 2022, it was noted that DPU have increase by 2.3% year on year This is Favorable as FCT have been able to improve their DPU which in turn translates to higher returns for shareholders.
It was worth noting that the improvement was due to the full six-month contribution from ARF acquisition, which includes Tampines 1, Tiong Bahru Plaza, Century Square, Hougang Mall, White Sands and Central Plaza. Offset by loss of contribution from the properties divested in the previous year. Thus the growth is more of asset changes than actual organic growth.
Occupancy
Occupancy rate as at 31 March 2022 stands at 97.8%. This was an improvement from last quarter occupancy rate of 97.2%, and is above my expected healthy occupancy rate of 95%. This is thus Favorable.
Gearing ratio
Gearing ratio stands at 33.3% as at 31 March 2022. This to me is considered Favorable as it means there is sufficient headroom from the MAS raised limit of 50% to fund new acquisitions through debt. This provides opportunity for FCT to improve their DPU should they obtain new loans in the current low interest rates environment before interest rates start to hike exponentially to combat inflation.
Interest coverage
The interest coverage for the trailing 12 months stands at 5.72 times. This is Favorable in my opinion FCT was able to take advantage of the current low interest rates and increase the interest coverage from prior year. However, with interest rates forecasted to increase in the next few years, there is a need to monitor this metric.
Debt maturity profile
Weighted average term to maturity of their debt stands at 2.09 years as at 31 March 2022. This is Favorable and it allows them sufficient time to refinance their debts as they fall due.
However it is definitely close to my minimum expectations of 2 years and may fall below if there are unable to refinance in time. Furthermore, refinancing loans during this period of interest rate hikes may be unfavorable as it will translate to higher financing costs moving forward. Thus we need to monitor this metric closely as well.
Price to Book Ratio
The Price to Book (“P/B”) ratio currently stands at 1.00. This is computed using the closing share price of SGD2.30 on 27 May 2022 and the net asset value per share of SGD2.31 as at 31 March 2022.
The P/B ratio is Favorable for a well managed asset.
Other Metrics
Tenant profile
FCT has a well diversified tenant profile with the top 10 customers as at 31 March 2022 only account for about 19.2% of monthly portfolio gross rental income. Furthermore no single tenant accounts for more than 3.3% of FCT’s gross rental income, and 54.4% of their portfolio is under essential services.
This is Favorable as FCT will not be too reliant on any single tenant for income.
Dividend
At 27 May 2022, with a closing share price of SGD2.30 and dividend payout of SGD0.120 for the full calendar year 2021, this translates to a healthy dividend yield of 5.20%. With the exception of 2020 drop in dividend due to Covid-19, FCT have been able to increase their dividends consistently throughout the years. The dividend yield is Favorable.
Do note the difference in yield for 2022 is due to only one dividend paid during the first half of 2022. The second distribution is expected to be paid in the later half of the year.
Key things to note
Interest rate hikes
The Federal Reserve have on 4 May 2022 announced an interest rate increase by 50 basis points to tackle inflation. Singapore, being heavily intertwined with the global economy, is likely to increase interest rates as well.
Website: Random Sharing on Singapore Savings Bond
As a REIT, FCT is heavily reliant on borrowings to fund their acquisitions, as seen by their gearing ratio of 33.3%. Their debt maturity profile also stands close to 2 years, which indicates a possible need to refinance soon. Moving forward, any new debts taken by FCT can be expected to be of higher rates than their current borrowings. This will affect their bottom line as more interest expenses will need to be paid, and an increase in interest expenses will significantly affect their interest coverage ratio.
What is more is that with the rampant inflation around the world, there are hints of future rate hikes over the next few years, which may further affect the borrowings of FCT and cause the dividend yield to be affected, resulting in potential capital losses of share price
Supply chain disruptions
FCT having a heavier portfolio in essential services will also mean that they are quite dependent on consumer goods.
With rising costs due to inflation, it will not be surprising if other countries start to restrict exports to Singapore as they look to control their own domestic inflation. This is turn will naturally further exacerbate the existing inflation we see in Singapore, making it more difficult for businesses to operate.
Website: Chicken shortage at some Singapore wet markets ahead of Jun 1 Malaysia export ban
Over the next few years, we will need to keep an eye on the occupancy rate. Given that FCT has a wide diversified tenant base, it also means they have several small tenants who may not be able to sustain their operations as we navigate through uncertainty.
Summary
FCT is currently trading at its book value which means investors do not need to pay a significant premium. This serves as a good floor price as given the current uncertainty in the market, I am still expecting some headwinds resulting in potential decline in share prices for other REITs that are trading at premiums of their book values.
I believe that the current share price of SGD2.30, having fallen over the last few weeks, have already priced in the current expected interest rate hikes and is Undervalued.
Nonetheless, investors need to take note that things may take a turn for the worse, especially if we enter into a recession in the near future.
