Saturday, 21 January 2017

Fraser Centrepoint Trust - Strong results despite North Point AEI

Earnings season is here! Other than looking for potential accumulation opportunities, it's also important to review stocks in my portfolio.

There're 3 REITs in my portfolio and one of them just announced their quarterly result.

What I like about REITs

  • They are required to pay out at least 90% of the profits to shareholders via dividends. By owning REITs it's somewhat similar to owning properties and renting them out. There is no need to pay property Tax as Dividends for Singapore Stock is exempted of Tax. 
  • The business is easy to understand and you can visit the premises of the properties to have a better understanding of how well they are doing. Ceteris Paribus;
    • Spaces within the properties are fully occupied = Higher DPU
    • High human traffic flow -> Shops stay in business -> Shops sign lease with rental revision = Higher DPU
What I do not like about REITs

  • Interest rate rising environment
    • REITs rely on borrowings to funds acquisition. With higher interest rates, cost of borrowing increases. This will result in higher liabilities and hence decrease profitability = Lower DPU
    • Thankfully, many REITs had already made preparations to counter this problem by converting their borrowings to fixed rate
    • REITs had already undergone a sell down period to reflect market sentiments but a knee jerk reaction is still expected whenever an announcement of interest rate hike is made

The REIT that I'm holding and just announced their result is Fraser Centrepoint Trust. Fraser Centrepoint Trust owns shopping centres in the suburban parts of Singapore such as Causeway Point, Northpoint, Changi City Point, Yew Tee Point, Bedok Point and Anchorpoint. Being in the Suburban part of Singapore means less competition for retail spaces and are relatively more stable in nature.

  1. Strong DPU of 2.89 cents is achieved despite ongoing AEI from Northpoint. 
    1. Essentially, at the current price, there are signs that investors are already taking into consideration of Northpoint AEI and buying i nto the future.
  2. 10 consecutive years of DPU growth shows the strength of the management team in growing the REIT annually. 
    1. Trend likely to continue after Northpoint AEI is completed
  3. NAV per share of $1.93 below the current share price reflects a premium but can be signs of investors looking at a brighter future for the REIT. 

Other than the impressive key highlights, other notable facts of this REIT are:

  • There had not been a single rights issue since listing
    • Low gearing ratio of 29.7% means that there is still room for debt without the need of Rights issue. 
  • Strong sponsor in FCL with a rather huge pipeline of properties for potential future injection into the REIT.
  • Supreme and unchallenged presence in the Northern part of Singapore looks set to continue. 

Some concerns about the REIT

  • Bedok point and Changi City Point occupancy rate is low at 82.9% and 85.9% respectively.
    • There are ongoing collaborations with Yes93.3fm for outdoor broadcasting in Bedok Point to gain exposure for the shopping centre. 
    • Bedok point being marketed as a food haven of the East 
    • Even though both points still seem to have limited impact but it goes to show the effort of the management. 
    • On the bright side, it means that there is still room to grow for these 2 shopping centres. 
  • With the rise of food delivery apps as well as rapid growth of e-commerce, relevance of shopping centres in the future might be in question at least to a certain extent.
    • Although with the current technology, experience of eating in a restaurant and buying from retailers still cannot be replicated from e commerce. 
Is there still value with the stock last closing price of $1.965?
Earnings Per Unit 2016 Q1: 2.88
Earnings Per Unit 2017 Q1: 2.72
Share price at 31 Dec 2015: $1.845
Share price at 31 Dec 2016: $1.91
Seems like with the recent run up in share prices, FCT is no longer considered under valued at present. However, Northpoint AEI is likely going to boost up Earnings and hence DPU and will share prices will likely follow. 

Disclaimer: I'm currently vested in FCT. The above information are based on my limited understanding and does not constitute a buy or sell call. Always do your own due diligence before taking any actions. 


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