IntroductionHi everyone, welcome back to The Investing Iguana, where we talk about all things related to investing and personal finance. I’m your host, Iggy, and today we’re going to do a deep dive into Frasers Centrepoint Trust, or FCT for short. FCT is a retail real estate investment trust (REIT) that owns and invests in suburban shopping malls in Singapore. As of March 8, 2023, it has a market capitalization of about S$7.1 billion. In this video, we’ll look at FCT’s portfolio, financial performance, growth prospects, dividend history, valuation, and risks. So grab your popcorn and buckle up, because this is going to be a fun and informative ride. Unlocking the Power of Location: FCT's Network of 10 Prime Suburban Malls in Singapore FCT's portfolio consists of 10 suburban malls in Singapore. These are:
These malls are strategically located near residential areas and transportation hubs, making them convenient for shoppers. They also cater to the needs of the local communities by providing a mix of stores, including necessity spending, food and beverage, and essential services. FCT's malls have a total net lettable area of about 2.9 million square feet and over 1,800 leases. As of March 31, 2023, FCT's retail portfolio had a committed occupancy rate of 99.2%. FCT also owns a 31.15% stake in PGIM Real Estate AsiaRetail Fund Limited (ARF). ARF is a private fund that owns six retail malls in Singapore, two retail malls in Malaysia, one retail mall in Japan, and one office property in China. FCT acquired its stake in ARF in October 2019 for S$1.06 billion. This was a strategic move to increase its exposure to the suburban retail sector and diversify its income streams. From Operational Synergies to Financial Strength: How FCT's 41.4% Stake from FPL Benefits UnitholdersFCT has a strong sponsor in Frasers Property Limited (FPL). FPL is a multinational real estate company that owns, develops, and manages a diverse portfolio of properties across Singapore, Australia, Europe, China, and Southeast Asia. FPL provides FCT with pipeline support, operational synergies, and financial backing. As of March 31, 2023, FPL holds a 41.4% stake in FCT, which aligns its interests with those of FCT's unitholders. FCT has delivered consistent financial performance over the years. From fiscal year (FY) 2018 to FY 2022, FCT's revenue grew from S$382.7 million to S$487.5 million, representing a compound annual growth rate (CAGR) of 6.2%. Its net property income (NPI) grew from S$277 million to S$353.7 million, representing a CAGR of 6.3%. Its distributable income grew from S$200 million to S$247 million, representing a CAGR of 5.4%. Its distribution per unit (DPU) grew from 12 cents to 12.07 cents, representing a CAGR of 0.1%. The slight increase in DPU was due to the enlarged unit base after the acquisition of ARF and the equity fundraising in 2019. FCT's First Half of 2023: Stellar Growth in Revenue, NPI, and DPU Driven by Surge in Shopper Traffic and Tenant SalesIn the first half of 2023, FCT's revenue increased by 23.8% to S$261 million. Its NPI increased by 25% to S$189.4 million. Its distributable income increased by 26% to S$136 million. Its DPU increased by 25% to 6.68 cents. These results were mainly driven by the recovery of shopper traffic and tenant sales, the full contribution from annual rent review (ARF), and the absence of rental rebates given to tenants in the previous year due to the pandemic. FCT has a strong balance sheet and a prudent capital management strategy. As of March 31, 2023, FCT's total assets were valued at S$7.1 billion. Its total borrowings were S$2.4 billion, giving it a gearing ratio of 33.9%, which is well below the regulatory limit of 50%. Its average cost of debt was 2.4%, which is relatively low compared to its peers. Its average debt maturity was 3.5 years, which is fairly long and reduces refinancing risk. Its interest coverage ratio was 5.4 times, which is comfortably above the minimum requirement of 2.5 times. FCT also has a high proportion of unencumbered assets (96.7%) and a diversified debt profile (52% fixed rate and 48% floating rate). FCT has an investment grade credit rating of BBB+ from Standard & Poor's and Baa2 from Moody's, which reflects its strong credit quality and financial flexibility. Unlocking the Potential: FCT Malls Set to Capitalize on Suburban Retail Surge and Easing COVID-19 RestrictionsFCT, a Singapore-based retail REIT, has a positive outlook and growth potential for the future. The company's malls are expected to benefit from the gradual easing of COVID-19 restrictions, the improvement of consumer sentiment, and the increase of vaccination rates in Singapore. In addition, FCT's malls are well-positioned to capture the growth of suburban retail demand, as more people work from home and shop near their residences. As of March 31, 2023, FCT's malls have a low average rental reversion rate of -1.1%. This means that there is room for rental growth when the leases are renewed or replaced. FCT also has several asset enhancement initiatives (AEIs) in the pipeline, which are expected to improve the attractiveness and competitiveness of its malls. These AEIs include the renovation of Anchorpoint, the reconfiguration of YewTee Point, and the upgrading of Northpoint City North Wing. In addition to organic growth, FCT also has opportunities to grow through acquisitions and developments. The company has a right of first refusal (ROFR) from its sponsor to acquire five retail properties in Singapore. These properties have a total net lettable area of about 1 million square feet and a total valuation of about S$1.7 billion. FCT also has a ROFR to acquire Frasers Tower, an office property in Singapore with a net lettable area of about 663,000 square feet and a valuation of about S$1.9 billion. Over 15 Years of Exponential Growth with a 5.9% CAGRFCT has a history of paying stable and growing dividends to its unitholders. It has paid dividends every year since its listing in 2006. The dividends have increased from 6.31 cents per unit in FY2007 to 12.07 cents per unit in FY2022, representing a compound annual growth rate (CAGR) of 5.9%. FCT's dividends are supported by its resilient portfolio, strong cash flow generation, and prudent payout policy. It pays out at least 90% of its distributable income as dividends every year. As of 31 August 2023, FCT's dividend yield was 5.4%, based on its last done price of S$2.24 per unit and its annualised DPU of 12.12 cents per unit for FY2023. This is higher than the average dividend yield of Singapore REITs, which was about 4% as of June 2023. FCT's valuation is reasonable compared to its peers and historical averages. As of 31 August 2023, its price-to-book (P/B) ratio was 1.18, based on its last done price of S$2.24 per unit and its net asset value (NAV) per unit of S$1.90 as of 31 March 2023. This is lower than the average P/B ratio of Singapore REITs, which was about 1.25 as of June 2023. FCT's P/B ratio is also lower than its five-year average P/B ratio of 1.32, which means that it is trading at a slight discount to its historical value. FCT's P/B ratio is also lower than some of its peers, such as CapitaLand Integrated Commercial Trust (P/B of 1.28), Mapletree Commercial Trust (P/B of 1.38), and Lendlease Global Commercial REIT (P/B of 1.25). FCT's valuation is also supported by its growth prospects, dividend yield, and quality portfolio. It has a positive rental reversion potential, a pipeline of asset enhancement initiatives (AEIs) and acquisitions, and a stake in Ascendas Real Estate Fund (ARF) that provides diversification and income stability. FCT has a high dividend yield that is attractive to income-seeking investors. It also has a quality portfolio of suburban malls that are resilient, well-located, and well-managed. Vulnerable Horizons: The Interplay of Interest Rates, Currency Fluctuations, and Regulatory Shifts Impacting FCTFCT, however, is not without risks. FCT faces the risk of competition from other retail players, both online and offline. FCT’s malls may lose their appeal and market share to newer and more innovative malls, or to e-commerce platforms that offer more convenience and variety. FCT also faces the risk of tenant defaults or vacancies, especially in the current uncertain economic environment due to the pandemic. FCT’s rental income may be affected by the inability or unwillingness of some tenants to pay their rents, or by the difficulty of finding new tenants to fill up the vacant spaces. FCT also faces the risk of interest rate fluctuations, currency movements, and regulatory changes. FCT’s borrowings are partly exposed to floating interest rates, which means that its interest expenses may increase if the interest rates rise. FCT’s stake in ARF is denominated in foreign currencies, which means that its income from ARF may fluctuate due to exchange rate movements. FCT’s operations are subject to various laws and regulations in Singapore and other countries where ARF operates, which means that any changes in these laws and regulations may affect its business activities and performance. FCT faces the following risks in 2023:
Why FCT Stands Out in Singapore's Retail Sector: A Buy Rating with an 11.6% UpsideSo, what do I think of FCT as an investment? Well, I think FCT is a solid REIT that offers a stable and growing income stream, a reasonable valuation, and a quality portfolio of suburban malls. I think FCT is well-positioned to benefit from the recovery of the retail sector in Singapore and the region, as well as from its growth initiatives and sponsor support. I think FCT is a good addition to any diversified portfolio of REITs or dividend stocks. However, I also think that FCT is not without risks and challenges. I think FCT needs to constantly innovate and adapt to the changing consumer preferences and behaviours, as well as to the competitive landscape of the retail industry. I think FCT needs to maintain its prudent capital management and financial discipline, as well as to monitor its exposure to interest rate, currency, and regulatory risks. Therefore, I would rate FCT as a buy with a target price of S$2.50 per unit, which implies a P/B ratio of 1.32 (its five-year average) and a dividend yield of 4.8%. This represents a potential upside of 11.6% from its last done price of S$2.24 per unit as of 31 August 2023. Ending NoteThat’s all for today’s video on Frasers Centrepoint Trust. I hope you enjoyed it and learned something new. If you did, please give this video a thumbs up and share it with your friends and family who are interested in investing or personal finance. And if you haven’t already, please subscribe to my channel and hit the bell icon so you won’t miss any of my future videos.
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