Our suburban mall retail real estate investment trust (“REIT”) have their share price have continued to decrease over the last few months as market sentiment continue to worsen. Nonetheless, Frasers Centrepoint Trust (“FCT”) have managed to develop a steady set of financial performance, and seems to have exciting quarters upcoming with a major acquisition of the Mercatus asset. I thus have a look at what they have to offer as below.
Background
FCT is a leading developer-sponsored REIT and one of the largest suburban retail mall owners in Singapore. FCT’s property portfolio comprises nine retail malls and an office building located in the suburban regions of Singapore, near homes and within minutes to transportation amenities. The retail portfolio has approximately 2.2 million square feet of net lettable area with over 1,400 leases with a strong focus on providing necessity spending, food & beverage and essential services.
FCT is among the top-ten largest Singapore REITs (“S-REITs”) by market capitalisation. It is also an index constituent of several benchmark indices including the FTSE EPRA/NAREIT Global Real Estate Index Series (Global Developed Index), FTSE ST Real Estate Investment Trust Index, 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 26 October 2022, it was noted that DPU have increase by 1.2% year on year for FY2022. 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 year contribution from the enlarged retail portfolio following the ARF acquisition on 27 October 2020, 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 30 September 2022 stands at 97.5%. This was a decrease from March 2022 of 97.8%, though an improvement from last quarter occupancy rate of 97.1%. The decrease noticed in the last quarter largely due to pre-termination by an anchor tenant. However the occupancy rate is above my expected healthy occupancy rate of 95%. This is thus Favorable.
Gearing ratio
Gearing ratio stands at 33.0% as at 30 September 2022. This to me is considered Favorable as it means there is sufficient headroom from the MAS raised limit of 50%. It also means that FCT will not need to be at the mercy of the rising interest rates if they need to refinance. However, investors need to take note that as the interest rates are continuing to rise, if FCT decides to take up new debt to fund acquisitions during this downturn, they will be at rates significantly higher than what they currently have.
Website: Another jumbo Fed rate hike is expected next week — and then life gets difficult for Powell
Interest coverage
The interest coverage for the trailing 12 months stands at 5.19 times., a decrease from 5.72 times as at 31 March 2022. This is Neutral in my opinion as the decreasing interest coverage means that FCT bottom line is getting affected as well despite the lower gearing ratio. If FCT were to take on new debt, especially as they bid for the Mercatus assets, their interest coverage might fall sharply given the high interest rate environment.
Debt maturity profile
Weighted average term to maturity of their debt stands at 2.03 years as at 30 September 2022. This is Neutral as while they have sufficient time to refinance their debts as they fall due, the due dates are coming soon and the current interest rate environment may result in FCT taking up loans at higher rates.
Price to Book Ratio
The Price to Book (“P/B”) ratio currently stands at 0.89. This is computed using the closing share price of SGD2.08 on 28 October 2022 and the net asset value per share of SGD2.33 as at 30 September 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 30 September 2022 only account for about 20.2% of monthly portfolio gross rental income. Furthermore no single tenant accounts for more than 4.1% of FCT’s gross rental income, and 54.1% of their portfolio is under essential services.
This is Favorable as FCT will not be too reliant on any single tenant for income.
Sustainable dividend yield
At 28 October 2022, with a closing share price of SGD2.08 and dividend payout of SGD0.122 for the full calendar year 2022, this translates to a healthy dividend yield of 5.88%. With the exception of 2020 drop in dividend due to Covid-19, FCT have been able to increase their dividends consistently throughout the years.
However, interest rates have been continuously increasing the last few months. This have prompted for multiple safer assets to increase their bond and interest rates to more than 3%. This causes the previous yields of FCT to become unfavorable, and FCT saw a decrease in their share price to provide higher dividend yields.
Website: Reasonable Dividend Yield Changes
If using dividend yield of 7% as a benchmark, based on the dividend of SGD0.122 there is potential for FCT to see its share price drop by another 16.4% to SGD1.74. Investors will thus need to be mentally prepared that the share price might further fall to these levels as interest rates for safe assets in Singapore approaches to cross 4%.
The current dividend yield of 5.88% is thus Neutral.
Key things to note
Interest rate hikes
There have been continues rate hikes by the Federal Reserve and have laid the groundwork for interest rates reaching 5% by March 2023. Singapore, being heavily intertwined with the global economy, is likely to increase interest rates as well.
Website: Fed Seen Aggressively Hiking to 5%, Triggering Global Recession
As a REIT, FCT is heavily reliant on borrowings to fund their acquisitions, as seen by their gearing ratio of 33.0%. 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.
New Acquisition
FCT is a potential bidder for the Mercatus asset. The portfolio looks to be around SGD3.3 billion if AMK Hub is excluded, and it could be further reduced to SGD2.3 billion if both AMK Hub and Nex are excluded. This is a good opportunity for FCT to expand its portfolio.
With a current market capitalization of around SGD4 billion for FCT, this acquisition will require significant funding from FCT. This could be done via debt or equity. The current interest rates may suggest that it is too expensive to take on debt, especially since the metrics “Interest Coverage” and “Debt Maturity Profile” are rated as neutral. If funded by equity, shareholders should expect to see large dilutions.
Share prices may therefore see further downward pressures.
Summary
FCT is currently trading below its book value which means investors do not need to pay a significant premium. The fundamentals of FCT did not worsen during this quarter. This suggests that the current share price is due to overall market sentiment, especially as safe assets have seen their yield rise considerably with rising interest rates. It is thus possible for the share price to recover should interest rates decrease over the next few years.
Nonetheless, investors need to take note that things may take a turn for the worse and further downside may happen.
Not financial advice.
One thought on “Frasers Centrepoint Trust (SGX: J69U): 2022 Full Year Result”
Comments are closed.