On 25 July 2023, Frasers Centrepoint Trust (“FCT”) have announced their 2023 third quarter business update. There are no updates relating to the financial position and performance, however noted they have disclosed the increase in gearing and the reduction in percentage of debt hedged to fixed rate interest. This indicates that management does not want to lock in new debt in the current high interest rate environment, allowing it to fall with the market over the next few years.
In the short-term however, it means that DPU will be adversely affected as interest rates continue to remain high, as seen by the continued decrease in interest coverage. Although it is not unexpected, investors should take note of the potential impact and ensure that FCT fits their risk appetite accordingly.
Website: General Announcement::Business Updates For The Third Quarter Ended 30 June 2023
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 | -0.1% |
Based on the announcement on 25 July 2023, DPU was not included in the business update for the third quarter of 2023.
As at 31 March 2023, the metric is Neutral as DPU have remained relatively unchanged.
Occupancy
| Metrics | Current | Previous |
|---|---|---|
| Occupancy | 98.7% | 99.2% |
Occupancy rate as at 30 June 2023 stands at 98.7%. This metric is Favorable as it is above my expected healthy occupancy rate of 95%.
Gearing ratio
| Metrics | Current | Previous |
|---|---|---|
| Gearing Ratio | 40.2% | 39.6% |
The gearing ratio has further increased to 40.2% as at 30 June 2023. No details are given in relation for the increase in borrowings, which have reached higher levels ever since the acquisition of the retail property Nex and additional stake in Waterway Point. This to me is considered Unfavorable as although there is sufficient headroom from the MAS limit of 50%, it has increased substantially.
Interest coverage
| Metrics | Current | Previous |
|---|---|---|
| Interest Coverage | 3.8x | 4.3x |
The interest coverage for the trailing 12 months stands at 3.8 times, a decrease from 4.3 times in the previous quarter. This is Unfavorable in my opinion but is not unexpected as other REITs are also seeing a decreasing interest coverage in the current interest rate climate. It has also worsened with the new debt financing taken up by FCT to purchase the new assets, as the debt is taken in the current high interest rate environment.
The Federal Reserve on 26 July 2023 has once again hiked the interest rates by a quarter percentage point to a range between 5.00% and 5.25%, the highest level in 22 years and are likely to keep it at these levels over the next few years.
Website: Fed approves hike that takes interest rates to highest level in more than 22 years
It may not necessary be a bad decision to take it borrowings in the current environment, especially noted that the new loans are on floating interest rates. FCT may be able to benefit when the interest rate were to decrease.
I have thus performed a sensitivity analysis using the information as at 30 June 2023:
| Description | Amount (SGD’000) |
|---|---|
| Total Debt | $2,265,000 |
| Debt Not Hedged (%) | 37.0% |
| Debt at Floating Rate Exposed | $838,050 |
| 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 | -$4,190 | -2.0% |
| + 100 bps | -$8,381 | -4.0% |
| + 150 bps | -$12,571 | -6.0% |
| + 200 bps | -$16,761 | -8.0% |
| + 250 bps | -$20,951 | -10.0% |
| + 300 bps | -$25,142 | -12.0% |
Do note the above is my estimation which may be different from management’s estimation. Nonetheless, 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 | 2.5 years | 1.9 years |
Weighted average term to maturity of their debt stands at 2.5 years as at 30 June 2023, with the increase due to the recent drawdowns. This is Favorable as while they have sufficient time to refinance their debts as they fall due.
Price to Book Ratio
| Metrics | Current | Previous |
|---|---|---|
| Price to Book Ratio | 0.93 | 0.93 |
Based on the announcement on 25 July 2023, net asset value (“NAV”) was not included in the business update for the third quarter of 2023.
The Price to Book (“P/B”) ratio currently stands at 0.93. This is computed using the closing share price of SGD2.16 on 14 August 2023 and the net asset value per share of SGD2.32 as at 31 March 2023. The P/B ratio is Favorable.
Other Metrics
Tenant profile
FCT has a well diversified tenant profile with the top 10 customers as at 30 June 2023 only account for about 18.8% of monthly portfolio gross rental income. Furthermore no single tenant accounts for more than 4.4% of FCT’s gross rental income. This is Favorable as FCT will not be too reliant on any single tenant for income.
Dividend Yield
| Year | Yield | Total |
|---|---|---|
| 2023 | 2.84% | SGD 0.061 |
| 2022 | 5.66% | SGD 0.122 |
| 2021 | 5.53% | SGD 0.092 |
| 2020 | 4.25% | SGD 0.122 |
| 2019 | 6.46% | SGD 0.140 |
| 2018 | 5.56% | SGD 0.120 |
The first dividend payout for 2023 amounted to SGD0.061 per share. If annualized this will be SGD0.122 per shares, which is in line with the payout in 2022.
At 14 August 2023, with a closing share price of SGD2.16 and expected dividend payout of SGD0.122 for the full calendar year 2023, this translates to a healthy dividend yield of 5.65%. 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 2023Q3
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 13.1% to SGD1.88. With interest rates continuing to increase, the expected dividend yield required may be higer.
| Yield | Share Price | Downside |
|---|---|---|
| Current (5.65%) | 2.16 | – |
| 6.50% | 1.88 | -13.1% |
| 7.50% | 1.63 | -24.7% |
| 8.50% | 1.44 | -33.6% |
The dividend yield is thus Neutral.
Summary
| Metrics | Financials | Rating |
|---|---|---|
| Distribution Per Unit | No Info | Neutral |
| Occupancy | 98.7% | Favorable |
| Gearing Ratio | 40.2% | Unfavorable |
| Interest Coverage | 3.8x | Unfavorable |
| Debt Maturity Profile | 2.5 years | Favorable |
| Price to Book Ratio | 0.93 | Favorable |
| Overall | | Neutral |
Overall, the metrics indicate that is it neutral to invest in FCT. The increase in borrowings is one that investors need to take note of especially since it is at floating rate. This may have a significant impact to the DPU moving forward and investors will need to monitor if the risks are well managed by the management over the next few months.
FCT is currently still trading below its book value which means investors do not need to pay a significant premium. They are also paying a decent dividend yield which may be considered a safety margin and investors will need to assess their own risk profile.
Disclaimer: Not financial advice. All data and information provided on this site is for informational purposes only.
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