Can Frasers Centrepoint Trust Survive The E-Commerce Era?

Online shopping and e-commerce is the way-of-life now for Singaporeans, present in different facets of shopping activities. Online purchase portal such as Lazada caters to consumers’ demand for general purchase, while specialised retailers such as Zalora and Redmart provide extensive fashion and groceries shopping experience. The traditional supermarket which prides themselves on providing fresh food products is also expanding their online market. The global giant in e-commerce: Amazon and Alibaba have also established operations in Singapore.

With consumers shifting their shopping activities online, there are concerns that shopping malls, as congregation spot for physical shops, are getting redundant and will go the way of dinosaur– extinct.

Against such a backdrop, can Frasers Centerpoint Trust (FCT), a retail REIT with all its malls located in Singapore, survive the e-commerce era and continue to excel going forward? Let’s find out by studying its latest Q4 earnings report.

Distribution Income

Firstly, Income Available for Distribution is 10% higher at $28m for 4Q. For the full year, it increased by 2.3% to $110m.

4Q Distribution per Unit (DPU) increased by 5.5% over FY16 to 2.97c. For the full year, DPU increased by 1.2% to 11.90c over FY16.

It is worth noting that this is the 11^th consecutive year of DPU growth since FCT is listed, and a historical high DPU.

Source: FCT Q4 17 earnings presentation

Revenue

4Q revenue came in at $48m, an 8.1% year-on-year rise. For the full year, revenue fell by 1.2% to $181m.

Management attributed the quarterly increase to higher rental contributions from Causeway Point, Northpoint City North Wing, Changi City Point and the addition of Yishun 10. As for the full year, it is impacted by the lower occupancy due to Asset Enhancement at North Point City.

Net Property Income (NPI)

4Q NPI stood at $34m, a 10% increase from last year. However, full-year NPI shrank by 0.2% to $129m.

Dividing the NPI over revenue gives us the NPI Yield, an important number that measures REIT manager’s ability in asset management and cost control to churn out high income that will determine actual shareholders’ returns in the form of distribution. This figure can also be compared across different REITs to determine the REIT managers’ competency.

For FCT, 4Q 17 NPI Yield is 71.6%, higher than last year’s figure (70.4%). Full-year NPI Yield is 71.3%, also higher than FY16 figure (70.6%).

Source: FCT Q4 17 earnings presentation

Occupancy Rate

Source: FCT Q4 17 earnings presentation

Q4 Occupancy Rate stood at 92%, an improvement from 87.1% of the previous quarter. All malls saw an improved occupancy rate except for Yew Tee Point that dropped from 98.5% to 95.7%.

Rental Reversion

In Q4, renewed rental rates were 8.3% higher than previous renewal. In particular, Northpoint rental rates increased by 24.3%.

Source: FCT Q4 17 earnings presentation

FCT enjoyed positive rental reversion for the full year too, with a 5.1% increase. However, Bedok Point rental reversion remained weak with a decrease of 21.3%.

Source: FCT Q4 17 earnings presentation

Shopper Traffic

4Q shopper traffic of 22.7 million was 9.9% lower year-on-year, 5% lower quarter-on-quarter. This is mainly caused by the ongoing Northpoint asset enhancement.

Balance Sheet

FCT spot a low gearing ratio of 29% at 4Q 17. Its interest cover, defined as Earnings before Interest and Tax (EBIT) divided by Interest Expense is 6.85 times, a slight decrease from 4Q 16. It is still a healthy Interest Cover ratio nevertheless.

Source: FCT Q4 17 earnings presentation

Portfolio Value

FCT’s total portfolio is $2.66 billion at Q4 17, compared to $2.5 billion last year. This is helped by the acquisition of Yishun 10 retail podium, and substantial value increase in Causeway Point and Northpoint.

Source: FCT Q4 17 earnings presentation

Positives

Growing DPU

REITs enable investors to own a share of properties owned and are usually favoured by income investors for its high dividend yield and regular distribution. It is fair to say that FCT has not disappointed in this aspect, as seen from its quarterly and full year increased dividends. Furthermore, this is the 11^th consecutive year of distribution growth since FCT went public. It is a commendable performance and a track record that is not commonly found in other locally-listed retail REIT.

Based on a price of $2.17 on 27 Oct 17, FCT dividend yield is 5.48%

Positive Rental Reversions

FCT malls continue to enjoy positive rental reversion of 5.1% for FY17. A positive rental reversion allows the REIT to grow its revenue organically. Assuming stable property expenses, Net Property Income will increase that should lead to a higher distribution too. Positive rental reversion is also a testament to the properties’ strength in attracting shoppers giving rise to healthy tenant sales. This will attract new tenants into the malls, or retain existing tenants, even with higher rental rates as tenants would be able to rake in higher sales in future.

FCT assets are suburban malls located near transport node in the town centre, catering to residents daily shopping needs that are non-discretionary. These malls tend to be more resilient and less impacted by Singapore’s economy. Judging by FCT’s track record so far, this seems to be the case.

Northpoint Asset Enhancement

Northpoint’s asset enhancement is currently at the final phase of integration with Northpoint City. After upgrading, the gross rental rate is expected to improve by 9% and this will boost FCT’s future performance.

The Negatives

Falling Shopper Traffic

FCT malls had falling shopper traffic in the past 4 quarters. While management attribute it to Northpoint’s upgrading works, my scuttlebutt observations at Northpoint suggest that shopping crowd is not too heavily impacted and it could be due to lower shopper traffic in other malls too. 4Q 17 traffic of 22.7m is also substantially lower than past 2 years’ figure 25m.

Continued Sub-Performance of Smaller Malls

While Causeway Point and Northpoint have been enjoying high occupancy and positive rental reversions, the 3 smaller malls performance have been lacklustre.

Anchorpoint and Yew Tee Point occupancy have been hovering around mid-90%, while Bedok Point fared the worst at 85%. Even Changi City Point with a size similar to Northpoint has been having occupancy rate below 90%.

In terms of rental reversion, Bedok Point has been bad in this area with lower rental renewal since 1Q 16.

Source: FCT Q4 17 earnings presentation

Conclusion

Overall, FCT has shown resilience in face of challenges posed by e-commerce and online shopping. It has been able to grow its revenue, NPI and DPU thus far while maintaining positive rental reversions and high occupancy rate. Management has shown competence in yield accretive acquisition and asset enhancement projects.

While we can’t predict if FCT can sustain its good performance in future, we take heart in its stellar track record thus far and management proactive mall upgrading efforts and will continue to monitor its earnings performance in future.

*All diagrams and visuals are obtained from FCT 4Q 17 Earnings Presentation

The information provided is for general information purposes only and is not intended to be an investment or financial advice. All views and opinions articulated in the article were expressed in CS Chong’s personal capacity. It does not in any way represent those of his employer and other related entities. CS Chong owns Frasers Centrepoint Trust.

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