Frasers Centrepoint Trust (FCT), known for running a portfolio of suburban malls with relatively resilient operating metrics, has reported a set of FY2023 results that most analysts are positive about. Nonetheless, with rates likely to stay higher for longer, some of them have trimmed their target prices for this REIT.
On Oct 25, FCT, whose portfolio of 10 malls includes stakes in the likes of Waterway Point, Northpoint City North Wing and Nex, reported a distribution per unit (DPU) of 6.02 cents for the 2HFY2023 ended Sept 30, a slight dip of 1.2% y-o-y. This brings the full-year distribution to 12.15 cents, 0.6% lower versus the preceding FY2022.
Richard Ng, CEO of the REIT’s manager, is optimistic that despite the challenging broader economy, FCT continues to enjoy several positive drivers. For example, Singapore’s population continues to grow amid sustained healthy consumer spending on essentials, healthy demand for prime suburban retail space and tight supply in the retail market. “We believe FCT is well positioned to benefit from these factors going forward,” says Ng.
“FCT continues to pull the right levers of growth organically,” state Geraldine Wong and Derek Tan of DBS Group Research, referring to the record-high occupancy rate of 99.7% across the portfolio and 5% hike in rental reversion.
Given that tenant sales have reached around 15% above their pre-Covid-19 levels, FCT is a REIT that continues to outperform its peers on several fronts, note Wong and Tan. Its occupancy cost, which stood at 15.6% for FY2023, was below its pre-Covid-19 levels of 16.6% to 17.0%, which means there is scope for further rental upside, especially with healthy tenant sales, add the DBS analysts, who have kept their “buy” call and $2.60 target price on this counter.
The DBS analysts believe that FCT’s manager’s track record in portfolio rejuvenation in recent years will help ensure the resiliency of the REIT’s portfolio for medium-term sustainability. Furthermore, FCT might raise its stake of 25.5% in the Nex mall in the current FY2024.
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As part of its overall capital recycling, FCT has announced the divestment of Changi City Point and its stake in Bursa-listed Hektar REIT. The DBS analysts estimate that impending proceeds of some $375 million will be used to bring gearing down to a “comfortable” 36.1%.
With a lower gearing, FCT will have additional flexibility to take on new debt to fund acquisitions in the medium term, specifically, an additional stake in the popular Nex mall. “At an implied cap rate of 4.9% for Nex, the redeployment into Nex can be done in a way that is accretive to value,” they write.
Meanwhile, given a new tone of higher for longer by the US Fed, the DBS analysts have tweaked their rates assumptions to a more “conservative” 4.25% average interest cost for FY2024/FY2025 from 4% previously.
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The DBS analysts have also lowered their DPU estimates marginally to 11.9 cents and 12.2 cents in the FY2024 and FY2025 respectively to account for a forward yield of 5.6% and 5.8%.
A ‘top pick’
Other analysts are not as bullish as DBS, as they trimmed their target prices to take into account higher costs.
CGS-CIMB Research’s Natalie Ong and Lock Mun Yee, citing the management, expect the current FY2024 to suffer from a slight margin compression because of higher utilities and manpower costs.
As such, despite the positive outlook, Lock and Ong have lowered their earnings per share (EPS) estimates for the FY2024 and FY2025 to reflect the divestment of Changi City Point and Hektar REIT units. They have also lowered their DPU estimates for the FY2024 and FY2025 by 3.0% and 3.4% on higher operating expenses (opex) and cost of debt assumptions, which has resulted in their lower target price of $2.52 from $2.62.
Even so, Ong and Lock have named FCT as their “top pick” within the retail sector S-REITs as they like the resilience and demand for space at the REIT’s suburban malls. They were also cheered by FCT’s positive rent reversions, higher turnover rents, as well as a stable balance sheet.
Citing the management, the analysts note that FCT will continue to focus on increasing gross turnover rents by rejigging the tenant mix towards tenants with higher sales, and pushing for higher base rents. “We think positive reversions, higher gross turnover rents from improved tenant sales and contributions from the completed asset enhancement initiative (AEI) at Tampines 1 will drive FY2024 revenue growth,” state Ong and Lock, who have an “add” call on this stock.
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In line with lowered DPU estimates, Krishna Guha of Maybank Securities has trimmed his target price as well, from $2.35 to $2.25, as he factors in slower retail sales and rising borrowing costs.
The analyst, who has a “buy” call on the stock, has also forecasted a CAGR of 2% for FY2022 to FY2024 led by growth in passing rents, higher ancillary income and service charges. That said, he expects borrowing costs to rise from 2.2% to 3.8% by 2025.
For the research team at OCBC Investment Research (OIR), the “only blemish” in FCT’s FY2023 was the “slight decline” in its DPU, no thanks to higher borrowing costs. As such, given the higher-for-longer interest rate environment, FCT is likely to face further pressure on its distribution, notes OIR, which has trimmed its target price to $2.35 from $2.41.
That said, OIR remains positive on FCT, noting that it has built up a strong track record of delivering positive DPU growth every year since its listing in July 2006 to FY2019 with the exception of FY2020 due to the Covid-19 pandemic. FCT’s FY2021 results saw a “firm rebound” y-o-y while growth continued in FY2022.
OIR believes that FCT’s resilient and defensive portfolio of suburban malls in Singapore would position it favourably amid an uncertain macroeconomic landscape, given the malls’ dominant positions in their respective catchment areas.
“Management’s astute divestments have also alleviated the strain on its balance sheet, and [FCT] is now better positioned to pursue inorganic growth opportunities,” writes the OIR team.
Nonetheless, the team has lowered its DPU forecasts for the FY2024 and FY2025 by 0.4% and 1.2% respectively to factor in FCT’s proposed divestments. With greater market volatility, OIR has also increased its cost of equity assumption from 6.2% to 6.4%.
OIR’s research team has also kept its “buy” call on FCT.
Defensive safe haven
PhillipCapital’s Darren Chan has kept his “accumulate” call on FCT as he likes the REIT’s “nearly full” occupancy, which stood at 99.7% as at Sept 30. The REIT’s continued growth in tenants’ sales and shopper traffic, higher portfolio valuation as well as a lack of refinancing risks in FY2024 are all positives.
However, higher operating costs were a concern to Chan, who believes that FCT’s net property income (NPI) margins for FY2024 will drop from 71.8% in FY2023 to 70.6% in FY2024.
In tandem, Chan has lowered his DPU forecasts for the FY2024 and FY2025 both by 5% as he rolls his forecasts forward, along with a revised target price of $2.29 from $2.35 previously.
“We expect positive rental reversions to remain intact for FY2024, supported by the low occupancy cost of 15.6% and tenants’ sales growth. The current share price implies a FY2024 DPU yield of 5.9%,” he says.
Like some of his peers, Chan is cheered by FCT’s active asset and capital management efforts, which will help reduce funding costs. He points out that the REIT’s manager has announced or executed five different transactions in FY2023 with a total value of $1.1 billion, including the divestments of Changi City Point and Hektar REIT.
Chan expects FCT to grow by raising its stake in Nex and Northpoint City South Wing. In addition, the first batch of asset enhancement works at Tampines 1 is slated for completion in November and tenants can be back in business in December. “The mall continues to operate as works are staged and more than 94% of AEI spaces have been pre-committed to date. The full completion of Tampines 1 AEI is expected in 4Q2024,” notes Chan.
For RHB Bank Singapore’s Vijay Natarajan, the FY2023 results were below his expectations. However, he likes how retail market conditions are reflecting a healthy improvement from steady income growth and tourist arrivals, which came across FCT’s operational performances across its malls.
The recent divestment moves are a plus in his book as well. That said, higher interest and operational cost pressures will continue to weigh on earnings, he says. “FCT remains a defensive safe haven but current yield spreads are not attractive,” he writes.
Like his peers, Natarajan has also lowered his DPU estimates for the FY2024 to FY2026 by 1% to 3% by fine-tuning interest costs and NPI margins. His new target price for FCT is $2.12, a slight dip from $2.15 earlier. Natarajan has kept his “neutral” call on FCT.
Moomoo Singapore’s equity dealer, Too Juncheong, believes that investors who have confidence in FCT may look to accumulate their positions in the REIT during this higher-for-longer interest rate environment with its current dividend yield of nearly 6%. Such investors can sit tight and wait for the eventual rate cuts, Too adds in his unrated report.
“FCT is the largest suburban retail mall owner in Singapore, and its presence is undeniable for most Singaporeans… Investors who are looking for opportunities in FCT can physically head down to any of the retail malls owned by FCT, to have a feel and sense of the occupancy and activity within the malls, something not as accessible for investors looking at overseas REITs,” he writes.
