Sunday, 15 September 2013

Frasers Centrepoint Trust

I have been staying at market’s sideline to sniff out good reits to add to my portfolio, as part of my portfolio construction process. This reit segment aims to provide sustainable, consistent dividend to to my coffers. Added together with my monthly investment funds, this will form a substantial amount to be used for purchasing cheap and good investments during down times. 

Looking at the reit landscape, I excluded office and industrial reit from my list as the rentals are volatile, and subjected to the economic cycle. I did not even consider hospitality reit as the rental is even more choppy, affected by tourist arrival, the macro economic climate and the seasonal whipsaw in hotel rates. 

I was contemplating between healthcare reit and retail reit. I suspect that retail reit may be more defensive in nature due to locals’ obsession with shopping as favourite past time. Of course human beings will fall ill and visit hospitals inevitably, but that does not happen as frequent as you walk into shopping mall for weekly grocery purchase. Furthermore, I cant really go into the hospitals of PLife Reit or First Reit to observe the ‘business’ going on there. In this aspect, its not as visible as what retail reit can offer. 

Hence I decided on retail reit. What I need here is a defensive and stable instrument that will mail me consistent dividend cheque quarter after quarter without fail. I want to be able to walk into some shopping malls, feel the crowd and see the businesses going on. Talking about basic scuttle-butt here. I also do not want to deal with currency risks and that limits my choices to the local retail reit. 

Which retail reit owns defensive sub-urban malls that are resilient to economic crisis, and will most likely attract nearby neighbourhood shoppers visiting to do their shopping even during downturn? Frasers Centrepoint Trust sprang to my mind. 

I did some analysis on FCT’s past years’ performance. The summary is presented in the table below.

I must say that I am rather impressed by its consistency and stability shown over the years. These are the 2 key qualities that I look for in a suitable reit for my portfolio. 

The reit manager’s operations efficiency, as measured by the NPI over gross revenue, has been slowly increasing from 2008. This shows that manager has been efficiently running the malls and keeping the expenses under control. 

The property yield, as measured by NPI over appraised property value, has also been constant around 5.5%, except for the blip in 2011. This could be due to the lower property value of Causeway Point that was undergoing asset enhancement initiative (AEI). 

Interest cover has been constant at around 4.5, and has even shown improvement to 5.7 in 2012. I take this as prudent debt management and ability to settle financing cost comfortably. 

Gearing has also been hovering around 33% for the past 5 years. As for leverage measured by total debt to assets, it also stayed constant at around 30%. 

Distribution per unit has also been constantly increasing. 

Underpinning the quantitative analysis is my belief that FCT holds quality assets that are well situated near MRT stations in town centres. FCT’s properties may not be as high-profiled and well-spread as its colossal competitor: Capitamall Trust (CMT). However, I like the unique positioning of its shopping malls as destinations where ordinary heartlanders visit for weekend outing and grocery purchase. It does sound like a smart strategy to me: running shopping malls at respectable town centres, avoiding head-on competition with CMT, concurrently carving out a niche for itself as a solid sub-urban focused reit. 

On this aspect, let’s look at 2 key properties of FCT. Causeway Point is located in Woodlands and we know that Woodlands will see intensive development into a regional centre in the near future. 

What is less well known is perhaps the growth potential of Yishun, where Northpoint is situated. As a Yishun resident myself, I know that there are at least 7 BTO projects and 3 condominiums under construction now. Several more are coming up. The population increase should lead to more shopper traffic at Northpoint and improve its quality. Not to mention that the plot adjacent to Northpoint which will be developed into an integrated bus interchange with shopping malls has been awarded to Frasers. FCT is strengthening its stronghold in Yishun with this development and we could well see a mega, well-integrated mall in 5 or 6 years time.  

Another facet of FCT’s attractiveness is its management’s competency and shareholder-friendliness. The competency can be seen from the various fundamental aspects as shared above. Also note that FCT has not implemented any rights issue since its IPO, for any of its acquisition or AEI. Instead, it tapped on private placement and debts to acquire Yew Tee Point, Bedok Point, and Northpoint and Causeway Point’s AEI.

Of course, FCT is not without its risks. Firstly, the impending tapering of QE. This will definitely lead to increase in borrowing cost, affect the ability of reits to roll over its debt, and borrow money for acquisition, and cause a fall in its DPU and its price. It is not within my intellectual capability to fully comprehend and explain the impact of QE withdrawal, except for a simple 2.5 liner above. 

One of FCT’s mall, Bedok Point, will be seeing much stiffer competition in Bedok when CMT’s Bedok Mall come into the picture in couple of years time. FCT has 32% and 36% of its leases expiring in FY2014 and FY2015, and Bedok Point has 52% and 21% (Annual Report 2012, page 37 and 49). One needs to monitor the lease renewal closely, especially for Bedok Point to see if the effects of Bedok Mall’s competition is manageable. 

FCT will also have $359 mil, 62% of its debt maturing in 1-3 years time (Annual Report 2012, page 39). We also need to see if this results in an increase of interest cost since by then the tapering of QE will most likely be underway. 

Taken together, I feel FCT is a well-managed and resilient reit due to the following reasons:
  • Consistent leverage, gearing, operations efficiency, property yield, and dividends
  • Good quality assets in sub-urban town centres with high footfall 
  •  Competent and shareholder-friendly management
I bought FCT at $1.8 for a forward yield of 6.1% based on estimated $0.11 FY13 dividend. Considering it has dropped from a 52 week high of 2.34, a 23% fall, it represents a comfortable entry point to me. 

Perhaps it will drop further when QE tapers off and interest rate rises. However, experience tells me that I cant be sure when that day will come, and will I have the guts and discipline to enter. Hence I prefer to decide based on current analysis, and upon seeing good value. 

I will also be comfortable to scoop up more shares if it falls further as a disciplined approach to enter in phases.


  1. Thanks for sharing on FCT.

    What would you think will be prospects for positive rental reversion? Would this depend on current AEI? Are there plans for further AEI and would FCT need to lever up more (i.e. increase gearing) to achieve this?

    Also, what is occupancy level like for each of their malls? Factoring in a potential downturn in the economy (for margin of safety), what would this fall to, and would this impact the NPI significantly? Mall expenses cannot be reduced easily while rental certainly can if many tenants go out of business or do not renew their tenancy agreements.


    1. Hi MW,

      The prospects for +ve rental revision in the long term is very high for Northpoint and Causeway Point.. Due to favourable macro development in the north: Yishun's re-juvenation and population growth, Woodlands growing into regional centre etc. As of now, there also does not seem to be new major malls that will come on stream that could compete with the 2 malls.

      For Yew Tee Point, management had been able to renew 37% of the rent at rates 9% - 11% above preceeding rental. So in the short term, looks fine.

      For Bedok Point, I am less sanguine due to competition from Bedok Mall. Management is re-positioning it to be complementary to Bedok Mall. Retaining tenants is key and they are working on this front through more competitive rental. Well, let’s see how is this being executed in due course.

      Causeway point just completed its AEI.. Northpoint had one 3 years ago.. Management also signalled that they have no intention to undertake massive AEI prog for other malls, So I do not foresee management to conduct AEI anytime soon.

      I think the need to gear up could come from potential acquisition of Changi City Point once they secure approval for strata subdivision. Thats when FCT will probably need to raise fund via debt or rights issue perhaps in FY14 or FY15.

      The occupancy level of FCT malls has been hovering around 95% past few years during normal times. Northpoint occupancy level was 48% at the height of their AEI back in FY09 and swiftly recovered to 98% post AEI. As for Causeway Point during AEI: 87%.

      The malls also had occupancy of 97%, 90% and 100% (Anchorpoint, Northpoint and Causeway Point) during GFC period in FY09. NPI also increased during FY09 from $57m to $60m.

      So I think the unique positioning of their assets as everyday mall strategically located at town centres is arguably quite resilient. Unless a financial meltdown more severe than GFC comes along, I do not expect their occupancy and NPI to fall too much.


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