Sunday, November 9, 2008

Value Hunting #3: Frasers Centerpoint Trust.

REIT that owns several shopping malls, located next to MRTs in S'pore. It owns Northpoint (expires 2089) (excluding Northpoint 2), AnchorPoint (freehold) and CauseWay Point (exprres 2094).

Approximately 625m shares issued.

Majority of FY08 profit/revenue (65-70%) comes from Causeway Pt., abt 25% from Northpoint, 5+% from Anchorpoint.

Listed on SGX as "FrasersCT". Not to be confused with Fraser Commercial Trust (formerly Allco), which is "FrasersComm".

1) Business Model
The usual stuff for a REIT: Borrow money, buy over and lease building, pay the difference as dividends.

2) Cyclical Aspects:
30% of their tennant's leases are due for renewal in 2009.

3) Financing:

28% geared. Financing takes up only a small amount of their profit. In FY08, borrowing costs were only 12m of out of revenue of 84m and profit of 37m.

Their total debt is 260m, due for refinancing July 2011. All debt is at fixed rate of 4%.

In Mar 07, was assigned A3 rating with stable outlook by Moodys.

4) Risks:
  • Tennancy renewal, in a declining economy. Smaller tennants can just go bankrupt and walk away. They should have no problems re-leasing due to the prime area, but I will not expect their rentals to increase.
  • FCT holds a 31.06% stake in Hektar Real Estate Investment Trust (“H-REIT”), is a pure listed retail REIT in Malaysia with properties in Selangor, Melaka and Johor. I am wary of this. I have seen many retail peoperties in Penang start out as cool, hip and happening places, and slowly degrade over the years to become ghost malls. People in Malaysia have cars or motorcycles, so their malls in Malaysia are not 'protected' agains obselesence by their location. Malaysia is very different from Singapore.
  • Woodlands MRT has a lot of empty surrounding land.
5) Future growth

Long term, can grow from the properties fed by their Parent, Fraser Central Ltd, which owne 54% of FCT. Would need to wait for the finance costs to come down or share prices to rise in order for this to happen.

They have a 5 year right of refusal over Northpoint2, Yew Tee, Bedok, CenterPoint. Not sure when the 5 years starts from? They also have a put/call option to buy Northpoint2 expires July 2010. These contracts are probably meaningless, since they are controlled by their parent anyway.

Will not factor this into calculations due to the economy.

6) Valuation:
FY08 DPU was 7.3c. Yield of 10.4% at a price of 70c. I will not factor in any increase in rental due to the current economy. Assume it remains constant.

7) Conclusion:

First remove the 3.4m distributions from Malaysia.

I will assume that long term (after Jul 2011), their borrowing costs go up from 4% to 5%. This is a wild guess, it may go up more or less.... but should be quite safe since the banking crisis (not economic crisis) should be over by then. This would add 2.4m to their borrowing costs.

Altogether, this reduces their profit by 12%, giving approximately 6.4c DPU per year. For a yield of 10%, I need a price of 64c.

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