Frasers Centrepoint Trust (FCT) has gone ahead with the widely expected acquisition of a stake in NEX that is held by sponsor Frasers Property TQ5 , further boosting its position as a leading suburban mall owner.
Relative to malls in town that are more frequented by tourists, suburban malls in FCT’s portfolio are deemed more resilient, thanks to their location in or near residential areas. The acquisition of the stake in NEX, long flagged by the investment community, is seen as a catalyst to help FCT generate more growth.
On Jan 25, FCT, which already holds an effective stake of 25.5% in NEX, said it would acquire Frasers Property’s 24.5% stake in NEX for $523.1 million, giving it a 50% stake.
Mercatus had sold 50% of NEX to the Frasers entities last February.
Richard Ng, CEO of the FCT’s manager, calls NEX an excellent asset with strong financial and operational performance and will fit well strategically into FCT’s prime suburban retail portfolio.
“The increased stake in NEX will further diversify FCT’s income base, enhance its portfolio resilience and improve its overall retail portfolio performance. The growth opportunities at NEX through AEI [asset enhancement initiatives], tenant remixing and rent improvement will support FCT’s objective to deliver regular and stable distributions to unitholders,” says Ng.
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FCT says the acquisition is expected to add 0.173 cents to DPU on a pro forma basis. This estimate included adjustments made for the divestment of Changi City Point and KL-listed Hektar REIT.
According to FCT, a potential NEX AEI is the redeployment of around 60,000 sq ft of non-commercial carpark GFA for retail and office use. It can also create new retail spaces using voids on multiple floors and reconfigure existing areas to improve space efficiency and optimise rental potential.
Citing a preliminary study done by Frasers Property, these development plans will cost between $80 and $100 million. FCT is targeting a return on investment of above 7%.
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According to FCT, the agreed value of NEX is $2.127 billion or $3,352 psf of net lettable area (NLA). This figure is the average of two separate valuations as at Dec 31, 2023, of $2.144 billion by Colliers International and $2.11 billion by Jones Lang LaSalle.
The NPI yield of the acquisition based on the agreed property value is 4.8%. This is higher than the NPI yield for the Seletar Mall transaction which averages around 4%.
Of FCT’s acquisition cost of $523.1 million, $196 million will be used to pay down bank loans taken out last February by Frasers Property to fund the acquisition.
FCT will use debt to help fund the latest acquisition and has also launched a private placement to raise at least $200 million.
Analysts have generally stayed positive on FCT following its 1QFY2024 business update on Jan 22. For the quarter ended Dec 31, 2023, FCT’s committed occupancy hit 99.9%, up 1.5% y-o-y and up 0.2% q-o-q.
Shopper traffic grew 3.1% y-o-y but sales of tenants declined 0.7% y-o-y, although they would have been up 1.1% y-o-y, after adjustment for tenants under renovation, which puts it at about 118% of pre-Covid levels.
Meanwhile, FCT’s first batch of retail units at Tampines 1 which had undergone AEI started trading in December 2023, achieving a leasing commitment of 97% and is on track to be complete by September this year.
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Citi analyst Brandon Lee is heartened by how FCT was able to extract strong rent reversion in 1QFY2024, as this was significantly higher than FY2023’s hike of 4.7%.
During an analysts’ briefing on Jan 24, Audrey Tan, CFO of FCT’s manager, said following December’s FOMC meeting, benchmark rates have come down. “We took advantage and increased our hedges from 62% to 73% and the all-in cost was less than 4% for the hedges.”
Aggregate leverage fell to 37.2% as at Dec 31, 2023, compared to 39.3% as at Sept 30, 2023, mainly due to the repayment of loans using divestment proceeds from Changi City Point and Hektar REIT. However, Tan says the REIT took on new loans for working capital and capex for Tampines 1’s AEI.
Maybank’s Krishna Guha points out that FCT’s 1QFY2024 update underscored the resilience of well-located malls and the importance of portfolio reconstitution and AEIs. However, Guha remains cautious about the impact of higher borrowing costs, which reflects ongoing repricing.
Upside factors noted by the analyst include an earlier-than-expected pick-up in leasing demand for retail space driving improvement in occupancy and better-than-anticipated rental reversions.
On the other hand, downside factors include the prolonged slowdown in economic activity, which could reduce demand for retail space, resulting in lower occupancy and rental rates.
Guha adds that the termination of long-term leases could also contribute to a weaker portfolio tenant retention rate, and a sharper-than-expected rise in interest rates could increase the cost of debt and negatively impact earnings, with a higher cost of capital lowering valuations.
RHB Bank Singapore’s Vijay Natarajan is not as bullish. He acknowledges the trust’s good set of 1QFY2024 operational numbers, healthy occupancy uplift, positive rent reversions and lower gearing but remains “neutral” on the counter and is only recommending investors to “buy” on dips.
He expects FCT to have an annual operating expenditure savings of $1 million per annum, due to various sustainable initiatives implemented such as solar panels, food waste valorisation and water usage efficiency. “These are positive steps in our view.”
Key risks noted by the analyst include inflationary pressures introduced by the recent rise in the goods and service tax (GST) on retail tenants and shoppers and the growing threat from omnichannel strategies by retailers and food delivery platforms.
