Frasers Centrepoint Trust: Watch Both External And Internal Factors (Rating Downgrade)

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I have a Neutral view of Frasers Centrepoint Trust taking into account both internal and external factors.FRZCF's future performance could be affected by external headwinds like a new competing retail...

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On its website, FRZCF calls itself a retail REIT which is among \"the largest suburban retail mall owners in Singapore.\" My previous April 30, 2020 write-up touched on Frasers Centrepoint Trust's financial strength and the effects of the pandemic on the REIT. The current article focuses on the external and internal factors affecting FRZCF's future performance. I have decided to downgrade my rating for FRZCF to a Hold. This takes into consideration external headwinds like weak retail sales and internal value creation levers such as asset optimization. Frasers Centrepoint Trust's shares can be bought or sold on the Over-The-Counter market and the Singapore equity market. The REIT's OTC shares have limited trading liquidity. But the REIT's shares listed on the Singapore Exchange are reasonably liquid with a three-month mean daily trading value of about $5 million (source: S&P Capital IQ). Readers can trade in Frasers Centrepoint Trust's Singapore shares with US stockbrokers like Interactive Brokers. Watch Weak Retail Sales And Competition From New Retail Mall Frasers Centrepoint Trust's outlook might be adversely affected by unfavorable external factors such as the weak retail environment in Singapore and new competing retail assets. All of the REIT's assets are located in Singapore, and it is reasonable to think that sluggish retail sales in the Singapore market could have a negative impact on FRZCF's future rental income. A recent May 18, 2024 news article published in Singapore media publication The Straits Times cited The Singapore Retailers Association's comments that \"most retailers\" are registering lower sales on a YoY basis in April 2024. In this media report, it was noted that more Singaporeans are \"preferring to spend more overseas\" which has been a drag on domestic retail sales. Official retail sales figures for April will only be released in June. The latest retail data available from Singapore Department of Statistics indicate that retail sales (adjusted for automobiles and seasonal effects) contracted by -0.3% Month-on-Month in March 2024. It will be reasonable to claim that recent retail sales trends for the Singapore market aren't particularly favorable, and this has negative read-throughs for Frasers Centrepoint Trust's outlook. Separately, FRZCF's wholly-owned retail property in Pasir Ris, Singapore known as White Sands is expected to be competing with a new retail mall soon. White Sands accounted for 13.0% of Fraser Centrepoint Trust's gross rental income for the first half of fiscal 2024 (YE September 30, 2024) as disclosed in its results presentation slides. Also, White Sands has 10.7% of leases (in terms of property area) up for renewal in the current fiscal year. According to Singapore real estate company Allgreen Properties' disclosure on its website, \"Pasir Ris Mall\" which boasts over \"150 renowned brands\" is scheduled to open its doors in the second quarter of calendar year 2024. Prior to this, White Sands was the sole retail mall in Pasir Ris, Singapore. Therefore, Fraser Centrepoint Trust could find it tough to raise its rents for White Sands' expiring leases in the face of new competition. REIT Has Value Creation Levers At Its Disposal External factors like competition and domestic retail demand are beyond Frasers Centrepoint Trust's control. But FRZCF does have internal plans in place to enhance its assets and optimize the mix of tenants. The REIT has interests in nine shopping malls in Singapore. One of them in the eastern part of the country, Tampines 1, will be concluding its asset enhancement initiative by end-Q3 2024 (calendar year) or end-FY 2024 (company's fiscal year). Although no specific financial guidance has been provided by the company, it is highly probable that this particular retail asset will deliver higher rental rates with the rejuvenation of this mall and the entry of new tenants as detailed below. Asset Enhancement Initiative For The REIT's Wholly-Owned Tampines 1 Retail Mall Frasers Centrepoint Trust's 1H FY 2024 Results Presentation Another retail property that offers opportunities for optimization is the NEX shopping mall situated in Serangoon, Singapore, which is 50% owned by Frasers Centrepoint Trust. An Overview Of FRZCF's 50%-Owned NEX Retail Asset Frasers Centrepoint's March 25, 2024 Investor Presentation At an earlier shareholders' meeting in late-March this year, the REIT shared that NEX has the potential to achieve a faster pace of organic gross revenue growth comparable to other malls, and indicated that a possible move is to reduce the space allocated to anchor tenants. In specific terms, Frasers Centrepoint Trust estimated \"an 8.7% gap\" between NEX's current organic gross revenue and the average organic gross revenue for the REIT's other similar assets. The REIT also mentioned at the March 2024 shareholders' meeting that \"anchor and mini-anchor spaces\" made up more than half of NEX's property area which is a reasonably high ratio. In a nutshell, FRZCF has specific internal value creation levers that it can pull, taking into account its current asset optimization exercise (Tampines 1 mall) and potential asset restructuring opportunities (NEX asset). Concluding Thoughts The positive internal factors and negative external factors leave me with a mixed view of Frasers Centrepoint Trust. Also, the REIT's valuations are comparable to that of its closest peer, CapitaLand Integrated Commercial Trust (OTCPK:CPAMF) [C38U:SP], and this supports the case that FRZCF is at a fair valuation. The consensus next twelve months' dividend yields for Frasers Centrepoint Trust and CapitaLand Integrated Commercial Trust are 5.57% and 5.56%, respectively. CapitaLand Integrated Commercial Trust and Frasers Centrepoint Trust currently trade at trailing P/B ratios of 0.95 times and 0.92 times, respectively. These metrics are obtained from S&P Capital IQ.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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