REITs are a great asset class for investors seeking a steady source of passive income.
The steady dividends that these REITs paid over the years have endeared them to income investors over the years.
However, in recent months, the sector has come under pressure due to a combination of high inflation and rising interest rates.
Investors have turned bearish on the REIT sector, resulting in falling unit prices.
Frasers Centrepoint Trust (SGX: J69U), or FCT, is no exception.
The retail REIT, which owns a total of nine suburban retail malls spanning 2.3 million square feet, saw its unit price slide nearly 13% year to date.
Despite the decline, FCT reported that its distribution per unit (DPU) inched up 1.2% year on year to S$0.12227 for its fiscal 2022 (FY2022) ending 30 September 2022.
Investors may be curious as to whether the retail REIT can continue to post higher DPU.
We dig deeper to try to determine this.
A stellar track record
FCT has a stellar track record of increasing its DPU over the years.
Listed on the Singapore Exchange in July 2006, the retail REIT started with just three suburban malls, namely Causeway Point, Northpoint, and Anchorpoint.
The total value of the trio of properties stood at S$915.2 million back then.
Over the last 16 years, the REIT has tripled its number of properties while increasing the value of its assets under management by more than six-fold to S$6.2 billion.
DPU growth has also been impressive.
FY2007 saw DPU come in at S$0.0655 but this has steadily increased to FY2022’s S$0.12227.
The REIT saw uninterrupted year on year DPU growth that was marred in FY2020 due to COVID-19-related restrictions and closures.
DPU growth, however, seems back on track for FY2022 as restrictions were eased earlier this calendar year.
Resilient suburban malls
FCT’s malls are located in the heartland areas and serve a wide swath of Singapore’s HDB population.
Examples of these malls include White Sands (Pasir Ris), Hougang Mall (Hougang), Tiong Bahru Plaza (Tiong Bahru) and Century Square (Tampines).
Because of their proximity to HDB dwellers, these malls have been resilient throughout good times and bad and see healthy footfall and tenant sales.
FCT’s retail committed occupancy stood high at 97.5% for FY2022.
Shopper traffic was just 20% lower than pre-COVID levels across all of FCT’s malls but tenant sales have all but recovered, coming in at between 4% to 15% above pre-COVID levels for FY2022.
FCT also has a reputable sponsor in Frasers Property Limited (SGX: TQ5) or FPL.
FPL has also released a multi-feature loyalty app called Frasers Experience that allows customers at its malls to earn and redeem points at 15 of its properties, including all of FCT’s malls.
These points can be accumulated and redeemed for gift cards and other perks, thereby encouraging users to patronise FCT’s malls.
A history of capital recycling
FCT’s manager has also chalked up a good track record of capital recycling.
This process involves divesting lower-performing assets and acquiring properties with higher net property income yields.
In September 2020, FCT acquired a 63.1% stake in AsiaRetail Fund Limited for S$1.06 billion, adding five suburban malls that almost doubled its retail area.
At the same time, the REIT also announced the divestment of Bedok Point.
In December 2020, Anchorpoint was sold off for S$110 million and in March 2021, YewTee Point was divested for S$220 million.
These moves by the REIT manager show how FCT has optimised its portfolio by selling away underperforming assets and then channelling some of the proceeds into buying better-yielding properties.
Favourable debt metrics
Meanwhile, FCT also exhibits healthy debt metrics that can enable the REIT to continue growing.
Aggregate leverage stood at just 33%, significantly below the maximum threshold of 50% mandated by the Monetary Authority of Singapore.
The all-in average cost of debt was also low at 2.5% while 71% of the REIT’s loans were hedged to fixed interest rates, thereby mitigating a sharp rise in borrowing costs.
There could be interesting opportunities out in the market for FCT’s manager to swoop in on.
We previously reported in June about Mercatus Co-operative, a unit of NTUC, offering four of its properties for sale.
The latest update is that Mercatus has removed one of the assets from the deal but has included Jurong Point and Swing By @ Thomson Plaza.
Link REIT (HKSE: 0823), Asia’s largest REIT, is said to be the frontrunner for Mercatus’ assets but there is still a chance that FCT could bid successfully for them.
The winning bidder could be announced in a few weeks.
If FCT manages to snag any of Mercatus’ assets, it could provide a much-needed boost to its asset base and help increase its DPU further.
Get Smart: Holding out for a hero
FCT is well-positioned to benefit from its portfolio of suburban malls.
The REIT’s track record suggests it can continue to grow its DPU, barring the onset of another pandemic similar to what was experienced two years ago.
The manager’s capital recycling expertise, along with the presence of a strong sponsor, should also assure investors of the REIT’s quality and resilience.
Not sure which REIT to put your money in? Use our 7-step REIT checklist to find one that fits into your retirement plan. Checklist is inside our latest FREE report “Singapore REITs Retirement Plan”. Click here to download it now.
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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.