Frasers Centrepoint Trust (SGX: J69U)(FCT) is one of two retail REITs on my watchlist. The Trust owns a portfolio of suburban malls in Singapore, the largest being Causeway Point in Woodlands. FCT has an unparalleled record of increasing distribution per unit (DPU) every year since its IPO in 2006. Refer to Figure 1 below.
Figure 1. FCT’s annual distribution per unit. Source: FCT 3Q FY2017 results.
FY2016 marks its tenth year of DPU rise. Currently, FCT has a major asset enhancement initiative (AEI) underway at Northpoint in Yishun. However, it has not been without hiccups – there was later-than-expected relocation of large tenants within the mall, thereby lowering the occupancy in 3Q FY2017.
With two more months to go before the fiscal year ends, I wonder if FCT is still poised to score another year of DPU rise in FY2017.
I extracted FCT’s financial data to attempt a prediction.
Required 4Q FY2017 Net Income
Figure 2 below shows FCT’s DPU by quarter between FY2007 and FY2017. In order to beat FY2016’s DPU of 11.764 cents per unit, the Trust must achieve a minimum 4Q FY2017 DPU of 2.834 cents per unit.
|Figure 2. FCT’s distribution per unit by quarter.|
Next, I did my homework to forecast the number of units in issuance at end FY2017.
(1) Base Management Fee
FCT’s Trust Deed stipulates that the Manager is entitled to receive 0.3% of the value of the Deposited Property as base management fee. The Manager can opt to receive in cash or in units. On 26 July 2017, FCT reported that 656,436 units were issued at a price of $2.1173 per unit to the Manager. This is payment for 70% of the base fee for the period 3Q FY2017. For 2Q FY2017, the payment was 665,121 units issued at a price of $2.0533 per unit. For 1Q FY2017, the payment was 738,767 units issued at a price of $1.8956 per unit.
Short of a massive shift in property valuation, I do not expect the Deposited Property value to change significantly. Assuming the Manager takes 70% of the base fee as payment in units and a flat unit price, I believe a conservative number of 660,000 units will be issued for the period 4Q FY2017.
(2) Performance Fee
The Trust Deed also stipulates that the Manager is entitled to receive 5% per annum of FCT’s Net Property Income as performance fee for the relevant financial year. On 19 January 2017, FCT made a fourth amendment to the Trust Deed, which includes changing the payout of the Manager’s performance fee from a quarterly basis to an annual basis.
At end 3Q FY2017, FCT reported that 2,304,380 units are to be issued to the Manager. Deducting the 656,436 units paid out on 26 July, 1,647,994 units remain in the ledger. This is payment for 70% of the performance fee for the first nine months of FY2017.
While not scientific, I am just going to do a straight-line extrapolation and assume that the Manager will receive a hearty 2,200,000 units as performance fee for FY2017.
(3) Acquisition/Divestment Fee
The Manager is also entitled to receive a 1% acquisition fee and a 0.5% divestment fee. The Manager can opt to receive in cash or in units. However, I do not foresee any acquisition or divestment happening in 4Q FY2017, so I will not cater for such provision in the calculation.
The existing number of units in issuance at 26 July 2017 is reported to be 922,448,285. With the two assumptions above, the number of units in issuance at end FY2017 is estimated to be 925,308,285. Given our target DPU of 2.834 cents per unit and an estimated 925,308,285 units in issuance, this implies that FCT will need to earn at least $26.23 million for the period 4Q FY2017.
Is this a realistic and possible figure?
Lease Renewals in 4Q FY2017
FCT earned a net income of $21.89 million in 3Q FY2017. This excludes the $3.4 million net tax adjustments, the $829,000 contribution from the Malaysia-listed Hektar REIT and the $116,000 income from FCT’s joint venture (Changi City Point car park operations with Ascendas Frasers Pte Ltd).
If we make another bold assumption that these 3Q FY2017 figures will be similar for the next quarter, my back-of-the-envelope calculation indicates that FCT will be able to hit the target DPU nicely.
Of course, there is the concern of negative rental reversions for the quarter.
Figure 3 below shows FCT’s portfolio average rental reversion since FY2007.
|Figure 3. FCT’s average annual rental reversion. Source: FCT 3Q FY2017 results.|
For the first nine months of FY2017, FCT experienced the lowest positive rental reversion (4.3%) throughout the entire period. This hints that, as a landlord, FCT is running short of pricing power this fiscal year.
In the 3Q FY2017 results, FCT reported 47 leases are up for renewal in the last quarter of FY2017. This represents 6.5% of the portfolio’s net lettable area and 7.3% of the portfolio’s gross rent. Of these 47 leases, a majority of 19 leases are at Causeway Point – the stronghold in FCT’s portfolio. This represents more than one tenth of the gross rent at the mall. For the first three quarters of FY2017, Causeway Point saw net rental reversions of +10.6%, +6.3% and +5.8% respectively. Given the trend, I do not expect to see a dramatic decline in rental reversion for the period 4Q FY2017.
3 leases are up for renewal at Changi City Point. Similarly, 2 leases are up for renewal at Bedok Point. Currently, these two malls have the most pessimistic situation. (The occupancy rate is 84.0% and 81.7% respectively. I do not count Northpoint which is undergoing AEI, hence the lower occupancy is to be expected.)
The bearish sentiment is most pronounced at Bedok Point, which experienced a whopping 30.2% negative rental reversion in 3Q FY2017. However, Bedok Point only makes up less than 3% of the portfolio’s net property income. It is unlikely to tilt the needle into the red.
On the other hand, Changi City Point makes up a chunky 11.4% of the portfolio’s net property income. Looking on the bright side, the mall had experienced positive rental reversions for the first three quarters of FY2017. What the Manager could not fill in terms of space, it made up for it in terms of higher gross rent.
Taking these factors into consideration, I would still expect FCT to eke out a positive, albeit small rental reversion in FY2017.
While not entirely fool-proof, the above mental exercise gives some assurance that FCT should be able to maintain another year of DPU rise. The Northpoint AEI scheduled to complete in September 2017 will also lead to a 9% rise in average gross rent, if the management’s forecast is to come true.
Another matter on my mind is whether the Sponsor, Frasers Centrepoint Limited will be injecting its one-third share of their latest mall Waterway Point at Punggol into FCT’s portfolio anytime soon.
But that is an investigation for another time.
The Eleutherian Odyssey
*Disclaimer: I am currently vested with shares in Frasers Centrepoint Trust.