Income investors favour strong, well-managed REITs that can stand resilient in the face of economic hardship.
Frasers Centrepoint Trust (SGX: J69U), or FCT, counts as one of such REITs.
The suburban retail REIT is helmed by a strong sponsor in Frasers Property Limited (SGX: TQ5) and its portfolio of 10 malls and one office property are located close to public transport nodes.
FCT had just announced its fiscal 2023 (FY2023) earnings for the year ending 30 September 2023.
The REIT pulled off an admirable performance amid a tough environment of rising interest rates and high inflation.
Here are five highlights from the REIT’s latest earnings report that investors need to take note of.
1. A respectable financial performance
For FY2023, FCT reported a mixed performance with revenue rising 3.6% year on year to S$369.7 million.
Net property income (NPI) inched up 2.7% year on year to S$265.6 million.
However, distribution per unit (DPU) slipped by 0.6% year on year to end FY2023 at S$0.1215.
The chief reason for the lower DPU is the 73% year-on-year surge in finance costs from S$46.8 million to S$81 million for FY2023.
Fortunately, this increase was offset by a better performance from FCT’s associates and joint ventures.
At a unit price of S$2.12, FCT’s historical distribution yield stood at 5.7%.
2. Commendable operating metrics
Despite the slight dip in DPU, the retail REIT reported healthy operating metrics for its portfolio.
Committed occupancy for the portfolio stood at 99.7%, excluding Tampines 1 which is undergoing an asset enhancement initiative (AEI).
The REIT also recorded a positive rental reversion of 4.7%, higher than the prior year’s 4.2%.
Shopper traffic surged by 24.7% year on year while tenant sales improved by 7.3% year on year for FY2023.
FCT also reported a stable portfolio valuation for its portfolio of nine retail malls (excluding partial interests in both Nex and Waterway Point, as well as Changi City Point which is slated for divestment).
The appraised value of these properties stood at S$5.22 billion, in line with the prior year’s valuation of S$5.19 billion.
3. No refinancing risks for FY2024
With interest rates on the rise and possibly staying higher for longer, investors will naturally be concerned about FCT’s debt profile.
As of 30 September 2023, FCT’s aggregate leverage stood at 39.3%.
The pro-forma aggregate leverage, however, is 36.1% assuming the divestment of both Changi City Point and units in Hektar REIT (KLSE: 5121) are used to repay certain debts.
The REIT’s cost of debt crept up slightly to 3.8% from 3.7% in the previous quarter, with its adjusted interest cover ratio at 3.47 times.
Only 63% of its total loans are hedged, opening the possibility of further finance cost increases for the remaining 37% of loans that are on floating rates.
The good news is that the manager has already refinanced the S$353.5 million that will come due in 2024 to 2029.
Hence, there is no refinancing risk for FY2024 until 23.2% of FCT’s loans come due in FY2025.
4. Strong fundamentals for prime suburban retail space
CB Richard Ellis (“CBRE”) has painted an optimistic scenario for Singapore’s suburban retail sector.
The research outfit expects overall retail rents to end on a positive note in 2023 with suburban prime retail rents rising by 3.1% year-on-year.
Furthermore, the Ministry for Trade and Industry (“MTI”) expects consumer-facing sectors such as retail and food & beverage to expand, underpinning continued growth for FCT’s tenant base.
Along with Singapore’s population growth of 5% in 2023 and the steady rise in median household income here, these factors bode well for the continued health of the retail sector.
Meanwhile, FCT has also introduced 72 new-to-portfolio tenancies in FY2023.
Some examples include Mixue in Century Square, Gashapon Bandai in NEX, and Love Bonito in Waterway Point.
With these new brands, the manager hopes to continuously refresh the retail mix to ensure relevance and to draw more shoppers into the REIT’s malls.
5. AEI and capital recycling
The REIT manager is actively refreshing its portfolio through capital recycling and AEI.
The first batch of AEI units for Tampines 1 is slated to roll out from December 2023 onwards.
The mall will also organise a line-up of events and promotions to draw shoppers back into the mall.
To date, more than 94% of AEI spaces have been pre-committed.
FY2023 has also been a busy year for the manager.
It undertook two acquisitions – that of a 25.5% stake in Nex and an additional 10% stake in Waterway Point, as well as two divestments.
Investors can look forward to more corporate developments as the REIT’s gearing post-divestment should come down to a reasonable level, opening it up for debt funding to acquire yield-accretive assets.
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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Disclosure: Royston Yang does not own shares in any of the companies mentioned.
