Defensive Strength Supported By Essential Services
FCT is one of the most defensive S-REITs. Essential services account for 45% of its total NLA and contribute 54.4% of gross rental income. Tenant sales have surpassed pre-pandemic levels since Oct 21, and were 11% above pre-pandemic levels in Jun 22. It can weather uncertainties due to its strong balance sheet with low aggregate leverage of 33.9%. Maintain BUY for its defensive yield of 5.8% for FY23. Target price: S$2.74.
• Suburban malls are resilient and defensive. Frasers Centrepoint Trust’s (FCT) suburban retail malls have large population catchment and good connectivity to public transport. All its nine suburban retail malls are located on or next to MRT stations. Thus, shopper traffic was high at 136m (FY21). The portfolio serves a combined catchment population of 2.6m (46% of Singapore’s population).
• Catering to daily necessities. Essential services, comprising F&B, supermarket & hypermarket, groceries, beauty & health and other services (personal grooming, clinics and etc), are patronised by consumers on a regular basis. Suburban malls typically have a higher proportion of retail space allocated to essential services at 40% of NLA, compared to industry average of 20-30%. FCT allocates an even higher 45% of NLA for essential services. This defensive segment contributes 54.4% of gross rental income.
• Suburban malls benefitting from reopening. FCT has turned around to achieve positive rent reversion of 1.7% (first year rent of incoming lease vs final year rent of outgoing lease) and 4.1% (average vs average) in 1HFY22. Shopper traffic grew 32% yoy in 3QFY22 with all suburban malls registering double-digit growth. Tenant sales increased 23% yoy in 3QFY23, driven by supermarkets, beauty & healthcare, leisure & entertainment and F&B. Tenant sales have surpassed pre-pandemic levels since Oct 21 and were 11% above pre-pandemic levels in Jun 22.
• Overcoming the bunching up of lease expiry in FY22. Portfolio occupancy was maintained at a healthy 97.1% as of end-Jun 22. Dominant suburban malls, such as Causeway Point, Northpoint City North Wing and Waterway Point, registered high occupancies of 99.3%, 100% and 100% respectively. Occupancy at Changi City Point improved 3.4ppt qoq to 96.1% as more employees returned to work at Changi Business
Park. Occupancy at White Sands improved 1.3ppt qoq to 95.3%. FCT has substantially completed the bulk of lease renewal required in FY22, which was initially 38.7% of total NLA.
• Progressively back filling vacant spaces. Occupancy at Century Square dropped 10.4ppt qoq to 83.0% due to pre-termination by anchor tenant Filmgarde. FCT is in advanced negotiations with two potential replacement tenants. Management expects lease agreements to be signed in 4QFY22 and occupancy is expected to recover above 90%.