On 26 January 2023, Frasers Centrepoint Trust (“FCT”) have announced their 2023 first quarter business update ended 31 December 2022. The results itself are generally stable. However, there are subsequent events which changed the profile of our suburban mall retail real estate investment trust (“REIT”) when they purchased the retail property Nex and an additional 10.0% interest in Waterway Point.
I have detailed in my article some of the potential impacts and key concerns relating to the acquisitions, mainly due to the increase in gearing and lowered interest coverage ratio. In the current high interest rate environment, financing the acquisitions using debt will likely decrease the DPU significantly.
However over the longer term, once interest rates decrease FCT should be able to benefit from improved DPU with lower cost of debt and also an uplift in property valuation. Investors should take note of the potential impact and ensure that FCT fits their risk appetite accordingly.
Website: General Announcement::Business Updates For The First Quarter Ended 31 December 2022
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.
FCT is among the top-ten largest Singapore REITs (“S-REITs”) by market capitalization. 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”)
| Metrics | Current | Previous |
|---|---|---|
| Distribution Per Unit | No Info | +1.2% |
Based on the announcement on 26 January 2023, DPU was not included in the business update for the first quarter of 2023.
As at 30 September 2022, the metric was Favorable as there was a slight increase in DPU.
Occupancy
| Metrics | Current | Previous |
|---|---|---|
| Occupancy | 98.4% | 97.5% |
Occupancy rate as at 31 December 2022 stands at 98.4%, an improvement from the previous quarter. The improvement was due to renewed leases, although the anchor space for Century Square is currently still ongoing. This metric is Favorable as it is above my expected healthy occupancy rate of 95%.
Gearing ratio
| Metrics | Current | Previous |
|---|---|---|
| Gearing Ratio | 39.4% | 33.0% |
The gearing ratio has increased to 39.4% with the acquisition of the retail property Nex. Keep in mind the investor presentation showed the increased leverage to 38.5% using the 30 September 2022 ratio of 33.0% as the base. If using 33.9% as at 31 December 2022, the leverage would have increased to 39.4%. This to me is considered Neutral as although there is sufficient headroom from the MAS raised limit of 50%, it has increased substantially.
Interest coverage
| Metrics | Current | Previous |
|---|---|---|
| Interest Coverage | 4.7x | 5.2x |
The interest coverage for the trailing 12 months stands at 4.7 times., a decrease from 5.2 times as at 30 September 2022. This is Unfavorable in my opinion as the decreasing interest coverage means that FCT bottom line is getting affected as well despite the lower gearing ratio prior to the acquisition. This is likely to be significantly worsened with the new debt financing taken up by FCT to purchase Nex, as the debt is taken in the current high interest rate environment. The Federal Reserve on 1 February 2023 has hiked interest rates to a range between 4.5% and 4.75%, and gave little indication it is nearing the end of this hiking cycle.
Website: Fed raises rates a quarter point, expects ‘ongoing’ increases
Website: Fed Officials Warn They May Need to Lift Rates to a Higher Peak
I have thus performed a sensitivity analysis using the information as at 31 December 2022:
| Description | Amount (SGD’000) |
|---|---|
| Total Debt | $1,864,000 |
| Debt Not Hedged (%) | 27.0% |
| Debt at Floating Rate Exposed | $503,280 |
| Distributable Income FY2022 | $209,884 |
Interest rate sensitivity analysis as below:
| Change in Interest Rates | Decrease in Distributable Income (SGD’000) | Change as % of FY2022 Distribution |
|---|---|---|
| + 50 bps | -$2,516 | -1.2% |
| + 100 bps | -$5,033 | -2.4% |
| + 150 bps | -$7,549 | -3.6% |
| + 200 bps | -$10,066 | -4.8% |
| + 250 bps | -$12,582 | -6.0% |
| + 300 bps | -$15,098 | -7.2% |
Do note the above is my estimation which may be different from management’s estimation. It also does not include the significant new debt financing taken in 2023 for the acquisition. Nonetheless based on the 31 December 2022 snapshot, if the interest rates were to increase by the basis points above, FCT may experience a fall in DPU accordingly.
Debt maturity profile
| Metrics | Current | Previous |
|---|---|---|
| Debt Maturity Profile | 1.8 years | 2.0 years |
Weighted average term to maturity of their debt stands at 1.8 years as at 31 December 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. There is a possibility that the new debt financing taken may extend the overall Debt Maturity Profile. However the information is not available based on the announcement.
Price to Book Ratio
| Metrics | Current | Previous |
|---|---|---|
| Price to Book Ratio | 0.95 | 0.89 |
The Price to Book (“P/B”) ratio currently stands at 0.95. This is computed using the closing share price of SGD2.21 on 3 March 2023 and the net asset value per share of SGD2.33 as at 30 September 2022. The P/B ratio is Favorable.
Other Metrics
Tenant profile
FCT has a well diversified tenant profile with the top 10 customers as at 31 December 2022 only account for about 18.0% of monthly portfolio gross rental income. Furthermore no single tenant accounts for more than 4.0% of FCT’s gross rental income, and 53.1% of their portfolio is under essential services. This is Favorable as FCT will not be too reliant on any single tenant for income.
Dividend Yield
| Year | Yield | Total |
|---|---|---|
| 2022 | 5.53% | SGD 0.122 |
| 2021 | 5.41% | SGD 0.092 |
| 2020 | 4.15% | SGD 0.122 |
| 2019 | 6.32% | SGD 0.140 |
| 2018 | 5.44% | SGD 0.120 |
At 3 March 2023, with a closing share price of SGD2.21 and dividend payout of SGD0.122 for the full calendar year 2022, this translates to a healthy dividend yield of 5.53%. With the exception of 2020 drop in dividend due to Covid-19, FCT have been able to increase their dividends consistently throughout the years. For my benchmark, a general reasonable range would be around an average of 5.5% to 6.5%, and FCT is within the range.
Website: Reasonable Dividend Yield 2023Q1
It is worth noting that interest for long-term safe assets have stabilized and is on a small uptrend. The April 2023 Singapore Savings Bond being issued with a 10-year average interest rate of 3.15%, which while it is lower than most of the previous few months, is higher than the March 2023 bond. There is a chance for interest rates to further increase, and the required dividend yield of investor may be higher than current.
Website: SBAPR23 GX23040S Bond Details
If using dividend yield of 6.5% as a benchmark, based on the dividend of SGD0.122 there is potential for FCT to see its share price drop by another 15.1% to SGD1.88. Investors will thus need to be mentally prepared that the share price might further fall.
| Yield | Share Price | Downside |
|---|---|---|
| Current (5.53%) | 2.21 | – |
| 6.50% | 1.88 | -15.1% |
| 7.50% | 1.63 | -26.4% |
| 8.50% | 1.44 | -35.1% |
Coupled with the uncertainty of the new acquisition, the dividend yield is thus Neutral.
Key things to note
New Acquisition
As highlighted above, FCT has made a significant acquisition of the Nex property using debt financing. Compared to the original speculation of bidding for more of the Mercatus assets, this is considered a small proportion. However with the acquisition, FCT gearing ratio and interest coverage have changed significantly to be unfavorable, for an asset that is only DPU accretive by 0.52%.
Subsequent to the Nex property acquisition, FCT have completed acquisition of another 10.0% interest in Waterway Point. This was financed from a combination of debt and/or internal sources of FCT. Less information is available for this acquisition and we will have to wait for the 2023 half year result for updates to FCT.
In my view, this is concerning as the acquisitions were done in an unfavorable macro-environment and will significantly change the financial position of FCT. However, the properties are in my opinion of good qualities. Over the next few years when interest rates start to decrease, the acquisition may be able to reap significant benefits. Until then, investors need to adjust their risk appetite for this REIT.
Summary
| Metrics | Financials | Rating |
|---|---|---|
| Distribution Per Unit | No Info | Favorable |
| Occupancy | 98.4% | Favorable |
| Gearing Ratio | 39.4% | Neutral |
| Interest Coverage | 4.7x | Unfavorable |
| Debt Maturity Profile | 1.8 years | Neutral |
| Price to Book Ratio | 0.95 | Favorable |
| Overall | | Favorable |
Overall, the metrics indicate that is it favorable to invest in FCT. FCT is currently trading below its book value which means investors do not need to pay a significant premium. Investors should take note as the fundamentals of FCT have weakened slightly in the short-term with the new acquisitions, and will need to monitor if the risks are well managed by the management over the next few months.
Disclaimer: Not financial advice. All data and information provided on this site is for informational purposes only.
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Website: Frasers Centrepoint Trust (SGX: J69U): 2022 Full Year Result
