Tug Of Fools: Frasers Centrepoint Trust – The Bull Argument


I am Ong Qiuying and this is my bull argument for Frasers Centrepoint Trust (SGX: J69U).

FCT is a leading retail real estate investment trust (REIT) in Singapore, comprising a portfolio of six quality suburban shopping malls with a combined value of S$2.3 billion.

In Singapore, the shopping mall is probably one of the most frequented places of interest, so much so that it has become part and parcel of our daily lives. Ask anyone what they are planning for the weekend or after work and there is a high chance that visiting a mall is part of it.

Suburban malls, in particular, have strengthened its position among heartlanders as it provides an equally satiable retail and entertainment experience. Driving this steady retail growth are the growing population and healthy economic figures in Singapore, where unemployment rates are low with signs of growing tourism receipts and median household income.

FCT’s portfolio certainly offers a unique pure play in the suburban retail segment. Notably, FCT’s multi-point strategy of organic growth, asset enhancement growth and acquisition growth has helped the trust build resiliency in its portfolio, where it enjoys steady occupancies and healthy rental growth.

This has also helped FCT deliver consecutive years of growth in revenue, net property income, total assets and distribution to unitholders since its listing in 2006 and weathered the global financial crisis.

High occupancies

FCT’s properties have consistently maintained near full occupancy rate. It has an overall 98.5% occupancy as at 30 June. Occupancy at Bedok Point, which fell previously due to ongoing upgrading works has recovered above 99% occupancy rate after the lease commencement of several tenants in 3Q14.

FCT’s ability to keep its retail space leased lies in its strategically placed malls near regional centers with good connectivity to the public transport network. It enables the malls to enjoy wide captive markets and high footfall, which also in turn, supports the attractiveness of the malls in retaining and capturing good tenants.

Despite an influx of 11 new malls island-wide come 2017, reported in Savills’ 1Q14 research, FCT may not need to fret given that the new malls are spread across the central business district and other regions.

Additionally, as Knight Frank’s 1Q14 Research noted that more malls now look to position themselves within various niche markets, FCT’s portfolio remains highly relevant in the daily lives of consumers with a predominant tenant base in necessities products.

Rental potential

Significantly, FCT’s multi-point strategy helps to drive up rental potential with its yield-accretive acquisition and continuous asset enhancement initiatives (AEIs).

Changi City Point, the latest addition to its portfolio should be immediately accretive to earnings for FY14 and is expected to generate a net property yield of 5.4%. Further rental upside could also potentially come from Changi City Point, where there are plans to refresh the tenant mix by the manager.

Separately, in the periods following the completion of AEIs on Causeway Point and Northpoint, FCT has seen a healthy boost to its top and bottom lines. For leases renewed in 2Q14, both malls registered around 10% increment in rental rates. The portfolio also achieved an average rental reversion of 9.3% in 2Q14 and 7.8% in 3Q14.

Looking deeper into the retail rental rates, Knight Frank’s 1Q14 report showed that in the suburban mall space, the average gross rents for prime spaces were up 3.9% year-on-year and 1% quarter-on-quarter at $32.30 per square foot per month.

Furthermore, Knight Frank reported that island-wide prime retail rents increased 0.8% quarter-on-quarter in 1Q14. These prime spaces across Singapore are also expected to remain firm with potential upside of about 3% to 5% by 4Q14.

Given the potential rental upside, leases expiring in FY14 and FY15 for FCT are likely to lock in better rental rates. Significantly, its top three assets by size, post-AEI, will account for 78% of rental renewals in FY15, spelling opportunities for its portfolio.

Source: Company Reports

Diversification boost

Particularly, Changi City Point could provide significant upside to its growth. By value, Changi City Point’s S$305 million price tag places it as FCT’s third largest property and is expected contribute 12.8% of net property income for the enlarged portfolio in the June-to-September period.

The addition of Changi City Point will also improve the trust’s tenant mix with more than 130 tenants and new tenants such as Tung Lok Signatures, Samsonite Service Centre and Nike Factory Store coming onboard. At the same time, it will reduce its reliance on income contribution from its largest asset, Causeway Point, which contributed 50.4% of its revenue stream in 2Q14.

Financial track record

Finally, FCT has not disappointed unitholders, with its steadily improving distribution pay-outs over the last eight years. Distribution per unit of FCT has a compounded annual growth rate of 8.9% from its listing in FY06 (annualised) to FY13.

Source: Company Reports

Further, the trust has maintained a consistently low leverage ratio below 40% at 30.2% as at 30 June 2014. This was including the part financing the acquisition of Changi City Point by placement proceeds of around $150 million on 16 June. 75% of its total borrowings amounting to $739 million are also on fixed rates or hedged via interest rate swaps.

In all, FCT’s resilience backed by its strong assets and financial track record appears to have positioned it well to grow in all directions. Usually, the rewards to unitholders would also follow suit.

This concludes the bull case. You can read the bear argument here.

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