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Frasers Centrepoint Trust is still keen on acquisitions

It feels confident about outlook for its focused suburban mall strategy, as these malls are likely to benefit from remote working trend.

Mr Ng says the immediate focus is to "improve the operations, making sure that we manage the operating and financial performance of this enlarged portfolio well".

FRASERS Centrepoint Trust (FCT) may have just announced a sizeable deal, but the manager of the real estate investment trust (Reit) has no qualms about snapping up more properties if the right opportunities come along.

"When the opportunity (to acquire suburban retail space) is available to us, we will evaluate it," said Richard Ng, chief executive at Frasers Centrepoint Asset Management. "If it is yield accretive and something that adds to the benefit of our unitholders, we will definitely look at it."

FCT recently bought the remaining 63.1 per cent of AsiaRetail Fund (ARF) it does not own for S$1.06 billion. The acquisition gives FCT 11 suburban retail properties, up from seven previously.

Mr Ng said the manager's immediate focus is to "improve the operations, making sure that we manage the operating and financial performance of this enlarged portfolio well".

But he added that FCT still has the capacity to make further acquisitions - even with gearing set to rise to 39.3 per cent following the ARF transaction, a S$1.34 billion fundraising exercise to fund it, and a separate sale of Bedok Point.

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"Let's say we find an attractive opportunity and it's an accretion to our portfolio. We can always come back to the market, to our unitholders, to support the transaction," he said.

In addition, he noted the gearing limit for Reits today is 50 per cent. "If there is a very, very good opportunity tomorrow, and the owner comes and says: 'It's 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 (gearing) slightly. Then over time, with the valuation increasing and so on, gearing could come down again."

Acquisition strategy

Among the assets that could become available to FCT is Northpoint City South Wing, which is partially owned by FCT's sponsor Frasers Property. That asset was last valued at over S$1 billion.

FCT also sees the potential to buy properties from owners of individual malls or from those with a small portfolio of assets, as such owners may be finding it harder to survive in a fast- evolving retail landscape.

Mr Ng said the growing popularity of omni-channel retail requires landlords to invest in such platforms. But small owners will find it costly and difficult to develop such infrastructure without the advantages of scale.

"We do believe that some of these mall owners may decide that it's better for them to exit the market, cash out and deploy the capital into something that they could manage better," he said.

At the same time, FCT "would not hesitate" to divest underperforming assets when possible.

"For certain assets, if we think that is the maximum we could derive from them, (we may divest them)," Mr Ng said.

For instance, FCT recently sold Bedok Point because the mall's small size - it is about 80,000 square feet (sq ft) - and lack of direct connectivity to key transportation nodes limited its ability to be the dominant mall within Bedok Town Centre.

The mall's performance was also affected when new and strong competition emerged in the vicinity, despite the manager's leasing efforts and repositioning strategies.

Mr Ng said that FCT still has "one or two (of such) smaller assets". Among them is Anchorpoint, which is just over 70,000 sq ft and generated S$3 million in net property income for the financial year ended Sept 30. Bedok Point had generated S$2 million.

FCT will continue to "drive the performance" of such smaller assets while considering opportunities if these arise, he said.

Retail pain

Although the retail sector is suffering from lower demand and an accelerated shift to online shopping due to the Covid-19 pandemic, FCT feels confident about its focus on suburban malls.

These tend to provide essential goods and services to nearby residential estates. And with remote working becoming more common, suburban malls are expected to be winners.

FCT also believes its suburban malls are perfectly positioned to serve as "last-mile" delivery and order collection points.

The short term outlook, however, is less sanguine. Following the release of FCT's FY20 results on Nov 3, a Maybank Kim Eng report said management expects its lease negotiations to be "more protracted" and rental reversions to be "neutral or slightly negative" in FY21.

CGS-CIMB, meanwhile, pointed out that leases representing 32.6 per cent of FCT's gross rental income were up for renewal in FY21, and that 20 per cent of those leases have been renewed at an average of negative to neutral rental reversion.

Mr Ng said retailers are still facing "quite a bit of uncertainty", as the recovery of the sector has been uneven. Some tenants may still be struggling to regain profitability due to safe management measures in malls.

FCT is therefore adopting differentiated approaches in negotiating with tenants. An example is locking in leases where the rent is lower for an initial period, perhaps six months, before reverting to the market rate in a subsequent period.

"The idea here is to allow us some time so that we have more clarity and visibility on the market and the way it's going to be reopened. Tenants will also be able to assess when things get better, what kind of sales they can do, whether the business is sustainable or otherwise, and then we can come back to the table to look at a more permanent lease structure," said Mr Ng.

FCT is also carefully assessing tenants' sales numbers, taking into account both pre- and post-pandemic performance. "If certain trades or tenants (were) already not doing well, typically we will engage them and work with them on improving their sales.

"In some instances, if we find that either their product or their operations is not suitable for the market or area, then perhaps it might be better for them to exit and we replace them with better tenants. It works better for us, and for them."

Financial impact

Rental rebates provided to tenants amid the pandemic have affected FCT's performance. Gross revenue for the half year ended Sept 30 fell 33.8 per cent on the year to S$64.5 million, mainly due to S$27.4 million in rental rebates.

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 per cent to 4.372 Singapore cents for the half year, from 5.913 cents a year ago.

Mr Ng said FCT has now reduced rental help to only those still unable to resume business, such as karaoke lounges and travel agencies. These tenants lease less than 1 per cent of FCT's total space, he said.

For other tenants, help is rendered case by case and may be in other forms such as online marketing and mall promotions.

FCT may have to extend further concessions to its tenants. The government is introducing a framework named Re-Align to help small and micro businesses renegotiate or exit contracts without penalties.

Mr Ng thinks that such businesses will make up only "a very small proportion" of FCT's tenants, although he noted that specifics of the framework have not yet been announced.

Units of FCT closed down 2.1 per cent at S$2.31 on Friday.

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