Frasers Centrepoint Trust (SGX: J69U), or FCT, is a Singapore-focused suburban retail real estate investment trust (REIT).
It owns or jointly owns four of Singapore’s top ten largest prime suburban malls, namely NEX, Northpoint City, Causeway Point and Waterway Point.
Despite facing higher interest rates over the past two years, FCT’s robust operational performance, driven by high occupancy rates, and positive rental reversion, has enabled it to maintain a stable and resilient financial performance.
While its average cost of debt surged from 2.5% in the fiscal year ended 30 September 2022 (FY 2022) to 4.1% in FY 2024, FCT has managed to contain the drop in its distribution per unit (DPU) to less than 2% over the same period.
Here’s why FCT stands a chance at increasing its DPU for this financial year.
Strong demand for FCT shop spaces
FCT’s malls are situated at convenient locations near residential areas with excellent public transportation connectivity, driving robust demand for their shop spaces.
This is evidenced by a high portfolio occupancy of 99.7% at the end of last September and a remarkable rental reversion of 7.7% for nearly a third of the retail portfolio’s net lettable area (NLA) in FY 2024.
Moreover, with a healthy retail occupancy cost of 16%, there is the potential for further rental growth.
Given the improved performance of FCT’s tenants, with their sales increasing by 1.9% year on year from January to August 2024, compared to a 0.6% year on year decline in the broader market, retailers could be willing to absorb higher rental costs.
Increased contribution from NEX and Tampines 1
Beyond organic growth, FCT’s recent acquisition of an additional 24.5% stake in NEX last March should further increase this year’s distributions from investment.
Furthermore, the successful revamp of Tampines 1, with more than 9,000 square feet of additional NLA, is poised to boost both FCT’s top and bottom lines.
On the flip side, asset enhancement initiatives (AEI) of Hougang Mall are slated to commence in the second quarter of 2025, and will be implemented in phases.
Similar to the Tampines 1 project, the mall will remain operational throughout the enhancement works, and management will receive their fees in units to mitigate the income disruption caused by the AEI.
High interest rates? Johor Bahru-Singapore Rapid Transit System (RTS) Link?
Some of you may be concerned that elevated interest rates could negatively impact distributable income.
While this is a valid concern, given the inherent volatility and unpredictability of macroeconomic conditions, accurately predicting the direction of interest rate movements is challenging.
Therefore, let’s focus on the current situation.
Since last September, the US Federal Reserve’s federal funds rate has declined by 1%, and FCT faces no refinancing risk in FY 2025.
Based on the latest projections from the manager, the average cost of debt is expected to be around the low 4.0% level for the current financial year, indicating stable borrowing costs.
Another external factor that has garnered significant attention recently is the RTS Link between Johor Bahru and Singapore.
Projected to commence passenger service by the end of 2026, the RTS Link will not have a material impact on FCT’s performance this year.
Even after completion, the impact may be more nuanced.
There is a potential for some leakage of shoppers to Johor Bahru but this is only one aspect to consider.
Offsetting factors could include new developments in the northern region, such as new housing, a commercial hub, and the Woodlands Health Campus.
In addition, Causeway Point and Northpoint City could potentially benefit from increased interest from retailers across the causeway looking to expand their presence in Singapore.
Get Smart: Size your position to protect the downside
The combination of higher revenue and stable borrowing costs suggests that FCT’s FY 2025 DPU may exceed last year’s S$0.12042.
At the current unit price of around S$2.10, this translates to an attractive yield of 5.7%, approximately 3% higher than the average interest rate of Singapore Savings Bonds issued in February.
It’s crucial to remember that DPU is not guaranteed and can be impacted by unforeseen events.
To mitigate potential downside risks, investors should carefully consider their risk tolerance and adjust their investment position accordingly.
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Disclosure: Chan Kin Chuah owns shares of Frasers Centrepoint Trust.
