Frasers Centrepoint Trust (J69U) Earnings Call Transcript & Summary

Hi, good morning. Welcome to Frasers Centrepoint's financial results presentation for the second half and financial year 2020 ended September 30, 2020. I'm Fung Leng. I'm the Head of Investor Relations for the Trust, and we are very honored to have with you today at our briefing. Today's briefing will be recorded. And we have with us the management team of the manager, CEO, Richard Ng; the CFO, Ms. Tay, Hwee Pio; our Head of Investment and Asset Management, Ms. Pauline Lim; and myself on hand. So before I hand over to the CEO, I would like to just remind everyone to put yourself in mute, and Q&A will be at the end of this session. So Richard, we are ready to begin.

Hi. Good morning, everybody. Glad that you can join us this morning. And you will probably have seen the information deck that we have announced this morning, including the presentation deck that we're going to run through with you shortly. So at the end of it, we will spend some time, as usual, taking any queries that you might have. And I presume there will be many questions that we'll be going through today. So the first slide that you see in front of you here is kind of a snapshot of all the activities or events that have taken place since the beginning of this year. 2020 seems like a lifetime, a lot of things have happened. Of course, we have also, in this slide, kind of split it into 2 parts, right? The first part that is largely in red, it's a lot about the COVID situation, how -- when it started in Singapore and the various events that took place and as well as the Circuit Breaker. And then we move on to the reopening, Phase 1 and then Phase 2. And of course, moving on to the period after June, in which we saw traffic coming back to the mall, sales improving, and of course, our major announcement activities, including our acquisition as well as the EFR that we have just completed not too long ago. So this kind of gives you a perspective of what have we done this year. Moving on to the next slide, that is more with regards to our key financial highlights for this period. Of course, if you look at the slide here, you can see that, firstly, in terms of gross revenue, on a full year basis, there's a drop of 16.3%. We're going to go through all this number in greater detail. So I'm not going to -- just run through the whole table, but just pick up some salient point. The other key point that I wanted to highlight is in terms of portfolio occupancy. It stood at 94.9% or close to 95%. So as you can see that the -- a lot of effort has been made in terms of trying to maintain or trying to retain our tenants at the mall. NAV at 2.27% is a slight increase for this period compared to previous period. And for the next slide itself, in which we will be able to share with you more insights into the numbers. Okay. So from here, you can see that the table on the left is the half year comparison, second half '20 and -- versus second half '19. And the one on the right, it's the comparison full year versus full year. The numbers, as you can see, it is what it is, but I think we also wanted to dwell a little bit more in-depth and to see what are some of the major causes that have resulted in, for example, a drop of revenue by 16.3%. Predominantly, this is the result of the rental relief that we have given, amounting to about $27.4 million for this year itself. So we have also worked out for you. So if we were to exclude this amount that was dished out, our revenue would have fallen by a mere 2.4%. And this is despite the fact that, for a large period of this year, we have impact to our capital income. We couldn't do anything at our atrium. There's a loss of income for our other revenue perspective. There's very limited Makan activities. The GTO is also affected. So -- but by and large, if we have excluded the $27.4 million, our fall in revenue is 22.4%. And our NPI drop would have been only 0.7% instead of the 20.4% that you have seen. So a couple of insights to this. Firstly, I would have -- I would like to say that, especially the first half of 2020 for us has been a very effective year. We, in fact, did very well for the first half until the COVID situation turned worse towards the February onwards, March, and then that resulted in a CB. Otherwise, we would have probably be able to achieved a number that's better than last year. Okay. Moving on. It is the breakdowns in terms of asset-by-asset as what we always do. For this period, up to our financial year end of September 30, we are showing only the FCT portfolio. Going forward, now that the transaction has been completed on the 27th of October, moving forward, you will be -- we will be able to share the information on ARF portfolio in total as well. So I'm not going to go into details for all these assets. As you can see, that in the second half, again, predominantly, the impact for revenue comes from the rental rebates that we have given out. Next slide. At the same time, we also were able to improved in terms of expenses. Again, during a Circuit Breaker, we were able to improve our efficiency, especially in terms of energy usage when we shut down certain key components in the mall because not the full mall was operational. So we had some savings in terms of operating expenses. And in terms of NPI, again, it's largely driven by the drop in revenue. For the next 3 slides, for the full year number, again, the explanation is the same. First 6 months, we were doing better. But of course, the second half or the second 6 months were impacted by the rental rebates that were dished out. Okay. Expenses, similarly, savings as achieved and NPI. Okay. I think the next section, I will pass on to Hwee Pio to share a little bit about our financial position. Hwee Pio?

I will run through now the financial position highlights as of September 30. As of end September, the gearing stood at 35.9%. It has edged up, mainly due to the 12% acquisition in ARF that we made in July. Interest cover for the financial year at 4.95x, and the total borrowings was at $1.255 million -- $1.255 billion. The percentage of borrowings on fixed rate and hedge via interest rate swaps was at 54.3%, so which means that the balance of the borrowings are on floating rate. As you are aware, there have been 3 terms of interest rate cuts in the last few months. And 1 month [indiscernible] currently is about [ 0.11% ]. Our average cost of borrowing all-in was at 2.4%. Credit ratings. So following our announcement on the acquisition of 63.1% stake in ARF, both rating agencies, Moody's and S&P, have actually reaffirmed our BBB rating and has restored us to a stable outlook, following the liquidity position that we are able to accomplish during the Circuit Breaker period and also our plan to refinance some of the borrowings to lengthen our debt maturity profile. Next, please. Next slide. This is the balance sheet as of September 30 this year as compared to last year. The NAV and NTA per unit is now $2.27 compared to last year, this time, $2.21. And the assets in this current balance sheet would have included the 36% stake that we own in ARF. The investment properties that you see here, there is a so-called drop of about $100 million. That is because we have reclassified Bedok Point as asset held for sale down the line. Next slide, please. This is the debt maturity profile as of September 30. So if you could see the footnotes that have been attached to the $80 million, post-September 30, we have paid down the anchor points mortgage loan of $80 million from the equity fundraise proceeds, and that was on 7th of October. And following the completion of the preferential offerings on 27th of October, we paid down the -- some of the revolvers that you see. That the 2 strict -- the 122 -- $125 million and also partially the $200 million that view -- or where we view FY 2022. So for the short-term revolvers, they amounted to $325 million due this year. And I mean year 2021 and 2022, we have basically picked them off by a mix of the equity fundraise money and also a refinancing of a secured -- unsecured 5-year term loan. Next. This is the asset valuation. We had conducted slightly earlier than September 30 this year for the valuation of our portfolio, mainly due to the impending equity fundraise on 28th of September that we announced. And as of 30th of -- 15th of September, the valuations, cap rates remained -- basically remain unchanged as compared to last year. As for Bedok Point, we have booked the $108 million based on the selling price that we have entered into S&P agreement in September 10. And the completion of Bedok Point sale is expected to be sometime in November. Over to you, Fung Leng.

The next session is on the operational performance. This section is -- will be covered by our Head of Investment and Asset Management, Ms. Pauline Lim.

Good morning, everyone. Thank you for taking the time to join us this morning. I will provide a salient update on the asset performance for financial year '20 ending September. Next slide, please. So this slide shows the occupancy of the portfolio. I think what Richard mentioned earlier in 18, a healthy and respectable 94.9% coming out of the Circuit Breaker and also in the midst of challenging times for a lot of people. In essence, the nonrenewals in term loans were compensated by the incoming leases at other malls over the last quarter. And this is the result of the key focus on tenant retention as well as [indiscernible] to tenants over a very challenging and difficult period, which came in the form of dispensation of government subsidies, landlord [indiscernible] base as well as marketing assessments to drive their productivity. We also maintained a flexible sense in terms of renewals as well as new commitments, especially for the near-term offerings. Next slide, please. So this slide reports the recovery of footfall and sales post-Phase 2 reopening, which took place in Wuhan in mid-June, right? So from the top, we see that both tenant sales as well as footfall recovered deeply after the Phase II reopening, and both total tenant sales and footfall have stabilized at a certain level, so total tenant sales very, very close to pre-COVID levels compared to the same period last year. Shopper traffic had about 60 -- varies at 60% to 70% across the various months. In terms of sales for the month of September, it [indiscernible] lower. So you see that we have actually come down a little bit compared to last year. A point to note is that the recovery across tenants and trade still varies with essentials and new trends, like, for example, [ sports ] and well-being, leading the type in terms of recovery. So then the essentials will include, like the supermarket, the households as well as the health care. Next slide, please. Right. This slide shows the lease expiry profile of the FCT portfolio by gross rental income. A few things that we observe from this chart. Firstly, the lease expiries are actually very well spread out over the next 2 years. So we don't see any concentration -- particular concentration in any year. The WALE at 1.5 years depending -- at 1.5 years is healthy, given the average premier lease tenant of retail leases. And also just to highlight that approximately 20% of our lease expiries for FY '21 had been [ DV. ] But on the ground, it's important to note that leasing remains challenging due to the still very positive fixed sentiments, and leasing agreements and [indiscernible]. Next slide, please. This slide comprise a breakdown of the expiry by malls. 65% of the renewals are at the largest malls, which includes -- within the portfolio, and this includes Causeway Point, Northpoint City North Wing as well as Waterway Point. I think this is important to highlight because dominant malls -- malls that are dominant within their respective catchments are also retired by retailers when they do consolidation. And over this challenging COVID-19 period, we will see an increase in polarization in the mall performance. Larger and trends and well-managed malls will prove ahead and maintain their operating resilience. But having said that, just to reiterate that market remains challenging and uncertain, leasing is a key focus of our team and complementing that will be marketing support to drive the sales productivity of the retailers. Next slide, please. All right. So this slide provides an overview of the leasing activity that took place over the FY '20. Some key points to note. About 24% of the portfolio, NLA was renewed -- newly committed in FY '20 despite the challenging situation, especially in the third and fourth quarter of the financial year. The reversal is maintained at a positive territory of 4.2% on average-to-average basis. When we look at incoming versus outgoing basis, it maintained also a neutral to slightly positive territory. In terms of the reversions across malls, over time, for the last 2 quarters, we saw a mix of positive and negative reversions across our malls. With this, I would hand over to Richard to do a round up for this presentation. Thank you.

Just to give you a sense on overall what's happening in the market in terms of the macro situation, you're probably very familiar in terms of the announcement by MTI, in terms of the projection that is being put across by MTI as well as the various analysts in the market, so I'm not going to drill a lot onto that. But I think the more important part is what are we going to focus on? I think the idea here is to rather focus on what we can do rather than focusing on things that is beyond what we can manage, right? So for a start, in terms of ensuring safety measures, we'll continue with our Phase 3 -- watch out for the Phase 3 reopening that should be coming out soon, hopefully. And also preparing ourselves in view of the increase in capacity when Phase 3 is implemented. We continue to -- in terms of ensuring that the malls are well maintained, the various sanitization activities are ongoing. And also in terms of preparing ourselves, utilizing the various token, et cetera. So those are the operational aspects that we will be focusing on. The other part is, of course, now that with the completion of the ARF portfolio, we want to look at merging the 2 portfolios as efficiently as possible to drive synergy in terms of looking at opportunities where we could harness the expanded scale that we will -- we currently have going forward, and try to, again, leverage on the scale to get us better contract terms, negotiate better deals in terms of the expenses, et cetera. And the other aspect is, of course, very key to us is in terms of working with our retailers right now, as we have mentioned and talked about, is to retain our tenants. See how we could work together during this short-term period so that when things recover and things are going back to normal, we will be able to then fall back on the expectation that we both have as landlord and tenants. And at the same time, the asset management team will be working very hard to look at ways to improve our malls in areas that we think we could do some improvement, while the situation is not -- has not gone back to normalcy. There are areas of work that we can do. Maybe this is the right time for us to do it. We are also looking out for opportunity in which we could probably enhance the mall -- value-add the mall. And again, this is right time to explore some of these possibilities. So that by the time it's ready, hopefully, by then, the market would have recovered significantly. And the other part is, of course, our focus very much on to driving omnichannel going forward. Again, we have touched on this during our roadshow when we were doing the acquisition and EFR about the platform that we -- is being rolled out by FPR -- FPL as a whole in terms of the eStore, in terms of Makan Master. So these are the areas in which we think it's going to be critical, it's going to be important going forward, especially as more and more of our tenants are trying to embark on omnichannel, multiple ways in which they can market their products as well as our consumers continue to look at various ways for their convenience in terms of accessing the market. So this is very -- another very important thing that we will be focusing on. And at the same time, it's also trying to continue to make sure that our mall and -- our malls are performing well. We can leverage on our real estate as the last-mile fulfillment hub. Okay. The last slide is, again, just a recap -- Fung Leng. Okay. Again, I think what we have also again showed here is the resilience that a suburban mall portfolio like ours provides, right, in terms of -- if you have seen the numbers that Pauline showed for the month of June -- for month of July, August, September, the traffic numbers have kind of stabilized, and that's no surprise because we still have a lot of work from home. People are working from home. So your transient customers would have reduced and kind of stabilized that number. But what is important is that the sales have more or less also maintained for the last 3 months. So initially, we were a little bit concerned when we showed the number for July, so we were asking what's going to happen in August? Are we going to see the same trend? And August turned out to be quite similar. And we are happy to also see that, for September, the numbers have continued to maintain. So this is a good sign that probably, in terms of suburban mall, at least, people are coming back their spending because, at the end of the day, not forgetting that about 53% of our GRI essential services, about more than 40% -- close to 45% of our NLA essential services type of product. So that is where I think it's a point of differentiation, because suburban mall continues to stay resilient and relevant to the communities at large around us. And the other final takeaway from this particular slide is that we are focused very much on putting the 2 portfolios together to drive value from this expanded portfolio. And we will remain, at least for the immediate future, Singapore-centric and suburban retail-focused. With that, I end my presentation, and we are happy to take any Q&A. Thank you.

Hi, everyone. Thank you, Richard and thank you, Hwee Pio and Pauline. We are now into the Q&A session. [Operator Instructions] So looking -- just give a few seconds for the queue to build up. Okay. We are ready to get into the Q&A session. First, in the queue is Terence Khi from JPMorgan.

Just a few questions from me. Given this weaker leasing environment, what are your expectations of rental reversions and occupancy outlook heading into FY '21?

Okay. If you look at the current situation, I think what is important is, firstly look at the amount of spaces that are for renewal, which Pauline have shared, and we have done about 20% of those. So leasing activities continue. There are probably 2 groups of retailers that we are looking at today. One is those retailers that fall under the category of essential, and those that have done well throughout this period, even during the Circuit Breaker. So for those pretty much we continue our leasing activities, and the negotiation of rental is quite straightforward. And usually, we will continue with an usual permanent 3-year lease or whatever the case may be. There's another category of retailers who have suffered the losses or the business had been impacted during this period. So this is where, again, every of these retailers are different, so we have to approach it differently. Some of them have seen improvement when Phase 2 kicked in. And month-on-month, you can see that the sales have progressed. So these are the group of tenants who want to stay. We know they want to stay. It's about trying to help them tie over this short-term period. So this is where we will work out with them, probably do a 6-month extension, 12-month extension before we lock in permanently. So during this period itself, I would say that the rental will not be the same as the usual, these 3 years lease that you're expecting. So there will be some compromise of the base rent, perhaps, and then we can add up with some GTO. At the same time, usually for such extension, we will also include a clause, whereby we could give a 1-month notice to recover the space in the event that the tenant are not doing well or we have opportunity to bring in a better tenant. So this is ongoing. So the whole focus here is more towards retaining tenants and then keeping the occupancy rate as high as possible. Currently, we are close to 95%. So we hope to maintain this as much as we can, while we go through this period of difficult times. There will be another category of tenants, which we felt that, despite what measures has been given, their sales continued to be very challenging. And even in the normal course of business, right, even before COVID, we do see tenants who may not be able to continue. So this is where we will probably talk to them about exiting their premises, find a way in which they could probably return us the space -- reinstate our space and then remarket. So it's a combination of ways in which we try to approach the market. And on the aspect of rental reversion, I would say we will face -- we continue to face a bit of challenges throughout the market. For 2020, we have done well. You've seen the reversions close to 4% based on average in/average out comparison basis. What we have seen so far is probably neutral or slight negative for the initial bunch of leases that we have done, and we'll continue to work on it. So the expectation for rental reversion will be -- have to be managed in terms of -- at least for the immediate future, and we hope that, as we progress on a quarter-on-quarter basis and when more of these spaces are opened up, capacity limits being relaxed, this is where we could then be focusing more on getting the rental rates up again. I hope I answer your questions, Terence.

Yes, Richard. I guess that moves on to my next question in terms of the impact of this realigned framework, which was announced yesterday, which allows, I guess, the micro and the smaller tenants to exit their leases. Do you expect some of these tenants who you mentioned are suffering to want to exit? And can you give us a sense of what's the proportion of GRI for these tenants who are not doing as well?

Okay. We are still waiting for the criterias to be established because I think is -- currently, what they have done is given up -- given us a general framework. In fact, as we speak now, there's a meeting that's ongoing between Min Law and the various -- with CEOs and developer CEOs. I can't join because I'm having this session. So Chee Wah, the CEO of FPR, is there attending the meeting. So we will have more clarity in terms of definition of impact, definition of the size, and then that's where we could probably come back to you for -- in terms of what would be disproportion. By and large, we don't think it's significant. Looking at numbers across the board, especially when we talk about tenants that are really, really being impacted and we don't see that as a number that is very material for now. So -- but let us have a more definitive criteria before we could give you a number. As far as this new legislation that's going to be put in place, I guess, if you look at the bigger picture, perhaps, it's actually not the worst situation. It might make things easier because there are certain tenants that if they cannot continue, it might be a better option for us to work out a way for them to exit. They pay off whatever that is outstanding. They reinstate the space, they give us back the space, and then we remarket the space rather than we prolong the situation. We try to go after them for whatever amount that's owing and et cetera. So it could be a position whereby we cut off, and then we start fresh again.

Our next question in line is Brandon Lee from Citi.

Just 2 questions on your sales for the quarter, July to September, right? Can you give us a rough sense of how many percentage of your tenants would have experienced at least a 20% drop in their sales compared to pre-COVID?

Richard, do you want me to answer the question?

Yes, go ahead.

So Brandon, your question is with regards to the percentage of tenants that -- with the sales dropping more than 20%, okay.

Yes, Correct.

Yes. So like I mentioned in my presentation on the -- it's quite varied across the trade across the tenants itself. So even say within a particular trade, we do have certain tenants that are performing better than their peers, and by the way, they are in the same state. And it's a function of -- to a certain extent there that details of their business model and also their [indiscernible], right? So they run promotion and all that, they tend to do better. Now in order to quantify those that have performed 20% lesser, I think it would be somewhere in the same range as well, maybe on that 20% to 30% mark across the portfolio. Does that help?

Okay. Yes, yes, yes. So 20%, 30% of your tenants assumed that at least 20% drop in sales, you're saying. Just want to confirm that.

Yes.

Yes. Just to add on, Brandon, the other thing we have to also qualify is that this 20%, 30% is, again, depending on different months, because different tenants, again, is not saying that the last 3 months, they performed 20%, 30% worst. Some of them, we have seen that maybe they start off the initial period a little bit slower, a bit lagging. And as we move towards August, July -- August, September, some of them do pick up. Vice versa, there will be groups of tenants who did more promotion during July, August, maybe their sales would have been better. So it's a little bit [ grayish ] to say that really is a function of this 20% to 30% we have done the same for the last 3 months.

Okay. Yes, just another pull off, just on the rent rebates that you expect to give, I think, for the next FY '21?

For start, we have provided whatever that we are due to give. In fact, we gave a little bit more because certain category of tenants, for example, like the karaoke, they do not allowed to open. We still continue to support them, but those are very far and few in between. So as far as legislation is concerned, we have fulfilled all obligations. Going forward, I would not say that we are giving rebates to our tenants. I guess it's all case-by-case basis. If -- let's say, for example, certain trade are still prohibited from operating, this is where we can work with them or we can work a way out with them. As far as the other retailers are concerned, largely is trying to work around see how can we help each other? How can we do marketing campaign, A&P, et cetera, rather than rebates because rebates usually it's a one dimension, it's a one way. And you only can help them for that period of time, you'd rather do things like, for example, I mean, if you go into -- if you have phrases experience member, you see a lot of promotions -- one-for-one promotion, a lot of push towards spending at our malls, et cetera, to create and generate sales. So these are things that ongoing. And of course, some of the parts comes in terms of our extension of leases. So it's not really looking at dishing out inventory rebates going forward.

Next in line is Derek Tan from DBS.

Just a question on what you have earlier said about some of the tenants are impacted and also need some assistance or restructuring the leases. Are those numbers captured in your rental reversion number on Slide 22?

Okay. For rental reversions, we only compare those leases that is on a permanent basis. So if, let's say, any leases that is less than up to 1 year, all right, we will not compute them as -- regard them as rental reversion because really, these are short-term leases. Until such time, when they are converted into permanent leases, then it will be computed into the rental reversion calculation. However, for the full year of FY 2020, I would not put a significant number of those cases in there because a bulk of our leases were already done pre-COVID.

Okay. Sounds really good. My next question is on Causeway Point, and this is probably the mall with a bit of a larger footprint kind of anchor tenants. Just wondering whether are you fairly comfortable with the format? And are they looking to also give that space?

Okay. The larger tenants we have at Causeway Point is Metro. That's one of the largest. Of course, we have a cinema operator. As of now, we don't see them asking or talking about return of space. For Metro, I think one of the things that they can't wait is for us to be able to utilize our atrium because Metro works very well, especially when we have promotions at the atrium. So they generate a lot of their sales from atrium. So probably that is one thing that is holding them back. However, when post the reopening -- Phase 2 reopening, their sales actually improved because they did quite a bit of sales at their outlet. And Metro is still for us, I think, and also for our shopper, is still very relevant as far as their location is concerned.

We have a next question from David Lum from Daiwa. He has posted question on the chat group that says, how strong are your departmental store tenants? How important are they to your tenant mix in the mall?

Okay, David. I think my response on metro because, currently, from our portfolio, we only have one department store across the entire portfolio. And that is the only one in Causeway Point, as what I've alluded to. They are still relevant. We still see the sales, pretty decent sales that they have been able to generate in Causeway itself, especially when now they are reduced to only 2 outlets, right, in Paragon and also Causeway. So it's a case of relevance. Today, we still think they are relevant. But if one -- the day comes should we decide that then we could better utilize the space or for whatever reason, if Metro should decide to exit, I think we could pretty well reconfigure the space and bring in other mini anchors or other retailers. It's not a big issue for us. And our exposure to department store is only for one single mall.

So maybe I'll just add on to Richard's earlier comments. So when you look at the trending prior to COVID, it was tracking at sustainable levels. They have -- and we've been monitoring the performance quite closely as well, coming out from the Circuit Breaker. They have managed to maintain performance at a good level, and largely because we are doing a lot of sales as well.