Analysts positive on addition to portfolio and sale of underperforming Bedok Point

 

FRASERS Centrepoint Trust' s (FCT) proposed acquisition of the rest of AsiaRetail Fund (ARF) will boost the real estate investment trust (Reit)' s suburban portfolio even as suburban malls are expected to recover more strongly from the negative impact of Covid-19 than their centrally located peers.

 

On Sept 3, the Reit had announced a plan to buy the remaining 63.1 per cent stake in ARF for S$1.06 billion. The seller is its sponsor, Frasers Property.

 

ARF owns five malls in Singapore: Tiong Bahru Plaza, White Sands, Hougang Mall, Century Square and Tampines 1. It also owns the Central Plaza office property on Tiong Bahru Road.

 

At a media briefing on Friday, Richard Ng, chief executive of Frasers Centrepoint Asset Management (FCAM), the manager of FCT, said: " What the (Covid-19 pandemic) has shown up at this difficult period is how important and resilient suburban malls are."

 

During the lockdown period, 30 to 40 per cent of FCT' s retailers continued to operate.

 

" The (two) portfolios are complementary, we have very limited competition amongst ourselves. This is good so that we can service a larger catchment population as well as retailers that want to have locations in parts that we originally do not have," said Mr Ng.

 

Separately, the Reit is also looking to sell Bedok Point to Frasers Property for S$108 million.

 

With a net property income (NPI) yield of 2.5 per cent, Bedok Point is one of the weakest malls in FCT' s portfolio. In comparison, ARF' s five retail malls have an NPI yield of 5 per cent.

 

" There' s an opportunity for us to recycle this asset and put the money to better use by investing in a higher yielding portfolio," said Mr Ng.

 

Analysts reacted positively to the news.

 

SooChow CSSD Capital Markets (SCCM) said on Friday that it sees the transaction as a " timely deal to better position FCT to benefit from a suburban mall recovery" .

 

Tata Goeyardi, managing director and co-head of equities at SCCM added: " There is already a visible recovery in underlying fundamentals." He pointed out that tenant sales in July for both the FCT and ARF portfolios were just 0.7 per cent to 3 per cent lower year on year. " Although occupancies are still relatively low&hellip as long as shopper demand recovers, demand from new tenants could gradually resurface again," he said.

 

Meanwhile, CGS-CIMB upped its target price on FCT to S$2.83 - from S$2.78 previously. It also reiterated its " add" call on FCT, saying that it views both deals positively.

 

Prior to Thursday' s announcement, DBS Group Research had on Aug 31 called malls with suburban characteristics a " safer bet" as compared to tourist-focused Orchard Road malls. Recovery for the latter will likely lag and face difficulties returning to optimal capacity given current travel restrictions, DBS said. FCT was among the research team' s top sector picks.

 

To minimise tax leakages, FCT is also aiming to convert the ARF properties - with the exception of Century Square - to limited liability partnerships (LLPs) post acquisition.

 

In FY2019, FCT saw a tax leakage of S$4.7 million based on its 36.9 per cent stake in ARF.

 

" That is a significant loss&hellip We have to see how we can resolve this and with a new structure that will help us to save this tax leakage and that will benefit our unit holders as a whole," said FCAM CEO Mr Ng.

 

By converting the properties to LLPs, FCT will have full control of them and unitholders will enjoy tax transparency.

 

Century Square' s property holding company is the Singapore branch of a Mauritius-incorporated company. FCT said it is " currently exploring how tax transparency can be achieved" , possibly through the transfer of Century Square directly to the Reit.

 

In the short term, FCT will continue to stabilise its assets through " extending some of (its) leases and trying to retain as many tenants as (it) can at this current moment" .

 

While the Reit continues to see some " short term renewals and extensions" of leases, Tay Hwee Pio, chief financial officer of FCAM, said that these are " not significant" in proportion to its total leases.

 

Additionally, FCT is also stepping up its digitalisation efforts to boost shopper traffic.

 

For instance, next month, Frasers will be launching its new eCommerce marketplace, which allows shoppers to consolidate their orders from multiple retailers in a Frasers mall. They can then choose to pick up their purchases all at once in-store or have them sent to their doorsteps.

 

As for future plans, Mr Ng said that there are " still pockets of opportunities that (FCT) could evaluate for the assets" , and that FCT will continue to " proactively manage the portfolio" . This may include further divestment of assets if in the longer term they do not " fit into (FCT' s) requirement to build up a very strong, sustainable, resilient type of portfolio" .

 

On Sept 3, the manager of Frasers Centrepoin announced it plans to acquire the 63.1% in PGIM Asia Retail Fund (ARF) it does not own, currently held by Frasers Property (FPL). FCT' s manager also announced the proposed sale of Bedok Point. Prior to the acquisition, ARF will divest a Malaysian mall.

 

Upon completion of the transactions, FCT&rsquo s retail properties in its portfolio will increase from seven to 11, and its net lettable area will expand by about 64% to 2.3 million square feet, placing FCT among the largest suburban retail mall owners in Singapore. FCT&rsquo s portfolio size will increase to approximately $6,650 million. Post the proposed Equity Fund Raising, FCT is expected to be among the top ten largest S-REITs by market capitalisation, the manager announced. 

 

ARF&rsquo s portfolio of suburban retail malls shares similar characteristics to FCT&rsquo s malls, which includes the focus on Essential Services, being located in populous residential areas and above or near transportation nodes. ARF&rsquo s Singapore portfolio includes five retail malls: Tiong Bahru Plaza, White Sands, Hougang Mall, Century Square and Tampines 1 and one office property Central Plaza.

 

To fund the purchase, FCT has announced a placement and preferential equity fund raising to raise $1,300 million. As an example, if FCT issues 585.6 million units priced at $2.22 apiece, the acquisition would provide a distribution per unit accretion of 8.59% based on FY2019&rsquo s pro forma numbers. Hence DPU would rise to 13.02 cents from FY2019&rsquo s 11.97 cents. 

 

However, based on 9M2020 to June 30 this year (FCT has a Sept year-end) and including the rental disbursement by the ARF properties, the accretion is less, with DPU rising just 0.4%.

 

Whatever the short-term DPU accretion, looking past Covid-19, this is a transformational transaction. In a recent report dated Aug 31, Credit Suisse upgraded FCT to a buy, based on the potention acquisiton of the PGIM ARF portfolio.

 

FPL has given an undertaking to subscribe to its pro rata share of the preferential equity raising. Since this is an interested party transaction, FCT' s unitholders get to vote on the acquisition in an EGM. 

FRASERS Centrepoint Trust (FCT) is proposing to raise up to S$1.39 billion in equity through a private placement and/or a preferential offering, to fund its acquisition of the remaining 63.1 per cent of AsiaRetail Fund (ARF) for S$1.06 billion.

 

ARF owns five retail malls in Singapore - namely, Tiong Bahru Plaza, White Sands, Hougang Mall, Century Square and Tampines 1 - as well as the Central Plaza office property.

 

ARF also owns Setapak Central, a mall in Kuala Lumpur, Malaysia. But ARF will divest this mall to FCT' s sponsor for a sale price of S$39.7 million before FCT acquires ARF, so FCT' s enlarged portfolio will not include Setapak Central. This is in line with FCT' s current strategy to grow its portfolio of Singapore assets, it said.

 

To fund the acquisition and pare down existing indebtedness, the Reit manager is proposing to issue up to 628 million new units in FCT, representing around 56.1 per cent of the total number of issued units.

 

Based on the illustrative issue price of S$2.22 per new unit, the proposed equity fund raising is expected to raise gross proceeds of up to S$1.39 billion.

 

Separately, FCT plans to divest Bedok Point to its sponsor for a sale price of S$108.0 million, so that FCT can unlock value and redeploy it to acquire higher-yielding assets with larger scale, it said.

 

On a pro forma basis, these transactions are expected to provide 8.59 per cent DPU (distribution per unit) accretion based on FCT' s FY2019 financial statements.

 

Pro forma net asset value per unit would be S$2.22 as at Sept 30 2019, from S$2.21 as at Sept 30, 2019.

 

Upon completion of the transactions, FCT' s retail properties in its portfolio will increase from seven to 11, and its net lettable area will expand by about 64 per cent to 2.3 million square feet, placing FCT among the largest suburban retail mall owners in Singapore.

 

FCT' s portfolio size will increase to approximately S$6.65 billion, from S$3.96 billion.

 

Suburban malls remain an attractive asset class, FCT said: " Since the commencement of Phase 2 of Singapore' s re-opening on June 19 (after the Covid-19 partial lockdown in April), more than 99 per cent of the retailers in the ARF Singapore retail assets and FCT' s existing portfolio have resumed business.

 

" For both FCT and ARF portfolios, shopper traffic as at July 2020 has recovered to between 60 per cent and 70 per cent of last year' s level. Similarly, portfolio tenants' sales in July 2020 has recovered to between 97 per cent and 99 per cent of last year' s level.

 

" The pace of the recovery has demonstrated the resilience of suburban retail malls through challenging times."

 

The acquisition fee payable to the Reit manager for the proposed ARF acquisition is approximately S$19.3 million.

 

Stamp duties, professional fees and other expenses to be incurred in connection with the acquisition and the proposed equity fund raising are estimated at S$32.1 million.

 

FCT will convene an extraordinary general meeting on Sept 28 to seek FCT unit holders' approval for the proposed transactions.

 

FRASERS Centrepoint Trust (FCT) announced on Thursday that its portfolio occupancy fell 2.2 per cent year on year (y-o-y) to 94.6 per cent for the third quarter ended June 30.

 

This was due to &ldquo weakened leasing market conditions&rdquo , with tenants monitoring the changing Covid-19 situation before committing to new leases, said the suburban retail Reit.

 

Leases that expired in June represented 7.8 per cent of gross rental income and 5.8 per cent of the total leased area, of which 4.8 per cent was left to be renewed in Q4 2020.

 

While more than 95 per cent of FCT&rsquo s tenants resumed business on June 19 with the start of Phase 2, shopper traffic for its malls (Causeway Point, Northpoint City, Waterway Point, Changi City Point, YewTee Point, Bedok Point and Anchorpoint) fell 51.8 per cent from June the year before and 38.9 per cent y-o-y as of July 12.

 

FCT attributed the decline in July mainly to &ldquo safe-distancing and traffic-density measures still in place&rdquo .

 

Since rolling out various tenant support packages in February, FCT has to date disbursed about S$25 million in landlord&rsquo s rental rebates to its tenants.

 

&ldquo The impact from Covid-19 and rental rebates for tenants will affect FCT&rsquo s financial and operational performance for the second half of Financial Year 2020. Potential impact, if any, to the valuation of the investment properties going forward remains to be seen,&rdquo it said.

FRASERS Centrepoint Trust (FCT) is acquiring an additional 12.07 per cent stake in PGIM Real Estate Asia Retail Fund (ARF) for S$197.2 million, in line with plans to bolster its presence in Singapore' s suburban retail sector. 

 

FCT now holds a 24.82 per cent interest in ARF, through its wholly-owned subsidiary FCT Holdings (Sigma). The acquisition, expected to be completed in July, will raise FCT' s interest in the fund to 36.89 per cent.

 

FCT Holdings (Sigma) had exercised its right of pre-emption as a shareholder of ARF to buy the shares from certain shareholders that had indicated their desire to sell. Frasers Property Limited owns the remaining stake of about 63.1 per cent in ARF.

 

The acquisition is accretive to FCT&rsquo s distribution per unit, based on the assumption that the deal had been effected at the beginning of FY2019. But with the acquisition, which will be fully funded by debt, FCT' s pro forma gearing is 36.2 per cent as at Sept 30, 2019.

 

The net asset value of the stake as at March 31, 2020 amounts to about S$194 million in total. 

 

FCT' s manager said in the exchange filing that the acquisition is in line with its principal investment strategy to acquire interests in quality income-producing properties used primarily for retail purposes, and to enhance FCT&rsquo s presence in Singapore' s suburban retail sector, so as to deliver regular and stable distributions to FCT&rsquo s unitholders. 

 

Richard Ng, chief executive of the manager, said: " The ARF portfolio of suburban retail malls shares similar characteristics to FCT&rsquo s malls, which focus on essential spending and F& B trades as well as their locations in populous residential areas and close proximity to transportation nodes. These characteristics continue to underpin the resilience of the suburban retail sector, notwithstanding the difficult Covid-19 period."

 

ARF is an open-end private-investment vehicle set up as a company, and the largest non-listed retail mall fund in Singapore. It owns five retail malls near MRT stations (Tiong Bahru Plaza, White Sands, Hougang Mall, Century Square and Tampines 1) and an office property (Central Plaza) in Singapore, and one retail mall in Malaysia.

 

It is managed by PGIM Real Estate, the real estate investment business of PGIM, the US$1 trillion global investment management business of Prudential Financial.