Asked by Anonymous
Asked on 12 Jun 2019
Please share your evaluation criteria, and related materials which can help me to decide which REIT to purchase.
IMO, even though FCT seems to be having a lesser gearing ratio, I dislike the lack of diversification where there are only 6 malls, and only a few of these malls are performing well.
Just going to give my short opinion on this. I prefer Capitaland Mall Trust.
For REITs, some things you can look at are:
Portfolio of properties
Lease expiry and occupancy
Distribution per unit (how much they yield and whether it increased over the years)
Frasers Centrepoint Trust
6 properties. Malls ending with "point". Causeway point, Northpoint,..etc. Personally, I don't really visit these malls often. Northpoint just got revamped not long ago though. But I feel the locations of these malls are not very good.
3 out of 6 properties have less than 90% occupancy. Other 3 has above 90%.
DPU: 12.015 cents. Based on current share price of 2.57 that gives 4.68% distribution yield.
Market cap: 2.799B
CapitaLand Mall Trust
15 properties, in good locations at MRT stations with high good connections. This means high traffic.
99.2% occupancy rate.
DPU last year was 11.86 cents. Based on current share price of 2.59 that gives 4.58% distribution yield.
Market cap: 9.516B (3x FCT)
I prefer Capitaland Mall Trust. Share price similar which means as an investor your same amount of money can be invested in either, for the same number of units.
Good about FCT
Higher dollar dividend (by 0.2 cents)
Good about CMT
CMT is a bigger cap REIT than FCT. Furthermore, growth of CMT is better than FCT. CMT has a greater portfolio of malls (and maybe because I prefer the malls in the portfolio of CMT haha). Higher occupancy rate than FCT.
There is no doubt that the management of CMT and FCT have excellent track record of increasing its DPU per unit every year as shown. However, why CMT is a better buy than FCT? Let’s take a look.
CMT and FCT have 16 and 6 shopping malls all around Singapore respectively. All shopping malls own by CMT and FCT are near or beside a MRT station or bus interchange. This means that it is easy for customers like us to go to their shopping mall, aka more convenient. We understand that for FCT, Northpoint North Wing and Causeway Point are FCT’s gems. However, what I don’t like about FCT is its smaller shopping mall such as Bedok Point and Anchorpoint. I honestly felt that it was a mistake of acquiring Bedok Point because Bedok Mall which is owned by CMT is just beside Bedok Point. Anchorpoint is too far from the nearest MRT station.
One thing to take note for FCT is that close to 76% of the rental comes from Causeway Point and Northpoint North Wing and Yishun 10. That is a huge risk to take on if both gems did not perform well. CMT has a more diversified portfolio compared to FCT. I did not go into detail of CMT shopping malls because they really are the best. Comment below if you disapprove!
A look at the Portfolio occupancy, we can see that 98.5% and 94.7% of all rentable spaces are occupied in both CMT and FCT respectively. It is very depressing to look at the occupancy rate of Bedok Point and Anchorpoint. However, bright spots for FCT are that occupancy rate for Causeway Point is resilient, Northpoint City, Changi City Point figures are improving every year. We can expect occupancy rate to improve next quarter.
WALE figures for CMT and FCT are 1.9 years and 1.72 years respectively. The higher the WALE the better though it has its cons too. Before we start looking at the lease expiry profile, we should note that the FCT end of FY2018 is Sep 2018 while CMT is Dec 2018. About 85% for both CMT and FCT leases will end from now till 31 Dec 2021. For those who are about to invest in either CMT and FCT should take note of this risk as recession might happen on or before or after 31 Dec 2021. Due to this, both CMT and FCT might record negative rental reversion during this period.
In terms of rental reversion, I would say that FCT did a very good job but the figure got dragged down by its underperformers. Looking at the quarter figures, you can see FCT’s Bedok Point recorded -23% rental reversion and Anchorpoint at -10.4%. It is the same story for its full year figures where FCT’s Bedok Point recorded -23% rental reversion and Anchorpoint at -5.1%. However, despite the fact that these two shopping malls recorded negative rental reversion, the figures are positive when looking at overall numbers. On the other hand, CMT recorded less than 1% positive rental reversion with negative rental reversion of at most -2% coming from some malls. Overall, the number is at 0.6%.
In terms of financial performance, FCT beats CMT hands down. Its aggregate leverage is lower than CMT at 28.6%. It is difficult to judge the aggregate leverage for CMT because CMT has just announced recently that it has acquired Westgate using private placement and debt. The aggregate leverage should be from 34%-36% after the acquisition. Interest coverage for FCT is also higher than CMT’s. Average Cost of debt for FCT is lower than of CMT. FCT might need to refinance a lot of its debt in the next three years where close to 88% of its debt will mature in the next three years but this is only so for 31% for CMT. Even though, FCT might have done well in its balance sheet, it is important to take note that CMT credit rating is better than FCT and that most of FCT’s debt will mature in the next three years. You be the judge.
Remember the time when Amazon Prime Now came to Singapore? It resulted in retail REITs, Sheng Siong to drop. Those who believed that Amazon will not be as successful as others thought would have profited from the fear. Those who bought despite the fear was right as retail REITs and Sheng Siong still produce great results.
The retail industry in Singapore still looks dull according to URA data. According to an analyst report, Singapore’s QOQ retail rental growth reverted to negative territory in 2Q2018. The rental growth has been negative since 1Q2015 and only inched up 0.1% in the previous quarter. You can refer to these websites for more information: RETAIL PROPERTY MARKET OVERVIEW section, Independent Retail Market Overview section, and URA media release.
I would prefer CMT over FCT. Reason being, it has a diversified portfolio than FCT. The risk for FCT in terms of rental income is that close to 76% of its property income are from the bigger malls. The risk is that if the bigger mall did not perform well, it will drag down the DPU. Anchorpoint and Bedok Point are not contributing much to the rental income. It was definitely a failed acquisition by the management to acquire Bedok Point. Bedok Point was bought for $127 million in 2011 and it is now valued at $110 million. There isn’t high probability that the mall would be sold at a premium looking at the depressing rental reversion and occupancy rate. On a brighter spot, FCT’s sponsor which is Frasers Property has solid shopping malls such as Northpoint City South Wing and Waterway Point that FCT could acquire. With such a low gearing ratio, there is room to take on more debt to acquire bigger shopping malls to diversify its portfolio.
I'm less technical, and sometimes lazy till I use common sense. Tan Wei Ming put in a lot of effort to write up!
Things I look out for:
1) vibrancy of the mall and traffic, how many stalls are closed and not operating
I think CMT really beats most of the sg retail reits here. Better energy, better mood to shop, and the store owners will get better business to pay rent.
Look at Big Box, sometimes it just feels so dead, and now its closed down.
2) occupancy levels and history - better be >> 95%.
3) debt / equity below 53% for me. This is 35% gearing I think. The wider the gap between current gearing and 45% limit, means new property acquisitions can mostly be funded through new debt / borrowings and not rights / private equity placement.
4) revenue growth trends. If the 1 / 3 / 5 years are available, I would like to see growth. My min expectation for 3 yr revenue growth usually is 0% (so out w the negatives). If the business and management is good, they will be disciplined and try to manage the bad stuff until it is offset. 人往高处爬。i don't like mgmt that give excuses for underperforming. Once is ok, too many and I just think they are crap.