In my previous article, I provided two reasons as to why I believe that Frasers Centrepoint Trust (SGX: J69U), or FCT for short, is able to continue to grow its dividend. FCT has an enviable track record of raising its dividend every year after its IPO. The first two reasons are:-
1. Potential injection of property from sponsor
2. Acquisition of shares in PGIM Real Estate AsiaRetail Fund and growth of Hektar REIT
Here are another two reasons which bolster my belief on why FCT can continue its track record of raising dividends far into the future.
3. Asset enhancement initiatives (AEIs)
Asset enhancement initiatives, commonly known as AEI, are measures taken by the manager of the REIT to enhance the appeal of their properties. These measures will include (but are not limited to) refurbishment, renovation, additions or repairs.
Northpoint City has just completed its $60 million AEI in Q1 2018, which will integrate it with the newly-built South Wing. Though North Wing is much older than the newer South Wing, it has caught up in terms of façade and tenant mix after the refresh.
FCT recently announced a 10-month AEI at Causeway Point, commencing end-February 2019 with target completion in December 2019. It involves the construction of an underground pedestrian link between Causeway Point and Woods Square. This is expected to increase traffic flow into the mall when Woods Square is completed in 2020/2021 as the link also provides a shorter underground link to Woodlands MRT station.
These are just two examples of AEI and investors should note that AEI enhances both the footfall and rental potential of the properties involved, as it increases the appeal of the mall (e.g. through better connectivity) and may also add additional net lettable area (NLA). These, in turn, also increase the rental revenue earned by the REIT and would naturally translate into higher DPU over time.
4. Positive rental reversion
Another method for increasing rental revenue is for the REIT to undergo positive rental reversions. Rental reversion refers to the renewal of rentals for existing tenants after their existing tenancy agreements expire. If the reversion is positive, this means tenants pay a higher rental per square foot of net lettable area.
FCT has a strong track record of positive rental reversions as can be seen below:-
Source: Frasers Centrepoint Trust’s Q2 2019 Presentation Slides
There is good reason to believe that positive rental reversions can continue, as FCT reported a +2.0% rental reversion in Q2 2019 alone. Tenancy agreements usually include rental escalation clauses that are pegged to inflation and this is one of the key drivers in ensuring positive reversions.
Strong confidence in FCT’s prospects
With the four reasons detailed in both my articles, I believe there is a strong case to be made for FCT continuing to achieve higher DPUs for investors well into the future.
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The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. Motley Fool Singapore contributor Royston Yang does not own shares in Frasers Centrepoint Trust. The Motley Fool Singapore has recommended shares of Frasers Centrepoint Trust.