Since its IPO in 2014, Frasers Property TQ5 Limited (FPL) has made some deft moves. However, the most notable initiative, made under group CEO Panote Sirivadhanabhakdi when he first became a board member, was the acquisition of Australand soon after FPL was listed.
Australand provided FPL with an industrial and logistics (I&L) portfolio that enabled the group to gain a foothold in Australia ahead of other REITs and funds, long before logistics became a byword for the New Economy.
In 2016, FPL listed Frasers Logistics and Industrial Trust (FLT). This became Frasers Logistics & Commercial Trust BUOU (FLCT) following the completion of the merger between FLT and Frasers Commercial Trust.
Once firmly ensconced with the I&L portfolio, FPL in 2017 acquired a 99.5% stake in Geneba Properties, an Amsterdam-based listed real estate investment company that owns and manages a portfolio primarily comprising long-lease logistics and industrial assets in Germany and the Netherlands.
In March, FLCT acquired an 89.9% interest in four logistics properties from FPL for $189 million, demonstrating that FLCT remains an efficient securitisation vehicle for its sponsor.
FPL’s other interesting manoeuvre involved retail malls. In March 2019, FPL and Frasers Centrepoint Trust J69U (FCT), its 39.4%-held REIT, took an initial stake in the PGIM Real Estate AsiaRetail (ARF) Fund. The fund owned five malls, Tiong Bahru Plaza, White Sands, Hougang Mall, Century Square and Tampines 1, and an office building, Central Plaza. In 2020, FPL and FCT acquired the remaining stake in ARF they did not own. Eventually, FCT acquired full control of the five malls and the office building.
In 2023, FPL and FCT together acquired 50% of NEX which FCT subsequently took over. These acquisitions made FCT the largest owner of suburban retail malls in Singapore.
In terms of geographical and asset diversification, FPL can be said to be more successful than other listed developers (see Charts 1 and 2) as the group has derived its profit before interest and tax from places like the UK, Europe and Australia.
Over the years, FPL has become a little bit more complicated as it absorbed significant stakes in its parent’s Thai companies. Nonetheless, the questions high on the list of investors have always been how the stock could be more liquid and whether the discount between its share price and book value could be narrowed.
Development, capital recycling
According to JP Morgan, FPL has identified three focus areas: Unlocking value, increasing development exposure and strengthening income streams as part of its effort to create better shareholder returns.
“We believe these steps will accelerate asset recycling to reinvest into development projects with higher margins, such as FPL’s 25% stake in the joint bid for the Jurong Lake District master developer site and further focus on I&L projects,” JP Morgan says in a May update following the group’s 1HFY2024 ended March results.
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FPL also has an ecosystem where its REITs act as offtake vehicles for properties which have stabilised. Unlocking value via recycling assets into its two REITs, FLCT and FCT, and stapled hospitality trust, Frasers Hospitality Trust ACV , and strengthening income streams are two sides of the same coin.
Earlier this year, FPL sold its stake in NEX into FCT and the four German warehouses into FLCT. This enhances fee income and frees up FPL’s own balance sheet to take on more development. “The sponsor offers its best assets to the REITs and these are assets the REIT is likely to be familiar with rather than third-party assets,” notes Sirivadhanabhakdi. “Our partnership with the REITs continues to be an invaluable vehicle for our capital recycling.”
Increasingly, FPL is taking on more development projects which provide a faster turnaround time for capital. In 1HFY2024, 95% of a Frasers Property Australia mixed community development comprising 3,000 completed apartments and townhouses were pre-sold. Altogether, FPA has $0.7 billion of unrecognised revenue. FPL also has a residential joint venture with Mitsui Fudosan in Brisbane where 2,300 units have been sold.
The main drawback of a property development focus is its lumpiness. During a recent results briefing, FPL group CFO Choo Leong was asked why revenue fell by 20.4% y-o-y in 1HFY2024. He says: “This is due to the lumpiness of the development projects. Outside of Singapore, revenue recognition is only upon settlement. We had a significant recognition in 1HFY2023.”
FPL has also divested assets to third parties. Earlier this year, it divested Capri by Fraser, Changi City, for $170 million. On May 14, FPL announced the sale of Fraser Residence River Promenade for over $140.9 million to Tuan Sing Holdings T24 5IC T24 5IC T24 5IC T24 5IC T24 5IC . “We can sell assets directly to third parties when the asset is fully optimised. We also do capital partnerships with external parties beyond the REITs,” Sirivadhanabhakdi says.
“A development property is not just a residential development. When we think about development properties versus investment properties, a good development project should be strategically developed to be traded. Both development and investment properties should be viewed as potentially helping the company achieve a more efficient capital structure and improve its IRR [internal rate of return] and return for shareholders,” Sirivadhanbhakdi elaborates. “That’s why we have this three-pronged approach,” he adds, referring to the focus on unlocking value, increasing development exposure and strengthening income streams.
“When we listed, residential income was about 80% but we have grown our investment properties to the extent that residential income is less than 25%,” Sirivadhanbhakdi points out.
“We’ve been actively managing and optimising our portfolio. We have grown to a point where our investment properties help us ride through difficult times like the pandemic, rising interest rates, deglobalisation and slower growth. These challenges impacted us and caused us to pivot to a portfolio where the capability is focused on improving returns,” Sirivadhanabhakdi explains. “We refreshed the leadership,” he adds.
One Bangkok, fee income
In 2017, FPL streamlined its ownership of Thai assets. FPL holds an 80.9% deemed interest in Frasers Property Thailand and a 95.7% stake in Golden Land Property Development. Both companies are listed on the Stock Exchange of Thailand. Frasers Property Thailand is the sponsor and major unitholder of Frasers Property Thailand Industrial Freehold & Leasehold REIT with a 26.6% stake. The REIT is focused on I&L properties in Thailand.
Separately, Frasers Property Thailand holds a 25.3% stake in Golden Ventures Leasehold REIT focusing on commercial properties.
Additionally, FPL owns 19.8% of a joint venture with its major shareholder TCC Assets in One Bangkok, the largest integrated precinct in Thailand. Set on 172,800 sq m of prime real estate with an investment value of THB120 billion ($4.5 billion), One Bangkok comprises five premium office towers, five luxury and lifestyle hotels, and three luxury residential towers. Parts of it are scheduled to open in 4Q2024, starting with a luxury hotel and a shopping mall.
“We are creating something that was never there but should be there. The asset is relevant to the use of the market. I believe that Singapore and Bangkok’s commercial office is worth one-tenth of the value and four times the economic rent. Our One Bangkok is evolving. We’ve invested 20% with TCC Assets, our partner and sponsor. We are the master developer of the project so we earn [development] fees. We will continue to drive facility management and asset management through the properties. In my view, we will see contributions from One Bangkok to FPL as it unfolds,” Sirivadhanabhakdi says.
Not many projects in Bangkok get pre-leased, he indicates. The first One Bangkok office tower of around 90,000 sq m is 50% pre-leased.
As an associate, One Bangkok is likely to be equity accounted in FPL’s financials. For the time being, FPL consolidates its REITs as it controls them.
Undervalued or value trap?
It seems none of FPL’s strategic moves have endeared it to investors. Its share price is trading at just 0.32 times its NAV (net asset value) of $2.44.
DBS Group Research thinks that FPL is undervalued. “We maintain buy on FPL with a target price of $1.20 or a 60% discount to our RNAV of $3.00. The group is trading at a remarkably cheap valuation, with its stake in various REITs exceeding its market cap of $3.1 billion. The market is assigning zero value to its (i) solid track record as a developer of residential homes in Singapore and Australia, (ii) global industrial & logistics sourcing and development platform and (iii) fast-growing hospitality business.”
Thiveyen Kathirrasan, The Edge Singapore’s in-house analyst, thinks FPL is fairly valued. He says: “From our most recent quantitative valuation of property-themed stocks, FPL’s score shows it is fairly valued and not undervalued. Reasons for this include its cash and quick ratios are 0.40 and 0.42 respectively, with a net gearing of over 80%. Furthermore, an interest coverage ratio of 2.3 times shows that the company’s overall financial safety is just mediocre, if not below average. Other metrics that suggest that FPL is not undervalued are its profitability ratios, where the company’s return on assets (ROA) and return on equity (ROE) are 0.01% and –0.39% respectively. In addition, FPL’s historical financial performance over the past 10 years has not been consistent. This includes recording negative operating cash flows and free cash flows, which also contribute negatively to the company’s quantitative valuation.”
In a nutshell, FPL’s balance sheet is not very liquid. Its gearing ratio may also rise as it had redeemed $600 million of perpetual securities in April. As for the outlook on interest rates, Loo says: “When we underwrite these deals, we were not expecting rates to fall. We never account for interest rates to come down. We make sure we underwrite the project so we can deliver the outcome.”
Loo declines to comment on the average cost of debt by the end of FY2024. He would only say that the cost of debt will slowly inch up as loans mature while the cost of the new hedges will be higher. However, he is on the lookout for markets that could provide the best liquidity and cost of funds. For instance, Mizuho Bank was the lead arranger for a US$400 million ($540 million) sustainability-linked cross-border syndicated loan in yen that was swapped for Australian dollars. Mizuho was also the joint rating adviser when FPL obtained its inaugural credit rating from the Japan Credit Rating Agency (JCR). JCR assigned an AA– foreign currency long-term issuer rating to FPL. Obtaining such ratings is becoming popular for companies looking to raise JPY funding.
“We are making the most of the arbitrage, looking at where the liquidity is and the cost of funds, and optimising on that. The recent yen syndication was swapped to the Aussie dollar,” Loo says.
Despite a 20.4% decline in revenue, FPL’s 1HFY2024 patmi fell by 74% to just $57.4 million due to a decline in revaluations, mainly in the UK and Europe.
Would FPL divest some of its underperforming UK business parks? “What we need to do at the moment is just focus on what we can control, which is the relationship with our customers and the product that we’re putting onto the market,” says Ilaria del Beato, FPL’s UK CEO.
“We have to make the right decision on the portfolio, whether we ride through the cycle or make capital more efficient in a different way. We don’t know where the bottom is. We need real transactions,” Sirivadhanabhakdi says.
Some market watchers say FPL’s shareholders would benefit more if it divested its underperforming UK properties and kept its better-positioned Singapore properties like Fraser Residence River Promenade.
Yet, if FPL’s balance sheet turned more liquid and it saw a higher free float, that could lead to shares trading at a tighter discount to NAV and FPL would finally be rewarded for some of its smart acquisitions.
