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FRASERS Centrepoint Trust (FCT) may have announced a sizeable deal, but the Real Estate Investment Trust (Reit) trustee has no qualms about acquiring more property if the right opportunities present themselves.
“When we have the opportunity (to acquire suburban retail space), we will evaluate it,” said Richard Ng, CEO of Frasers Centrepoint Asset Management. “If it increases performance and it’s something that adds to our shareholders’ benefit, we’ll definitely look at it.
FCT recently bought the remaining 63.1 percent of the AsiaRetail Fund (ARF) that it does not own for S $ 1,060 million. The acquisition gives FCT 11 suburban retail properties, up from the previous seven.
Ng said the manager’s immediate focus is “to improve operations, ensuring that we manage well the operational and financial performance of this expanded portfolio.”
But he added that FCT still has the ability to make more acquisitions, even with the gear set to rise to 39.3 percent following the ARF transaction, a S $ 1.34 billion fundraising exercise to finance it, and a separate sale of Bedok. Point.
“Let’s say we find an attractive opportunity and it’s an increase in our portfolio. We can always go back to the market, to our shareholders, to support the transaction,” he said.
Additionally, he noted that the leverage limit for Reits today is 50 percent. “If tomorrow there is a very, very good opportunity and the owner comes in and says, ‘Either you do it in the next six months or I’m not going to sell,’ this is where we have to evaluate and, if necessary, increase (leverage) slightly. Then over time, with the valuation rising and so on, the leverage could go down again. “
Acquisition strategy
Among the assets that might be available to FCT is Northpoint City South Wing, which is partially owned by FCT’s sponsor, Frasers Property. That asset was last valued at more than S $ 1 billion.
FCT also sees the potential to purchase properties from individual mall owners or those with a small portfolio of assets, as such owners may find it more difficult to survive in a rapidly evolving retail landscape.
Ng said that the growing popularity of omnichannel retail requires owners to invest in such platforms. But smallholders will find it costly and difficult to develop such infrastructure without the advantages of scale.
“We believe that some of these mall owners may decide that it is better for them to exit the market, withdraw money and use the capital in something that they could manage better,” he said.
At the same time, FCT would “not hesitate” to dispose of underperforming assets whenever possible.
“For certain assets, if we think it’s the maximum we can derive from them, (we can divest them),” Ng said.
For example, FCT recently sold Bedok Point because the size of the mall is small (it is approximately 80,000 square feet) and the lack of direct connectivity to key transportation nodes limited its ability to be the dominant mall within Bedok Town Center.
The mall’s performance was also affected when new and stiff competition emerged in the vicinity, despite the manager’s leasing efforts and repositioning strategies.
Ng said that FCT still has “one or two (of those) smaller assets.” Among them is Anchorpoint, which is just over 70,000 square feet and generated S $ 3 million in net income per property for the financial year ended September 30. Bedok Point had generated S $ 2 million.
FCT will continue to “drive performance” on these smaller assets while considering opportunities if they arise, he said.
Retail pain
Although the retail sector is experiencing lower demand and an accelerated shift to online shopping due to the Covid-19 pandemic, FCT is confident in its focus on suburban shopping malls.
These tend to provide essential goods and services to nearby developments. And with remote work becoming more common, suburban shopping centers are expected to be the winners.
FCT also believes that its suburban shopping centers are perfectly positioned to serve as “last mile” delivery and pickup points for orders.
However, the short-term outlook is less optimistic. Following the release of FCT’s results for fiscal year 20 on Nov. 3, a Maybank Kim Eng report said that management expects its lease negotiations to be “longer” and rent reversals to be “neutral or slightly negative “in fiscal year 21.
Meanwhile, CGS-CIMB noted that the leases representing 32.6 percent of FCT’s gross lease income were renewed in fiscal year 21, and that 20 percent of those leases were renewed on a reversal average. rental from negative to neutral.
Ng said retailers still face “quite a bit of uncertainty” as the sector’s recovery has been uneven. Some tenants may still be struggling to regain profitability due to safe management measures in shopping centers.
Therefore, FCT is taking differentiated approaches when negotiating with tenants. An example is blocking leases where the rent is lower for an initial period, perhaps six months, before reverting to market rate at a later period.
“The idea here is to give us some time so that we have more clarity and visibility in the market and how it will reopen. Tenants will also be able to assess when things improve, what kind of sales they can make, if the business is sustainable or no, and then we can go back to the table to find a more permanent lease structure, “said Mr. Ng.
FCT is also carefully evaluating tenant sales figures, taking into account performance both before and after the pandemic. “If certain businesses or tenants were no longer doing well, we will usually involve them and work with them to improve their sales.
“In some cases, if we find that your product or operations are not suitable for the market or area, it may be better for them to go away and replace them with better tenants. It works better for us and for them.”
Financial impact
Rent refunds provided to tenants amid the pandemic have affected FCT’s performance. Gross revenues for the semester ended September 30 fell 33.8 percent on the year to S $ 64.5 million, primarily due to S $ 27.4 million in rent refunds.
Meanwhile, income available for distribution fell 51.6 per cent year-on-year to S $ 30.1 million. FCT’s distribution per unit (DPU) fell 26.1 percent to 4,372 Singapore cents during the half, from 5,913 cents a year ago.
Ng said that FCT has now reduced rental aid only to those who are not yet able to resume business, such as karaoke rooms and travel agencies. These tenants rent less than 1 percent of FCT’s total space, he said.
For other tenants, help is provided on a case-by-case basis and can be in other forms, such as online marketing and mall promotions.
FCT may have to extend more concessions to its tenants. The government is introducing a framework called Re-Align to help small and micro businesses renegotiate or exit contracts without penalties.
Mr. Ng believes that such businesses will constitute only “a very small proportion” of FCT’s tenants, although he noted that specific details of the framework have not yet been announced.
FCT units closed 2.1 percent lower at Singapore $ 2.31 on Friday.
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