Analysts are positive on Frasers Centrepoint Trust’s (FCT) J69U decision to divest Changi City Point.
FCT, on Aug 30, announced that it will be divesting the mall to a foreign buyer with real estate presence within Singapore. The mall was divested at a cash consideration of $338 million. The proceeds will then go towards repaying the REIT’s loans and reducing its aggregate leverage. The REIT’s average cost of borrowings and hedge ratio of fixed-rate loans will also be improved on a pro forma basis.
Citi Research analyst Brandon Lee has upgraded his call on FCT to “buy” given its improved gearing to 37.1%, making the REIT the lowest-geared retail Singapore REIT (S-REIT) among the REITs within his coverage.
FCT’s move will also give it sufficient debt headroom to make potential acquisitions that are accretive to its distribution per unit (DPU), Lee adds.
The recovery of retail revenue after Covid-19 is also another plus for FCT in the analyst’s book.
With all that in mind, Lee has increased his target price to $2.51 from $2.30. His new target price has an implied P/B of 1.08x in-line with FCT’s five-year pre-Covid-19 mean of 1.09x.
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Lee has also upped his DPU estimates for FY2023, FY2024 and FY2025 by 1.7%, 0.7% and 1.1% respectively on the revised debt cost and lower debt from the sale proceeds of Changi City Point.
Maybank Securities analyst Krishna Guha is positive on the deal as the REIT’s portfolio attributes and debt metrics will improve after the divestment.
“The mall has been underperforming within the portfolio. Historical occupancy and net property income (NPI) yield has been at or below average. It lacks a residential catchment and does not fit, in our view, with FCT’s strategy of focusing on prime suburban retail malls,” he writes.
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“The debt repayment improves financial flexibility. As such, the divestment puts FCT in a stronger position to execute the ongoing portfolio reconstitution strategy,” he adds.
Guha has kept his “buy” call with an unchanged target price of $2.35.
DBS Group Research analysts Geraldine Wong and Derek Tan have also kept their "buy" call on FCT with an unchanged target price of $2.60. Like Maybank's Guha, Wong and Tan like that the sale has given FCT an attractive exit yield of 4.3% in consideration of the shorter land lease tenure of the mall at 46 years.
The sale also serves as an opportunity to "crystallise" net asset value (NAV) for the REIT due to the mall's low land lease.
"The land lease tenure of the mall is the oldest within the portfolio – at 46 years – and will start to see a faster rate of valuation decay in the medium term," the analysts explain.
Referring to Bala's curve as a guide on valuation implications along a decline in leasehold value, the analysts note that a comparison between Changi City Point and another one of FCT's assets, Nex, will value both malls at around 70% and 89% of a fresh 99-year leasehold basis based on Changi City Point's 46-year leasehold tenure and Nex's 85-year leasehold tenure.
As such, the analysts have adjusted their NPI yields across selected FCT properties on a 99-year leasehold basis "for a fairer comparison to obtain an implied valuation cap of 3.6% for Changi City Point, even tighter than valuer cap rates for retail assets at [around] 4.25-4.50% for dominant malls."
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With the improved financial flexibility after the divestment, the analysts at DBS see the possibility of FCT acquiring its sponsor's remaining 25.5% effective stake in the joint venture owning Nex. Should the REIT be able to redeploy its debt capacity into Nex at an initial yield of 4.8% to 4.9%, that will be mean an immediate accretion to its DPU in comparison to its exit cap on Changi City Point at 4.31%.
"Moreover, the need for equity fund raising to fund the acquisition without overstretching its balance sheet is an overhang removed, in our view," the analysts write, adding that the purchase of its remaining sponsor's stake in Nex will require $350 million, which can be fulfilled from the divestment quantum of Changi City Point.
"On a portfolio perspective, this upcycling will be a premium to FCT’s overall portfolio strategy on all aspects including a longer lease tenure for Nex at 85 years, expansion of presence within the north – north east region of Singapore where retail space per capita is the lowest island-wide, dominant attributes at Nex mall with excellent mall connectivity to an MRT interchange station, and DPU accretion to a higher yielding asset at high 4%," the analysts add.
"FCT’s share price has held up well against peers year-to-date or ytd (-1% ytd), with more room to rally given that [the] equity fund raising overhang on [its] share price has been substantially lifted for now," they continue.
RHB Bank Singapore analyst Vijay Natarajan has kept his “neutral” call with a higher target price of $2.13 from $2.10.
“The proposed Changi City Point divestment is a positive move and one we believe addresses gearing concerns and ballooning interest cost pressures,” he says.
The analyst also expects the divestment to have a “mild positive effect” on DPU as the proceeds will help to repay FCT’s high interest floating rate loans.
“With lower gearing, FCT may now look more keenly at adding stakes in some of its newer high-quality malls – e.g. Waterway Point and NEX – that should help consolidate its dominant suburban retail position,” he adds.
Units in FCT closed 1 cent higher or 0.45% up at $2.24 on Aug 31.
