On 26 April 2023, Frasers Centrepoint Trust (“FCT”) have announced their 2023 first half year result ended 31 March 2023. The results itself are generally stable. The acquisition of Nex and additional stake in Waterway Point have definitely shifted the fundamentals of FCT for this quarter and we can see it in this results, with the higher interest rates and substantial increase in gearing.
However, I can see that long-term interest rates have already started to decrease, with the 10 year yield of the June 2023 Singapore Savings Bond decreasing to 2.81%. With their net property income continuing on an upward trend, over the next few years FCT should be able to benefit from improved DPU with lower cost of debt and also an uplift in property valuation. Investors should take note of the potential impact and ensure that FCT fits their risk appetite accordingly.
Website: Financial Statements And Related Announcement::Second Quarter And/Or Half Yearly Results
Background
FCT is a leading developer-sponsored REIT and one of the largest suburban retail mall owners in Singapore. FCT’s property portfolio comprises nine retail malls and an office building located in the suburban regions of Singapore, near homes and within minutes to transportation amenities.
FCT is among the top-ten largest Singapore REITs (“S-REITs”) by market capitalization. It is also an index constituent of several benchmark indices including the FTSE EPRA/NAREIT Global Real Estate Index Series (Global Developed Index), FTSE ST Real Estate Investment Trust Index, MSCI Singapore Small Cap Index and the SGX iEdge S-REIT Leaders Index.
Listed on the Main Board of the Singapore Exchange Securities Trading Limited since 5 July 2006, FCT is managed by Frasers Centrepoint Asset Management Ltd., a real estate management company and a wholly-owned subsidiary of Frasers Property Limited.
Key Metrics
Distribution Per Unit (“DPU”)
| Metrics | Current | Previous |
|---|---|---|
| Distribution Per Unit | -0.1% | No Info |
DPU have seen a decrease by 0.1% in the first half of 2023 when compared to the first half of 2022. The decrease is not unexpected given the decrease in net income due to a rise in finance costs, which arose this quarter from the additional debt taken to fund their recent acquisition.
This saw the distributable income for the period to decrease when compared to the same period in the previous financial year. However FCT is still able to main their total distribution payout as they have income available for distribution at the beginning of the period. In other words tapping onto their reserves.
Total distribution remained unchanged but due to an increase in the total number of units entitled to distribution from 1,701,649,000 units as at 31 March 2022 to 1,707,654,000 units as at 31 March 2023, the DPU therefore saw a decrease.
The metric is Neutral as DPU have remained relatively unchanged.
Occupancy
| Metrics | Current | Previous |
|---|---|---|
| Occupancy | 99.2% | 98.4% |
Occupancy rate as at 31 March 2023 stands at 99.2%, an improvement from the previous quarter. The improvement was due to being able to secure commitment for the anchor cinema space for Century Square. This metric is Favorable as it is above my expected healthy occupancy rate of 95%.
Gearing ratio
| Metrics | Current | Previous |
|---|---|---|
| Gearing Ratio | 39.6% | 39.4% |
The gearing ratio has increased to 39.6% with the acquisition of the retail property Nex and additional stake in Waterway Point. This is in line with my expectation as compared to management’s original investor presentation which showed the increased leverage to 38.5% using the 30 September 2022 ratio of 33.0% as the base. This to me is considered Neutral as although there is sufficient headroom from the MAS raised limit of 50%, it has increased substantially.
Interest coverage
| Metrics | Current | Previous |
|---|---|---|
| Interest Coverage | 4.3x | 4.7x |
The interest coverage for the trailing 12 months stands at 4.3 times, a decrease from 4.7 times in the previous quarter. This is Unfavorable in my opinion but is not unexpected as other REITs are also seeing a decreasing interest coverage in the current interest rate climate. It has also worsened with the new debt financing taken up by FCT to purchase the new assets, as the debt is taken in the current high interest rate environment.
The Federal Reserve on 3 May 2023 has hiked the interest rates to a range between 5.00% and 5.25%, the highest level in 15 years and are likely to keep it at these levels over the next few years. While the interest rates may not be increased further, maintaining the rates at these levels over the next few years may cause FCT to take on new loans at higher interest rates.
Website: US Fed raises interest rates again, signals potential pause in tightening cycle
I have thus performed a sensitivity analysis using the information as at 31 March 2023:
| Description | Amount (SGD’000) |
|---|---|
| Total Debt | $2,211,800 |
| Debt Not Hedged (%) | 23.6% |
| Debt at Floating Rate Exposed | $521,985 |
| Distributable Income FY2022 | $209,884 |
Interest rate sensitivity analysis as below:
| Change in Interest Rates | Decrease in Distributable Income (SGD’000) | Change as % of FY2022 Distribution |
|---|---|---|
| + 50 bps | -$2,610 | -1.2% |
| + 100 bps | -$5,220 | -2.5% |
| + 150 bps | -$7,830 | -3.7% |
| + 200 bps | -$10,440 | -5.0% |
| + 250 bps | -$13,050 | -6.2% |
| + 300 bps | -$15,660 | -7.5% |
Do note the above is my estimation which may be different from management’s estimation. Nonetheless, if the interest rates were to increase by the basis points above, FCT may experience a fall in DPU accordingly.
Debt maturity profile
| Metrics | Current | Previous |
|---|---|---|
| Debt Maturity Profile | 1.9 years | 1.8 years |
Weighted average term to maturity of their debt stands at 1.9 years as at 31 March 2023. This is Neutral as while they have sufficient time to refinance their debts as they fall due, the due dates are coming soon and the current interest rate environment may result in FCT taking up loans at higher rates.
Price to Book Ratio
| Metrics | Current | Previous |
|---|---|---|
| Price to Book Ratio | 0.93 | 0.95 |
The Price to Book (“P/B”) ratio currently stands at 0.93. This is computed using the closing share price of SGD2.16 on 5 May 2023 and the net asset value per share of SGD2.32 as at 31 March 2023. The P/B ratio is Favorable.
Other Metrics
Tenant profile
FCT has a well diversified tenant profile with the top 10 customers as at 31 March 2023 only account for about 18.5% of monthly portfolio gross rental income. Furthermore no single tenant accounts for more than 4.1% of FCT’s gross rental income, and 52.5% of their portfolio is under essential services. This is Favorable as FCT will not be too reliant on any single tenant for income.
Dividend Yield
| Year | Yield | Total |
|---|---|---|
| 2023 | 2.84% | SGD 0.061 |
| 2022 | 5.66% | SGD 0.122 |
| 2021 | 5.53% | SGD 0.092 |
| 2020 | 4.25% | SGD 0.122 |
| 2019 | 6.46% | SGD 0.140 |
| 2018 | 5.56% | SGD 0.120 |
The first dividend payout for 2023 amounted to SGD0.061 per share. If annualized this will be SGD0.122 per shares, which is in line with the payout in 2022.
At 5 May 2023, with a closing share price of SGD2.16 and expected dividend payout of SGD0.122 for the full calendar year 2023, this translates to a healthy dividend yield of 5.65%. With the exception of 2020 drop in dividend due to Covid-19, FCT have been able to increase their dividends consistently throughout the years. For my benchmark, a general reasonable range would be around an average of 5.5% to 6.5%, and FCT is within the range.
Website: Reasonable Dividend Yield 2023Q2
It is worth noting that interest for long-term safe assets have stabilized and is on a downtrend. The June 2023 Singapore Savings Bond being issued with a 10-year average interest rate of 2.81%. There is a chance for interest rates may not increase significantly moving forward, and the required dividend yield of investor may be lower than current.
Website: SBJUN23 GX23060E Bond Details
If using dividend yield of 6.5% as a benchmark, based on the dividend of SGD0.122 there is potential for FCT to see its share price drop by another 13.1% to SGD1.88. However with the long-term interest rates continue to decrease, I am not expecting the required rate of return to be 6.5% for the short term.
| Yield | Share Price | Downside |
|---|---|---|
| Current (5.65%) | 2.16 | – |
| 6.50% | 1.88 | -13.1% |
| 7.50% | 1.63 | -24.7% |
| 8.50% | 1.44 | -33.6% |
The dividend yield is thus Favorable.
Summary
| Metrics | Financials | Rating |
|---|---|---|
| Distribution Per Unit | -0.1% | Neutral |
| Occupancy | 99.2% | Favorable |
| Gearing Ratio | 39.6% | Neutral |
| Interest Coverage | 4.3x | Unfavorable |
| Debt Maturity Profile | 1.9 years | Neutral |
| Price to Book Ratio | 0.93 | Favorable |
| Overall | | Neutral |
Overall, the metrics indicate that is it neutral to invest in FCT. The recent major acquisition of Nex have definitely made an impact to the financial position of FCT. With this, investors should take note and will need to monitor if the risks are well managed by the management over the next few months, especially with the portion of debt expecting to mature within the next 2 years which may further affect the DPU.
FCT is however currently trading below its book value which means investors do not need to pay a significant premium. They are also paying a decent dividend yield considering that the interest rate available to retail investors are on a downward trend. This may be considered a safety margin and investors will need to assess their own risk profile.
Disclaimer: Not financial advice. All data and information provided on this site is for informational purposes only.
Previous Post
Website: Frasers Centrepoint Trust (SGX: J69U): 2023 First Quarter Business Update
One thought on “Frasers Centrepoint Trust (SGX: J69U): 2023 Half Year Result”
Comments are closed.