Frasers Centrepoint Trust (SGX:J69U) has been a winner over the last five years. The share price has recorded returns of about 142% from 1 Oct 2008 to the closing price on 1 October 2014. In comparison, the capital gain returns of the SPDR STI ETF (SGX:ES3), a proxy for the Straits Times Index (SGX:^STI), was 75.5% for the same duration. Over the past five financial years, the REIT has paid out a total of almost 45 Singapore cents in dividends. You can also read about a bull-and-bear thesis in the Tug-of-Fools article here.
Frasers Centerpoint Trust is a Real Estate Investment Trust or REIT. Being a shareholder of a REIT gives you partial ownership to all the real estate that it owns. In the case of this REIT, it has six suburban shopping malls under its umbrella. As per the Monetary Authority of Singapore (MAS), REITs are mandated to distribute at least 90% of its profits as dividends to enjoy tax transparency. I also wrote about a few pointers for picking REITs here.
So, while the returns from Frasers Centrepoint Trust has been fashionable — as Foolish investors, we should look behind the curtains to understand how sustainable the dividends are, and how it can grow.
A closer look
To get a sense of the resilience of the property portfolio, we can look at the gross rental by property of the REIT. Below is the growth of the gross rental revenue for the past five financial years.
Source: REIT Annual Report and Financials Download; Northpoint 1 and 2 are lumped together above.
From the chart above, it would seem like all five malls under the REIT show either stable or growing gross rental revenue over the period displayed. For the financial year ended 30 September 2013 (FY 2013), Causeway Point and Northpoint made up about 78% of total gross rental revenue.
There was a noticeable dip in rental revenue for Causeway Point in FY 2011. However, the dip was due to asset enhancement initiatives (AEI) works which may have boosted gross rental revenue in the subsequent years. The Northpoint mall, which was boosted by AEI activities and the acquisition of Northpoint 2, was the biggest gross rental growth driver in the past five financial years.
We would ideally like to see the revenue dollars drip down to the bottom line. For that, we look into the profitability of the properties.
Source: REIT Annual Report and Financials Download
To get a sense of the bottom line, we can look at the growth of the net property income (NPI) by property. The NPI is defined as the gross rental revenue of a property minus all related expenses.
In the case of Frasers Centerpoint Trust, the NPI has generally followed the rise of the gross rental revenue. The positive exception would be Yew Tee Point, Anchor Point, and Northpoint. The trio’s NPI grew faster that its gross rental revenue over the past five financial years. Northpoint was again the biggest driver in NPI growth for the same reasons mentioned before.
Finally, Foolish investors might also want to look at the debt profile of the REIT. The gearing ratio, type of funding, and interest coverage ratio may be of interest. To do that, we can look at the latest quarterly earnings presentation on 30 June 2014.
|Interest Cover*||6.72 times|
|% of borrowing on fixed rates or hedged via interest rate swaps||75%|
|Weighted Average Debt Maturity||2.75 years|
|Average Cost of Borrowing (all-in)||2.45%|
|% of Secured Bank Borrowings||45.2%|
|Total Borrowings||$739 million|
Source: REIT earnings presentation; * interest cover is calculated as earnings before interest and tax (EBIT) divided by interest expense
With the gearing of around 30%, and fixed rate loans at 75%, it would seem like Fraser Centerpoint Trust might be relatively protected from any increases in bank interest rates in the near future. Foolish investors should keep an eye out for its refinancing activities in FY 2016 and FY 2017 when 61.4% of its borrowings comes due.
Finding sustainable funding may be one of the important factors for an REIT. To this point, more than half of the loans are unsecured, therefore the REIT might have the option to pledge their properties in the future to raise capital. On end of FY 2013, the company also has expanded its Medium Term Note program from $500m to $1 billion. Therefore, the REIT could have funding flexibility in the future.
A quick look ahead
From the book Building Wealth Through REITs, the author Bobby Jayaraman quipped that “In general, mall rentals — especially suburban — have been quite stable over the years despite a fluctuating growth environment. Orchard Road mall rentals have been more volatile and have come down from their highs in the late 80s.”.
We will have to look at CapitalMall Trust (SGX:C38U) in another article for a more complete comparison, but from the information on Frasers Centerpoint Trust above, his statement would seem to be accurate for the case of suburban malls.
Frasers Centerpoint Trust strategy to grow in the future would be through organic growth (includes AEI), and acquisitions of new malls in Singapore or overseas. On 16 June 2014, the REIT completed the acquisition of Changi City Point. The acquisition was funded in part by issuance of new 88 million units at $1.835 per unit, and $150 million in bank borrowings. For the third quarter of 2014, Changi City Point added about $1 million in gross revenue and $0.6 million in NPI. It should be noted that this gross revenue, and NPI for the period 16 June 2014 to 30 June 2014 therefore we should look forward to higher contributions from the property in the future.
Foolish Take away
As lifelong students of Foolish long term investing, it pays to look under the hood to understand whether a rise in the REIT’s share price is supported by the quality of growth that we are looking for.
Frasers Centerpoint Trust might present itself as a stable income generating REIT to consider. Its gross rental revenue is less than the quarter than that of CapitaMall Trust, therefore there might be room for further growth within Singapore itself. However, the quality of growth might be the key for long term share price growth.
As of 2 October 2014’s closing price of $1.92, Frasers Centerpoint Trust traded at a price-to-book ratio of around 1.1, and has a dividend yield of around 5.9% (based on a trailing twelve months distribution per unit of 11.4 Singapore cents).
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.