Frasers Centrepoint Trust (FCT), which is one of the most defensive Singapore REITs (S-REITs), boasts defensive strength supported by essential services, says UOB Kay Hian Research analyst Jonathan Koh.
“Essential services account for 45% of its total net lettable area (NLA) and contribute 54.4% of gross rental income. Tenant sales have surpassed pre-pandemic levels since October 2021, and were 11% above pre-pandemic levels in June 2022. It can weather uncertainties due to its strong balance sheet with low aggregate leverage of 33.9%,” the analyst notes.
In an Aug 31 note, Koh is maintaining “buy” on FCT with a target price of $2.74, which represents a 21.2% upside.
FCT is one of the largest owners of suburban retail malls in Singapore with assets under management of $6.1 billion. It has nine suburban malls and one office building.
FCT’s suburban malls are resilient and defensive, writes Koh. They have a large population catchment and are well connected to public transport. “All its nine suburban retail malls are located on, or next to, MRT stations. Thus, shopper traffic was high at 146 million in FY2021 ended September. The portfolio serves a combined catchment population of 2.6 million, or 46% of Singapore’s population.
Essential services, comprising food and beverage (F&B), supermarket or hypermarket, groceries, beauty and health and other services are patronised by consumers on a regular basis, writes Koh. “Suburban malls typically have a higher proportion of retail space allocated to essential services at 40% of NLA, compared to industry average of 20%-30%.”
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FCT has turned around to achieve positive rent reversion of 1.7% (first year rent of incoming lease compared to final year rent of outgoing lease) and 4.1% (between averages) in 1HFY2022.
Shopper traffic grew 32% y-o-y in 3QFY2022 with all suburban malls registering double-digit growth. Tenant sales increased 23% y-o-y in 3QFY2022, driven by supermarkets, beauty and healthcare, leisure & entertainment and F&B.
Portfolio occupancy was maintained at a “healthy” 97.1% as of end-June 2022, says Koh. “Dominant suburban malls, such as Causeway Point, Northpoint City North Wing and Waterway Point, registered high occupancies of 99.3%, 100% and 100% respectively. Occupancy at Changi City Point improved 3.4 percentage points (ppt) q-o-q to 96.1% as more employees returned to work at Changi Business Park. Occupancy at White Sands improved 1.3 ppt q-o-q to 95.3%.”
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FCT has substantially completed the bulk of lease renewal required in FY2022, which was initially 38.7% of total NLA.
Malls are now progressively back filling vacant spaces. Occupancy at Century Square dropped 10.4 ppt q-o-q to 83.0% due to pre-termination by anchor tenant Filmgarde. FCT is in advanced negotiations with two potential replacement tenants. Management expects lease agreements to be signed in 4QFY2022 and occupancy is expected to recover above 90%, notes Koh.
Conservative capital management
Aggregate leverage remained low at 33.9% as of June. The average all-in cost of debt increased 20 bps q-o-q to 2.4%. 69% of its borrowings are hedged to fixed interest rates. Management estimated that every 50 bps increase in SOR/SORA will have a negative impact on distribution per unit (DPU) of 0.17 cents per year.
Looking ahead, FCT could tap on its sponsor pipeline, such as Northpoint City South Wing. It will also explore opportunities for acquisitions from third-party vendors, such as further increasing its stake in Waterway Point from 40% to 50%, writes Koh.
Notably, FCT is a top contender for inclusion into the Straits Times Index (STI). According to FTSE Russell, the four highest ranking non-constituents of the STI by market capitalisation in order of size are Olam International, Suntec REIT, Keppel REIT and FCT. “FCT is a top contender to replace any constituents that become ineligible as a result of corporate actions,” writes Koh.
As at 1.39pm, units in Frasers Centrepoint Trust are trading flat at $2.26
