Frasers Centrepoint Trust – Tenants Change, Malls Remain, Heartland Malls Do Not Wane

2020-07-27     drwealth
Frasers Centrepoint Trust – Tenants Change, Malls Remain, Heartland Malls Do Not Wane

I did a Facebook Live with SGX about Mall and Office REITs and thought that it would be useful to replicate the part about Frasers Centrepoint Trust (SGX:J69U) (FCT) here.

The disclosure is that I have some holdings in FCT. If you like that I have skin in the game then please read on. I would share why I think FCT is one of the better S-REIT bets now. This is my opinion and feel free to disagree.

Tenants change, Malls remain

Retail is undergoing a big change as we see more companies file for bankruptcies. Covid-19 should not be used as an excuse for the demise of some of the retail failures. The writing has been on the wall when e-commerce gained in popularity.

I believe that malls will do fine even as some tenants go out of business. This is because the void will be replaced by new retailers who are better prepared for today’s e-commerce era.

Some retailers may think that having a website and an online checkout would make them relevant today. Unfortunately, it isn’t true.

Here are two examples.

First, Marina Square has brought its tenants onto Lazada.

Second, CapitaMall Trust (SGX:C38U) has launched an eCapitaMall and Capita3Eats to help its tenants get some sales online.

I know that the malls are trying their best to help their tenants. But it is not as though you put up a new channel and customers will automatically show up. You need to market that channel actively over a long period of time. Having an online platform doesn’t make a business omnichannel. It’s just multichannel, which looks like the one on the left of the image (see below).

Multichannel means a business has more channels to sell its products or services. The sales data are limited to the channel and not integrated across the channels. The channels operate individually. A customer may buy a product from the store and another product online. But the company will register as two separate sales instead of drawing connection to the sales data.

Omnichannel, on the other hand, would have each channel contributing to the overall customer data. This would help the marketing team to target more specifically. Some customers may only like a particular item offered by the company and any promotions or ads for this item should be targeted at these customers. Advertising costs and effort can be saved and customers do not get irritated if only relevant ads and promotions show up.

IUIGA is an example of an omnichannel retailer. The physical store works like a showroom. This is where you can experience the products they sell online. To buy a product at the store you have to have an online account with IUIGA. You can scan the barcode of the item, make the purchase and self-checkout at the counter.

You can also call it the Online-2-Offline (O2O) model. One example would be AMORE Store x Lazada. Amorepacific has been selling Korean beauty products via the Lazada platform and together, they have launched a physical store at Funan. I believe more of such stores and collaborations will start to appear in malls.

Malls will be more experiential

Malls are an important leisure destination for locals. Imagine with work-from-home policies, more would be dying to go out for a change of environment. This would make malls more popular, not less.

We go to a mall to experience it and not purely for transactional purposes. We still like to dine in a nice restaurant or have a coffee in a cafe. Services such as hairdressing, massage and medical have to be done face-to-face and would be available in the malls. Cinemas would still be around to offer the experience of watching the big screen. This is something which Netflix is unable to replicate unless your house is big enough for a home theatre.

Supermarkets would be a mainstay. Covid-19 proved that our grocery delivery service is not at scale yet and most had to make a trip to the supermarkets to get their supplies because they couldn’t get a delivery date. There’s also less incentive to opt for grocery delivery because it is often faster to get it directly from the supermarket as there’s always one within walking distance.

Hence, I believe that malls are going to do fine because these experiences cannot be replicated online or at home.

Heartland malls win

I haven’t gone to the malls in the city but I have been to a couple of heartland malls. The car parks were full and the malls were packed. It was as though Covid-19 has never happened. Please be safe!

The city malls are more dependent on tourists. Coupled with much fewer workers in the CBD area, it is really tough for the retailers in the central region to survive.

Frasers Centrepoint Trust being a focused suburban mall player would do better as a result. FCT has also increased its stake in the PGIM ARF Retail Portfolio lately which includes 5 suburban malls – Tiong Bahru Plaza, Hougang Mall, White Sands Mall, Century Square and Tampines 1. This is a relevant and synergistic acquisition which can drive growth in FCT.

FCT has recovered 61.1% of last year’s shopper traffic in the second week of July 2020. 95% of its tenants have reopened. These are encouraging signs.

FCT’s first half results have been good too. Gross revenue has risen by about 1%. The income for distribution increased by 26% but DPU was down 24%. This is because the management has retained about $18m to better manage their cash flow. It is likely that this $18m would eventually be distributed to the unitholders and the DPU would recover.

I plotted the Price-to-Book range for FCT and historically the REIT has traded at an average PB ratio of 1.1. The current PB ratio is also around 1.1 which suggests that FCT’s share price is fair. Historically, PB ratio around 1.0 has been good levels to buy.

There’s a risk that rental income may come down as some businesses may not renew the leases and would take some time for new tenants to takeover. Lower rental projections would also depress FCT’s property valuations. CapitaMall Trust’s valuations have dipped by 2% in the latest update. I believe FCT would face the same issue. If so, the book value of FCT is likely to go down too.

Conclusion

Retail has long faced the onslaught of e-commerce and Covid-19 has accelerated the trend towards new retail. Businesses need to be omnichannel, having seamless online and offline experience for the customers, and not merely having multiple channels that do not interact with one another. Retailers who aren’t able to keep up with times would go and new ones would fill the void. Malls would be rejuvenated and their role is to provide an experience for the shoppers, beyond mere transactions for goods and services.

Malls in the city are faced with a double whammy – the lack of tourists and office workers. Hence, the suburban mall owner, FCT, stands to benefit from a faster recovery. FCT has recovered 61% of the shopper traffic compared to a year ago and has 95% of the tenants reopened for business. The recent increase in the stake of 5 suburban malls sits well with its focus and provides growth for FCT. FCT is trading at the historical PB average of 1.1 and is fairly priced. The share price has came down by 26% from the high of $3.02. But the fundamentals have improved and Covid-19 didn’t impact its financial performance by much.

Disclosure: I have stakes in FCT.

Disclaimer: We may have different investing objectives and preferences. Please do not take my view as an investment advice. Think independently and make your own decision.

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