Wednesday, 24 January 2018

AGM Series - Frasers Centrepoint Trust FY17

FCT is a long term holding in my core portfolio and I have written quite a few articles about it. See here, here, here and here.

Despite following its performance for long, I still learned new things about the Reit after attending its AGM yesterday.

In this article, I share some key takeaways and candid opinions expressed by Dr Chew Tuan Chiong, the CEO of FCT.

FY 17 DPU Increased Despite Northpoint City AEI
The AGM started with Dr Chew presenting the FY17 results. He commented that the Reit achieved a record high 11.90c Distribution Per Unit (DPU), despite a lower revenue and Net Property Income (NPI) due to Northpoint City's Asset Enhancement Initiative (AEI) during most of FY16 and 17. It is more commendable that according to Dr Chew, the management still retained a small amount of earnings last FY for future usage.

A shareholder praised the management team for such a 'miracle' he called - achieving 11 years of steady DPU growth. He wonder how does the management do it

Management Fees Tilt Towards Payment by Units to Maintain DPU Payment
The secret to the DPU performance, according to Dr Chew, is actually quite simple. The management opt to receive more of its fees in units, instead of cash, to conserve cash for DPU payment. In a usual year, management fees typically comprise of 80% cash and 20% units. In FY17, the proportion went up to 30% cash and 70% units in view of Northpoint City AEI.

My take is this shows management places shareholders' interest at the heart of its distribution policy. And they are doing this moderately only during the years when revenue is expected to fall. Fees paid in units also increases their stake in the Reit for better alignment of interest with shareholders.

Acquired Yishun 10 with a Long Term Plan
The old Northpoint is an L-Shaped building occupying a land plot with Yishun 10 Cineplex situated  at the top left corner, separated by a road. Bearing in mind the new Northpoint development, management acquired Yishun 10 (albeit just the retail podium at ground floor), with the grand vision of eventually amalgamating it into the Northpoint Complex.

However, Dr Chew stressed that this would not happen anytime soon. Management is simply being forward looking and acquired the asset as a strategic land bank for future developments.

Changi City Point Growth Not Up to Expectation
One shareholder pointed out that Changi City Point (CCP) had flat revenue and NPI in FY17, despite the newly-opened Downtown Line. This is a valid concern because CCP is a substantial asset in FCT's portfolio and its performance would impact FCT's overall figure.

Dr Chew agreed to his point. CCP was able to raise its occupancy rate from 81% to 88%, but management was not able to raise the rental. While CCP has a base crowd from nearby offices, institutions/university and Expo event goers, the lack of local catchment means its footfall is seasonal. One way to address this is to fine-tune its positioning as either an outlet or food-focused mall. Management is awaiting the completion of Jewel @ Changi Airport-just a stone throw away, before making a decision.

Bedok Point Continues to Be a Drag
Bedok Point sticks out like a sore thumb in FCT's suite of solid assets. Its revenue and NPI continued to fall in FY17. One shareholder asked what would management do to this asset, and suggested divesting it.

Dr Chew replied that Bedok Point's location a distance away from MRT station severely handicap its performance. For this mall, the key is to refine its tenant mix to attract passer by. Management is also exploring all options to derive maximum value for shareholders. One option was re-development, but as the mall was built on land previously occupied by 2 carparks and 1 cinema, there are much restrictions here.

Personally I feel turning Bedok Point around is a tall order. Efforts have been ongoing for a while but yielded no results. Perhaps the best option is to divest it. Plus, Bedok Central is showing some signs of retail saturation, with competition from Heartbeat and other non-mall retail shops. CapitaMall's Bedok Mall also had negative rental revision in Q3 earnings.

Rationale of Its Hektar Reit Investment
A shareholder felt that FCT's investment in Malaysia-listed Hektar Reit does not seem to be strategic considering that it constitutes only about 3% of FCT's revenue, and a starkly different retail environment in second-tier Malaysia cities.

Dr Chew explained that when FCT first invested in Hektar, it contributed about 7% of the revenue. But over years due to the weakening Ringgit and a growing Singapore portfolio, the percentage has shrunk to 3%.

And here is the interesting part. Dr Chew shared that FCT's investment mandate actually covers worldwide properties. While Malaysia's retail landscape is distinct from Singapore's, both markets share similarities in culture, heritage, and consumer tastes. Should FCT decides to expand overseas, it would be into markets where the Frasers Group has a presence, which include Malaysia. Its Hektar Reit stake allows FCT to understand the market better, before taking a bigger plunge (if that happens).

Local Retail Landscape Remains Challenging
While FCT boasts an asset portfolio of resilient suburban malls near MRT stations, it is also impacted by a challenging local retail landscape. Its portfolio occupancy cost, defined as tenants' gross rental to tenants' sales turnover, has increased in the past 3 years. In addition, all properties showed decline in tenants' sales in FY17.

Source: FCT  FY17 Annual Report

Dr Chew shared that a 16.6% occupancy cost is still manageable. However it is worrying if it rises above 25%, which will force most retailers out of business even for the high end shops with thicker margin. Management will proactively manage their malls and pursue its proven strategy of growth via acquisition, asset enhancements, organic growth.

Dr Chew's response showed that he has a good grasp of FCT's operational details and local retail environment. He also came across as a sincere and grounded CEO who shares openly about FCT's shortcomings and ways to address these issues.

Undoubtedly, the retail industry will continue to face headwinds. It is a sector-wide problem, also impacting other retail Reits. But I think FCT stand a good chance of continuing its good performance, due to its unique offering of suburban malls catering to non-discretionary needs, and management's competency shown thus far.

I will continue to hold my shares.

Lastly, FCT announced its latest quarter results last night, with improvement across key figures: DPU 3c (up 3.8%), Revenue $47.9m (up 8.7%), NPI $34.5m (up 9.1%).


  1. Thanks for the agm.

    I used to own fct and attend its agm too but recent years no longer have them. They've been very solid the last couple of years.

    1. yea FCT had really commendable returns past few years..
      reason of you selling probably due to better opportunities elsewhere, which you been able to reap great profits..
      and tks for dropping by!

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  3. Nice analysis Jacky, looks like you really dive deep into your investments to understand what's driving them. Retail is certainly struggling, but I think good quality malls will continue to appeal to certain people if they can keep enhancing the 'experience'. Good luck with this one!

    1. Tks. I smiled looking at your Fully Franked Website. Very well done to have a light hearted take on a heavy topic like investment!


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