Friday, 26 May 2017

CAPITAMALL TRUST OR FRASERS CENTERPOINT TRUST?

CMT's Bedok Mall

Recently, there has been a lot of negative news regarding the retail industry. Island-wide vacancy stock reached 5 million sq ft or 7.7 per cent, which is equivalent to the size of about five VivoCities. To experience how online shopping has affected retailers here, I decided to work in the retail sector during my school holidays. I am currently working at a suburban mall in the east. From my observations, the prospects of the retail sector is rather bleak. Sales are tepid and the store holds quite a large amount of inventory. Most common items can also be bought online, at a lower price.  

Nonetheless, dividend-seeking investors may still be interested in retail REITs, if they are priced at a attractive valuation. Much would depend on the innovative ability of retail malls to fend off intense competition from e-commerce. Retail REITs would have to redefine the retail experience when they upgrade or develop future malls. For example, CMT's redevelopment of Funan Mall focuses on providing an experiential retail concept for consumers, allowing them to test and feel products, which online shopping cannot offer. 

Capitamall Trust (CMT) and Frasers Centerpoint Trust (FCT) are two large retail REITs listed here, and I decided to compare their portfolio performance and financial strength, to see which REIT is a better investment.

Portfolio Performance



CMT's Portfolio Occupancy Rate

FCT's Portfolio Occupancy Rate

CMT owns 16 properties in its portfolio, compared to 6 properties for FCT. For FCT, Causeway Point contributes to slightly more than half of FCT's net property income. From a diversification perspective, CMT's portfolio is better as it is more diversified than FCT's.


Currently, FCT has a lower occupancy rate than CMT, as it was mainly dragged down by asset enchantment initiatives at Northpoint. Changi City Point's occupancy rate is rather disappointing, which surprised me because I thought that its location at Changi Business Park should provide good footfall.  

Going forward, key trends to watch out for would be whether the negative rental reversions continue for CMT. Sharp negative rental reversions at Bedok Mall and Westgate were a drag on performance this quarter.

Financial Strength


CapitaMall TrustFrasers Centerpoint Trust
Gearing ratio35.30%29.40%
Interest coverage5.0x7.56x
Average cost of debt3.20%2.20%
Weighted Average Debt Maturity5.2 years2.4 years

Gearing ratio is calculated by the ratio of total outstanding borrowings over total assets. FCT has a lower gearing ratio than CMT, which means that it can fund its future acquisitions with more debt, instead of issuing new shares. Though with the current oversupply of retail space in Singapore, acquiring more properties may not be the best strategy. 

FCT has a better interest coverage ratio than CMT, due to its lower average cost of debt. However, though FCT's average cost of debt is lower, this is because their borrowings have a shorter maturity duration. With interest rates set to rise, FCT may have to borrow at a higher interest rate when they refinance their loans, increasing their interest expense in the future.

Valuations


Retail REITs with suburban malls are generally considered being more stable, as they are less reliant on tourist spending. For REITs, I believe that using price/NAV would be the most appropriate valuation criteria. Currently, CMT and FCT are trading at 1.06 and 1.09 times net asset value respectively.

Going forward, I foresee that the retail sector would continue to face headwinds, with stores selling apparels and lower-end accessories facing most pressure from e-commerce. I think online shopping isn't that prevalent in Singapore yet, compared to the US. Perhaps the decline of brick and mortar retailers in the US is an indication of what to expect when e-commerce takes off here. As a comparison, when demand for office spaces were soft last year, commercial REITs such as Capitaland Commercial Trust traded at around 0.8x net asset value. For retail REITs, I believe we would need at least a 10% discount to net asset value for retail REITs to be a good investment opportunity.


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