Frasers Centerpoint Trust Analysis

Frasers Centrepoint Trust
An Investment Thesis
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Summary
1. Key Investment Objective(s)
2. Business
3. Valuation
4. Risk Management
5. Appendix

Key Investment Objective(s)
● Meets personal required rate of return
● Business that is easy to understand
● Able to fully grasp known and unknown risks
● Can be purchased at historically reasonable valuations

Personal Required Rate of Return
● Low Growth | High Yield | Low Risk
○ Per annum: 6% dividend yield + 2-3% growth
● Low Growth | High Yield | High Risk
○ Per annum: 8% dividend yield + 2-3% growth
● High Growth | Low Yield
○ Per annum: 3-4% dividend yield + 6-7% growth

The Business

Business Summary
● Real Estate Investment Trust
○ Tax Efficient
○ Needs to pay out at least 90% of its income to enjoy tax incentives
● Manages a group of suburban malls
○ Currently 5 Singapore malls
○ 30% stake in Malaysia REIT Hektar REIT
● Sources tenants for malls
● Buy/Sell malls, refurbish malls, maximise land area in the
interest of shareholders

KPI Metrics
● Appreciating Dividend Per Share (DPU)
○ Organic rent revision
○ Yield accretive acquisitions
○ Asset enhancement
● Shrewd capital management
○ Able to keep debt cost low
○ Manage credit risk
○ Tap equity markets on high valuations through placements

Suburban Malls
● Located within residential catchments
● Near major transport infrastructure
● Focus on customers looking for daily necessities and services

Current Portfolio
● Retail Malls typically longer land lease
●

Low Supply
● High supply will mean tenants have more areas to choose from
putting more cap on rents and tenancy
● Retail mall space not expected to grow fast
● Rank low versus world counterparts

Strengths
● Singapore Land Scarce and High Population Density
○ Suburban captures population demographic growth (Ref)
● Necessary Retail
○ Necessity Services cushion against bad economic times (Ref)
○ Footfalls are more resilient and thus command probable rentals
● Traditional Communal Gathering Culture
● High Occupancy due to limited supply
● Despite the rise of online retail, multi-channel strategy of major
retailers means malls are still needed

Strengths
● Strong Sponsor in Frasers and Neave
○ Upcoming suburban and prime malls to add to REIT
○ Changi Point and Centerpoint

Strengths
● What are Necessary Retail that will withstand online retail
○ Dining and Food Stores (Ref)
○ Supermarkets and Discount Stores
○ Home improvement
○ Highly specialized products that need to maintain a balanced
between online and physical
○ Fashion and Clothing - some of decision making due to interaction
with merchandise. Buying online can be a hit and miss. Designer
size varies, actual color versus the color you see online
○ Retail Showrooms - part of multi channel strategy

Strengths
● Traditional Communal Gathering Culture
○ Suburban malls situated close to town centres, major
transportation hubs
○ People support personal and good service
○ People like to shop and feel the physical interaction with
merchandise
○ Retail shops that act as outreach and awareness channel benefit
when customers supports good communication and brand
○ Families in Singapore are brought up since young that going to a
mall is a leisure experience
○ Suburban malls act as gathering spots

Strengths
● There is a limit to what 3D Printing is able to print
○ 3D printing prints parts but there are final integrated products that
will still need to be retailed
○ The rise of centralized 3D printing shops that offer both
consultations and customization

Weakness
● Frasers Management tend not to have a stronger partner
relationship with major retailers as Capitamall
○ Capitamall's mall look more appealing
● Suburban mall success depends on limited supply. An increase
in supply by Singapore Government will greatly affect tenancy
and ability to raise rent
● Escalating Rents make retail malls difficult for entrants to start
up business in contrast to online

Weakness
● Major Competition
○ 2013: Bedok Mall by capitamall asia. Bigger and Better location
next to MRT (Ref)
○ 2018: Newly integrated shopping center with community center
and air condition interchange next to Northpoint (Ref)

Weakness
● Poor Sales Staff Affect Customer Experience
○ Turns customers away and to online retail since interaction is so
bad
○ Singapore have not been customer service focus as Japan and
Korea
○ Low pay
● Difficulty in finding parking space

Threats
● Rise of internet retail shopping
○ Lower cost to start up and higher reach
○ Aggregate demand for space will be lower will hamper rental
growth and affect DPU
○ Less retail space needed by retailers with more online sales
○ Online retailers favor central prime one-location outreach versus
many distributed suburban shops
○ Online retailers will be attracted to shorter flexible leases versus
the current longer term ones.
● 3D Printing
○ People can create their own goods potentially

Opportunities
● Successful Internet Retailers need physical outreach to improve
sales and awareness
○ Multi Channel Strategies
○ Increase online sales will mean a greater demand for close
proximity collection and return points, potentially benefiting
suburban malls in increase tenancy and footfalls due to people
using stores more than postal

Opportunities
● Large International Retailers may want flagship physical
presence. May or may not benefit suburban malls
○ Likely to benefit prime retail malls more
○

Increasing DPU
● Since IPO in 2006, DPU have consistently improve yearly

DPU Growth
● Since IPO in 2006, DPU have grown at a 9% rate

Suburban malls - rather stable
historical rents
● From Mapletree Commercial Trust 2013 Report

Impressive historical rental revision
● Since IPO in 2006, rental revision averages 11.8% for past 6.5
years
● Lease usually are 3 years so on average 3.7% yearly revision
which is close to GDP growth

Capital Management

Rights Issue
● Since listed in 2006, there have been 0 rights issue
● Yet there have been 2 acquisitions and 3 asset enhancements
to date (2013)
● Acquisitions funded by share placements

IPO and Share Placements
● 2006 IPO: 614 million units
● Jan 2010 Placement: 137 million units at $1.33 to finance Yew
Tee Point and Northpoint 2
● Sep 2011 Placement: 48 million units at $1.37 to finance Bedok
Point
● Since IPO: Management issue 25 million units by way of
management fee (2013 Jun)

Debt Management
● 2013: 30% Debt to Asset Ratio
● 2013: 3.35 years average debt to maturity
● 2013: > 90% fixed interest debt
● 2013: 2.73% average cost of borrowing
● 2013: S&P - BBB+/Stable (w.e.f 24 Feb 2009)
● 2013: Moody's - Baa1/Stable (w.e.f 16 Mar 2009)

Debt Management
● Past debt to asset have been surprisingly consistently
manageable, despite the acquisitions and lack of rights issues
● Asset value have grown so more headroom for debts
● Since IPO majority of debts are fixed rate loans
Year 2007 2008 2009 2010 2011 2012 2013
Debt to
Asset
28.1% 29.9% 30.3% 31.3% 30.1% 30.5%
Interest
to Total
Debt
4.5% 3.1% 3.1% 3.0% 2.3% 2.7%

Valuation

Current Summary
● Date: 26 Jun 2013
● Forward DPU: $0.108 - $0.11
● Current Price: $1.85
● Forward Yield: 5.8 - 5.9%
● Current NAV: $1.53
● Price to NAV: 1.20 times

Price to NAV
● Since 2007, Price to NAV on average is 1.04 times. Fair purchase
price should place it at $1.59
● If we eliminate the GFC outliers, the Price to NAV on average is
1.11 times. Fair purchase price should place it at $1.69
● Current price is still too high

Dividend Yield
● Average Dividend Yield for FCT is around 6.24%
● Average Dividend Yield sans GFC is around 5.77%
● Current Dividend Yield of 5.8-5.9% is rather fair
● Current price is Ok

SREIT Mean Bond Spread
● Spread trended around below long term mean 3% ( to
potentially priced in stronger growth) during period when bond
yields is 3%. This implied forward sector yield of 61.-6.2%
● Increasing yield tend to mean higher spread - 4.2%

SREIT Mean Bond Spread
● This meets close to the mean implied sector yield of 6.1%. Price
needs to fall to $1.80
● If sector yield in rising rate environment is 6.7%, then share
price needs to fall to $1.64
● Current price is too high

FCT Mean Bond Spread
● Average spread for FCT is around 4.03%
● When 10 year bond yield was last at 3% spread was 3.7%
● Sans GFC, average spread is 3.67%
● If current 10 year bond yield is 2.4% (Jun 2013) then expected
forward yield should be around 6.1%
● With future dpu of $0.11, this means a share price of $1.79.
Share needs to fall by 3.2%
● Current price is Ok

Valuation Summary
● Price to NAV Average: 1.11 times
● Fair Value based on Price to NAV: $1.69
● Based on spread of 3.7%, required forward yield: 3.7+2.4 = 6.1%

Risk Management

Economic downturn recession affect
earnings
● Consequence:
○ Inability to find tenants
○ Inability to raise rent or have to reduce rent
● Impact: Medium
○ Affect DPU. Recession usually last for 1-3 years so effect may not be long lasting
● Probability: Medium
○ Suburban tenants cater to daily necessities, malls in high dense population will get
adequate crowds
○ Strategic tenants such as NTUC and food chains ensures a set of resilient core tenants
○ Historical downturns have shown company able to keep high occupancy

Economic downturn recession affect
earnings
○ Last 5 years suburban rents have been resilient. This includes a period of drastic
economic downturns
● Mitigation:
○ Investor should purchase company with a conservative expectation of DPU. DPU used
in calculating required yield should be based on recession times if possible
○ Investor should not pay too high over NAV for company. NAV can revised down during
recession, so certain margin of safety should be in place where valuation is concern

Company Management Culture
Changes
● Consequence:
○ Loss of excellent management. Management culture key to sound capital allocations
○ Parent meddles with management team by forcing asset dumping to REIT that is not
yield accretive (Thailand malls?)
● Impact: High
○ Affect DPU and puts investor capital at risk
○ Parent F&N bought over by consortium of TCC and Thai Beverage
○ Parent will look to see how to better optimize property division
○ Every chance parent will leave good management alone

Company Management Culture
Changes
● Mitigation:
○ Investors should watch for management changes. A drastic change in team with
poorer subsequent KPI may need investor to pare down holdings
○ Increase in risks due to capital allocation may need investor to sell holdings

Interest Rate to Rise Affect Cost of
Borrowing
● Consequence:
○ Cost of borrowing becomes more expensive
● Impact: High
○ Available Distributable income falls
● Probability: Low
○ Interest rate at all time low but currently (2013) > 90% of loans are fixed rate a
reasonable average interest and > 3 years expiry
○ Management have shown in the past to be able to control cost of debt
○ Rates rise in better economic times, which will increase rental escalations thereby
mitigating higher cost of debt

Interest Rate to Rise Affect Cost of
Borrowing
● Mitigation:
○ Investors should keep watch on management ability to raise rents
○ Investors should keep watch on management ability to control cost of debt
○ If management is not shrewd enough then investors should pare down or sell
holdings

Interest Rate to Rise Affect Appeal of
company
● Consequence:
○ Company as an asset looks unappealing versus lower risk asset
● Impact: High
○ Will affect NAV since property valuation is based on discount rate which is affected by
interest movement
○ Share price may revised down
○ Depends much on the rate of interest rise
○ Historically, correlation of long term losses from rate rise not consistent
○ Rates rise in better economic times may result in higher future rental revisions and
justify higher prices

company
● SREITs have been booming for past 10 years, not a good sample
● Total return however have not show consistent losses or
underperformance
● Total return during rate rises have largely been higher

company
● There is a positive relationship between cap rates and interest
rate.
● We should expect rates to head higher

company
● Historical cap rate seems to track 10 year bond yield rises
● Could mean asset value falls due to the demand for higher cap
rate (negative)

company
● The direction of cap rates of FCT's malls do track the 10 year
bond yield
● However, their magnitude have not change drastically. One
reason could be rents have been rising in tandem with asset
value and that the valuers use a conservative discount rate to
begin with

company
● Looking at US, REITs have underperformed general market
● Total return however have not show consistent losses
● Rate rises last for < 2 years (though in a falling interest
environment)

company
● Mitigation:
○ Investor should watch whether economic outlook justifies the rate climb. Should
environment is unfavorable for company to improve DPU, this may be a sell
○ Investor should watch that the yield on cost provided by investment have a justifiable
yield spread versus 10 year risk free rate. Should there not then it is better not to get
invested
○ Investor should evaluate management ability to operate in a higher interest rate
environment. Quality of management will navigate the more difficult environment
well
○ Investor should see the ability to raise rents

Rise of Online Retail
● Consequence:
○ Lower demand for tenancy due to a growing substitute channel
● Impact: High
○ Affect tenancy, duration and terms of lease and income
○ DPU and Share price may revised down
○ Impact will depend on how growing trend evolves
○ Depend very much on management able to limit threats and tap opportunities

Rise of Online Retail
● Mitigation:
○ Investors should watch the tenant mix, identifying key retail tenant losses, reduction
in rent after renewal and assess the long run impact
○ Investors should watch whether the malls under FCT are still the main mall in the
area. Losing that accessible status may mean a less appealing central showroom and
collection, returning point for online retailers
○ Investors should keep in touch and be aware that leases have switch to a more
flexible and shorter form, which may go against the investors' idea of the
defensiveness of the REIT
○ Investors should watch management ability to target established retailers, specialist
retailers, and retailers that are less exposed to the internet

Summary

Summary
● The key to this investment
○ Future outlook of business model
○ Competency of FCT management team
○ Valuation of purchase
● Losing these factors result in a strong sell

Summary
● Suburban mall rents have been resilient and defensive which is
a key aspect that interest me
● FCT have shown that they were able to consistently raise rent,
carry out asset enhancement and acquire yield accretive assets
from a strong sponsor
● FCT have shown to manage capital allocation and risk well and
do not have to rely on rights issues like most REITs to fund
acquisitions

Summary
● The threat of increase interest rates will impact cost of
borrowing and the appeal of the company. This will put a cap on
future returns
● Management have shown they navigate well in past interest
rate rises. Cap Rates have remained stable possibly due to
conservative discount rates used by valuers
● Management have shown a preference to fixed rate loans and
have kept debt to asset at a conservative 30% debt to asset
even though they can leverage up. This will help in a rising rate
environment

Summary
● The threat of online retailing is real and its impact will have to
be mitigated by strong management. Investors will need to
access management ability to execute and also tap emerging
opportunities

Summary
● At Price to NAV of 1.2 times, it is above historical average Price
to NAV sans GFC of 1.11 times. A better purchase is below $1.69
● Historical average dividend yield is 6.24% and sans GFC around
5.77%. Current forward yield of 5.8-5.9% is attractive based on
historical but not extremely undervalue. A surprise in forward
DPU to 11.4 cents or a share price move to below $1.80 will look
more appealing
● When 10 year risk free rate is at 3%, there is traditionally a
yield spread of 3.7%. A price below $1.65 looks safer in a higher
interest environment

Frasers Centerpoint Trust Analysis

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