The REIT reporting season has arrived once again, with Parkway Life REIT (SGX: C2PU) and Keppel DC REIT (SGX: AJBU) reporting their latest business updates last week.
Frasers Centrepoint Trust (SGX: J69U), or FCT, is next in line to report its full fiscal 2024 (FY2024) earnings.
Investors will be keenly watching its financial and operating metrics to get an idea of the Singapore’s retail scene and to see how the REIT is coping with elevated interest rates.
Income investors, in particular, will want to know if the REIT can continue raising its distributions.
So, what can investors expect from FCT? Are there any areas that warrant greater concern?
A downbeat set of first-half earnings
Investors may be concerned with the retail REIT’s financials as FCT had reported a downbeat set of earnings for its first half of fiscal 2024 (1H FY2024) ending 31 March 2024.
Gross revenue fell by 7.2% year on year to S$172.2 million while net property income (NPI) tumbled 8.4% year on year to S$124.6 million.
Distribution per unit (DPU) dipped by 1.8% year on year to S$0.06022.
FCT also saw its FY2023 DPU dip slightly to S$0.1215 from S$0.12227 a year ago for FY2022.
The retail REIT had an excellent track record of increasing its DPU from FY2020 to FY2022, going from a low of S$0.09042 to S$0.12227.
The lower DPU was because of COVID-related reliefs that the REIT manager has to dole out to tenants who were struggling because of circuit breaker measures back then.
For 1H FY2024, the results were negatively impacted by lower contributions from Changi City Point which was divested in October 2023, along with ongoing renovation works at Tampines 1 Mall.
If these two effects are excluded, revenue and NPI would have risen by 2.9% and 2.1%, respectively, for 1H FY2024.
However, the REIT is still reeling from the effects of higher interest rates.
Its finance costs for 1H FY2024 jumped 16.6% year on year to S$41.6 million, with the cost of debt hovering at 4.2% as of 31 March 2024.
Resilient operating metrics
Despite the fall in DPU, FCT continues to post resilient operating metrics.
For its business update for the third quarter of fiscal 2024 (3Q FY2024) ending 30 June, the retail REIT reported healthy occupancy, tenant sales, and customer footfall.
Retail portfolio committed occupancy stood at 99.7% for 3Q FY2024 while shopper traffic enjoyed a 4.1% year-on-year rise.
Tenant sales improved by a smaller magnitude of 0.7% year on year.
Rental reversion also came in positive at 7.5% for 1H FY2024, continuing the increase of 4.3% seen in 1H FY2023.
These robust operating metrics should reassure investors who are worried about the retail REIT.
A solid track record of acquisitions and AEIs
Apart from its operating metrics, FCT also has an enviable growth track record.
The REIT has grown its assets under management (AUM) from S$2.8 billion in FY2018 to S$6.5 billion in FY2023 through a series of acquisitions.
Retail net lettable area (NLA) also nearly tripled from around 1.1 million square feet to 2.9 million square feet over the same period.
Back in FY2019, FCT purchase an initial 33.3% interest in Waterway Point along with a 24.82% stake in AsiaRetail Fund Limited (ARF).
Then, in FY2020, the REIT upped its stake in ARF to 36.89% and proceeded to acquire the remaining 63.11% in FY2021.
The ARF acquisition helped to increase the NLA and AUM of FCT significantly as ARF owned a portfolio of five suburban malls – Tiong Bahru Plaza, White Sands, Hougang Mall, Century Square, and Tampines 1.
In FY2023, FCT’s manager proceeded to acquire an initial 25.5% stake in NEX Mall in Serangoon and increased its stake to 50% in FY2024.
These acquisitions are yield-accretive and helped to boost FCT’s DPU over time.
The manager also engaged in an asset enhancement initiative (AEI) for Tampines 1 that concluded in September this year.
The mall achieved 100% committed occupancy with around 9,000 square feet of NLA created and deployed to prime retail floors.
The entire project generated a return on investment of around 8%, and helped introduce 46 new-to-FCT concepts that occupied 17% of the mall’s NLA.
FCT’s manager said that it plans to announce an upcoming AEI project “in due course” to drive organic rental income growth.
With four other malls acquired from ARF that have not undergone AEIs, there is good potential for the manager to further enhance their assets to increase their appeal.
Get Smart: Healthy prospects for FY2025
FCT may have reported lower year-on-year DPU for 1H FY2024, but income investors should not fret.
The REIT has just completed an AEI which should help to boost rental income.
It also has a good track record of capital recycling with the divestment of Changi City Point and purchase of stakes in both Waterway Point and NEX Mall.
With strong occupancy and positive rental reversions, investors can look forward to a better FY2025.
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Disclosure: Royston Yang owns shares of Keppel DC REIT.
