by: Tam Ging Wien
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Frasers Centrepoint Trust (FCT) announced that it is proposing to raise up to S$1,394.2mil in an equity fund raising exercise in a bid to acquire all the remaining 63.1% stake in AsiaRetail Fund (ARF) at a purchase consideration of S$1,057.4mil. Including all acquisition fees and duties to be paid, the total acquisition cost will be S$1,108.8mil. FCT intends to use the difference between the amount raised and the total acquisition outlay to pare down existing indebtedness and/or to fund capital expenditures.
FCT currently has in its portfolio seven suburban retail properties in Singapore: namely Causeway Point, Northpoint City North Wing (including Yishun 10 Retail Podium), Anchorpoint, YewTee Point, Bedok Point, Changi City Point and Waterway Point (40% interest).
AsiaRetail Fund presently is the landlord of five suburban retail malls in Singapore: namely Tiong Bahru Plaza, ang MWhite Sands, Hougall, Century Square and Tampines 1. It also owns the office tower in Tiong Bahru just adjacent to Tiong Bahru Plaza - Central Plaza. AsiaRetail Fund also owns Setapak Central, a mall in Kuala Lumpur. As FCT’s current strategy is to grow its portfolio of Singapore assets, as part of the transaction, it will divest the KL mall to its sponsor for a sale price of S$39.7mil.
FCT has called for an Extra-Ordinary General Meeting (EOGM) to vote on the proposed equity fund raising and acquisition. The EOGM will be convened and held by way of electronic means on 28-Sep-2020 at 10.00am.
In the same EOGM, it will also be seeking shareholder’s approval to divest Bedok Point in Singapore to its sponsor for a sale price of S$108.0mil as well as approval to do a private placement of shares to its sponsor.
If the proposal is passed and the acquisition and fund-raising activities completed, FCT’s portfolio value is anticipated to increase to approximately S$6.65bil from S$3.96bil.
We layout our views on this proposed transaction from the point of view as unitholders.
Post-acquisition of the ARF Singapore Retail Assets, FCT will become the 2nd largest suburban mall landlord in Singapore after CapitaLand Mall Trust (CMT) by a difference of only 0.4% based on retail floor space. FCT also has in its pipeline potential acquisition opportunities from its sponsor such as the Northpoint City South Wing – an adjacent asset to its existing Northpoint City North Wing that it already owns. With its current growth trajectory, it could potentially grow into largest suburban mall landlord and solidify its position as the 2nd largest retail floor space owner in Singapore.
Among the S-REITs, FCT is poised to grow to among the top 10 largest market cap REITs overtaking Suntec REIT and Keppel REIT. This could place it on track for an inclusion consideration into the Singapore benchmark index – The Straits Times Index (STI) in the foreseeable future.
If this acquisition completes, its portfolio will increase from 7 to 11 malls with the number of leases doubling.
We view this FCT’s proposed acquisition of ARF Singapore Retail Assets to be highly synergistic. The Singapore assets are all suburban and also located within key catchment areas of the Singapore residential population; namely Woodlands and Yishun in the North, Hougang and Punggol to the Northeast, Tempines and Pasir Ris to the East and also Tiong Bahru, Bukit Merah and Queenstown in the central areas.
FCT’s portfolio has traditionally been dependent on the Northern malls of Causeway Point and Northpoint to derive the bulk of its rental income. Just these two assets alone account for about 48.2% of their portfolio valuation. With the full inclusion of ARF Singapore Retail Assets, those two assets will reduce to 35.2% of the portfolio valuation achieving a broader diversification across the Singapore suburban retail scene.
Had the acquisition been made without the impact of the circuit breaker measures where retail businesses were forced to shut down and landlords had to rebate rentals, the acquisition would have been DPU accretive. Theoretically, if these one-off rental rebate not been provided, the DPU accretion would grow from 9.03c to 9.45c or a 4.72% increase.
However, in this exceptional case, we would need to accept that year 2020 is indeed an exceptional year. According to the 9-month FY2020 pro forma, the DPU is expected to fall from 7.34c to 7.31c, a marginal dilution of just 0.4%. Arguable, this could be considered rather neutral as other factors could come into play. With the help of the Bedok Point divestment, the DPU becomes just slightly accretive at 7.37c or just over 0.4%.
However, looking forward to 2021 and 2022, we think that there is weak political will to take such a drastic shutdown measure again. We think that the risk of a second around of circuit breaker measures is likely to be low.
It is interesting to note that the data disclosed by FCT has shown than tenant sales have generally recovered for its portfolio of sub-urban malls despite the foot traffic. According to FCT, the shopping traffic have currently stabilised to roughly 40% below pre-pandemic levels and this was attributed to shoppers being held back by traffic density control measures.
However, tenant sales data appears to show that sales figures are down barely 0.7% at the ARF malls while it was just 3.0% in the other FCT portfolio malls compared to pre-pandemic levels. This seems to suggest that data is pointing to early signs that the necessity-based tenant profile of sub-urban malls tend to be fairly resilient and among the quickest to recover pre-pandemic. We would off course need to for more data points to come in to fully confirm this recovery trend.
As unitholders in this REIT, we are found the acquisition to be synergistic. The suburban retail sector anchored by necessity-based retail located in high density urban landscape like Singapore also fairly resilient. About 53.6% of the portfolio’s gross rental income are coming from tenants which are classified as essential services. Tenant sales has also staged a quick recovery after the circuit breakers have been lifted.
We have always emphasised that we like acquisitions to be DPU accretive. However, for this acquisition, we understand that the FY2020 DPU accretion is fairly neutral given the impact of COVID-19. We view this as a temporary impact and believe that we should write-off FY2020 and instead be looking forward to FY2021 and FY2022 where we see the acquisition would really deliver the real boost to our portfolios.
We look forward to grow together with FCT and would be proud unitholders when it one day becomes Singapore’s largest suburban mall landlord.
Disrupted by a fast-moving and unseen adversary, governments around the world has been forced to implement unimaginable measures. The COVID-19 pandemic has resulted in a massive worldwide "Work From Home" forced experiment that has thrown up the question on relevance of the workplace, offices and REITs.
Join Tam Ging Wien, co-founder of REITScreener & ProButterfly and Jill Smith, CEO of Manulife US REIT as they discuss the implications and future of offices and REITs in a post-pandemic world.
Date: 30th September 2020 (Wed)
Time: 7:00pm – 9:15pm
Register for Free: https://www.reitscreener.com/futureofoffices
Venue: Zoom Webinar (details will be sent to registered email)
Seats are allocated on a first-come-first-served basis. For more queries, please feel free to email [email protected].
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