Frasers Centrepoint Trust (OTC:FRZCF) is a retail-focused real estate investment trust operating in the island nation of Singapore. At the time of writing, the trust owned a total of five shopping malls located near bus stations or MetroTransit stops in suburban regions of Singapore valued at S$2.0 billion. At this point, some readers might be tempted to dismiss this trust and look elsewhere. After all, this year's holiday shopping season was quite disappointing. In the last full week before Christmas, store visits were down 21 percent compared to the prior year period and retail sales were down 3.1 percent compared to the prior year period. But, do not be so hasty. Singapore is not the United States and the fundamentals are quite different. In fact, Frasers Centrepoint Trust has a very strong history of growth. Since its IPO in 2006, the trust has seen seven consecutive years of growth in revenue, net property income, and per unit distributions.
As previously mentioned, Frasers Centrepoint Trust owns five shopping malls located in suburban Singapore near bus stations or MetroRail stations.
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Source: Frasers Centrepoint Trust
The location of these malls allows for easy reach by shoppers and there is some evidence that this strategy is paying off. On average, each of the REIT's five shopping malls served 7.3 million shoppers per month during the period of October 2012 to September 2013. Considering that the total population of this small island nation is only 5.4 million, that is a very impressive result! This high traffic should make the trust's malls look very desirable to retailers as they would want to put stores in these malls in order to sell to all of these shoppers. Indeed, the trust's malls enjoy a very high occupancy rate of 98.4% on average.
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Source: Frasers Centrepoint Trust
As the chart shows, only one of the trust's malls has an occupancy rate of under 95%. However, the trust is actively marketing the vacant units in that mall and should be able to secure tenants for these units in relatively short order. Once it does, the trust's new tenants should prove to be accretive to both revenue and net property income.
In addition to growing its income by securing additional tenants for the YewTee Point mall, Frasers Centrepoint Trust has the potential to grow by acquiring new properties. Frasers Centrepoint, the manager for the trust, manages seven retail malls in Singapore that are not currently part of the trust.
Source: Frasers Centrepoint Trust
Two of these malls have been slated for acquisition by the trust: The Changi City Point mall and The Centrepoint. The acquisition of these properties would prove very beneficial for the trust going forward as it would result in significant growth in revenue, net property income, and, most likely, distributions paid to investors. Of the two, The Centrepoint is larger. It contains total lettable space of 332,261 sq. ft. Additionally, it is located within Singapore's prime shopping belt and within walking distance of the Somerset MetroRail station. This location is likely to be highly desirable by retailers and so will command very solid rent payments. The second property, Changi City Point is somewhat smaller, containing only 207,479 sq. ft. of net lettable area. However, acquiring it will still prove to be quite accretive to the trust's income. Investors will benefit from any increases in the trust's income through both capital gains and increases in the distributions that they receive.
The trust has additional avenues for growth besides the acquisition of new properties. For example, the trust is able to raise the rent to match market prices whenever a tenant's lease expires. This is known as a rental reversion. The trust may have the ability to significantly grow its net property income in this way over the next two years. One of the trust's shopping malls, Causeway Point, has leases totaling 58.2% of the mall's total gross rent coming up for renewal in the next year. As the trust increases the rent as these leases expire, it will increase the revenue generated by the mall. In the following year, the same mall will have leases totaling 39.4% of its total gross rent come up for renewal. Additionally, a second mall owned by the trust, Northpoint, will have leases totaling 40.0% of its total gross rent come up for renewal. As in 2014, the trust will likely be able to grow its revenue by increasing the rent on these leases.
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Source: Frasers Centrepoint Trust
There are, of course, some risks to doing this. The trust may find that its existing tenants do not like the higher rent and decide to move out. But, there is little risk of this. First is the fact that the trust's malls are high traffic and in very desirable areas. A tenant that chooses to move out will be foregoing a great many customers. These same factors make it likely that the trust could find a new tenant should one choose to vacate. Second, the trust has historically had success at increasing rents upon lease expiry and still keep its tenants. This chart shows the average amount that the trust has been able to increase rents upon lease renewal since 2007:
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Source: Frasers Centrepoint Trust
The trust's ability to increase its rent upon lease renewal, even through the Global Financial Crisis of 2008 and 2009 shows well both the desirability of its retail space and its good relationships with its tenants. This should bring some comfort to investors in the trust that it will not be suffering a mass exodus of its tenants anytime soon.
The revenue growth that the trust achieves via the acquisition of these two new properties plus the growth that it achieves through rental reversions will be a continuation of the trust's historic growth. Since the financial crisis of 2008, Frasers Centrepoint Trust has grown its gross revenue every year at a compounded annual rate of 13.3%.
Source: Frasers Centrepoint Trust
The trust has managed to achieve net property income growth in excess of revenue growth, however. This shows that management has been quite effective at keeping costs under control as the trust has grown. During the period lasting from 2008 to 2013, the trust grew its net property income at a compound annual growth rate of 14.5%.
Source: Frasers Centrepoint Trust
This growth in net property income has given the trust the ability to continually increase the distributions that it pays to its unitholders. As I mentioned earlier, the trust has managed to increase its per unit distributions every year since its IPO in 2006. The growth rate of the distributions has also been rather encouraging. During the period lasting from 2006 to 2013, Frasers Centrepoint Trust has increased its per unit distributions at a compounded annual growth rate of 8.9%.
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Source: Frasers Centrepoint Trust
This history of distribution increases is likely to continue as the trust continues to grow. This makes an investment in the trust worth considering for an investor that needs a stream of current income that increases every year.
One risk that the trust does face would be that its revenue and income could be adversely impacted by a prolonged downturn in the Singapore economy. For the most part, the trust's tenants have leases that are long enough to ensure that they continue paying rent to the trust over a short downturn, such as one that lasts for a year or two. But, tenants likely would start vacating should a prolonged downturn hit the Singapore economy. After all, people have less income when an economic downturn occurs and so are less likely to go shopping. However, the economic fundamentals prevalent in Singapore currently are different than in the U.S. First, Singaporeans enjoy a growing median household income. When people have more money, they are more likely to go shopping. Second, the unemployment rate in Singapore stood at 1.80% at the end of the third quarter. This is down from the 2.10% that it was at during the second quarter. When people have jobs, they are more likely to go shopping. These numbers point to a strengthening economy, not a weakening one, and provide some measure of comfort that the risk of a prolonged economic downturn in Singapore is quite low.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
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