FCOT – OCBC

Divestment of the Australian Wholesale Property Fund (AWPF)

Divestment of all units in AWPF: Frasers Commercial Trust (FCOT) announced on 12 May that it has completed the sale of all 39,758,513 ordinary units in Australian Wholesale Property Fund (AWPF) to National Nominees Ltd for an aggregate consideration of AUD22.2m (equivalent to S$29.11m). Including transaction costs, the net proceeds worked out to about AUD22.04m (S$28.9m). Prior to completion of the divestment, FCOT had a 39% indirect interest in AWPF and as at 31 March, the carrying value of the investment amounted to AUD24.94, (S$32.52m). The divestment is in line with the manager’s objective to reshape the portfolio of FCOT as the investment in AWPF is considered non-core. Taking into consideration that AWPF has not paid any distributions since Mar 2008, the Manager is of the view that the divestment is in the interest of unitholders as the net proceeds from the divestment will be utilised to reduce debt liabilities.

Positive on Divestment. Despite the divestment loss of S$3.62m, we view this transaction positively. AWPF was inherited from FCOT’s predecessor, Allco Commercial REIT (acquired prior to the financial crisis). Its book value on FCOT’s balance sheet has also dropped from a high of $75.1m in 4Q07 to a low of S$26.1m in 3Q09. We do not see much upside potential for the solely New South Wales assets, and have always reiterated that the capital could be recycled for better income maximizing purposes such as debt pare-down or yield accretive refurbishments. According to our estimates, this successful divestment will lower FCOT’s aggregate leverage from 37.8% as of 31 Mar to 37%. It will also provide FCOT with additional debt headroom of S$101.8m before surpassing the 40% gearing mark. The impact on FY11 DPU is, however, marginal with this divestment.

Looming Dent on Japan Assets. Our primary concern now rests with its Japan exposure1 . As of 31 Mar, FCOT’s Japan assets account for 9.6% of its gross revenue and 7.92% of its overall NPI. We noted that 100% of the leases for Azabu building in Tokyo and 65.5% for Galleria Otemae in Osaka will expire by FY12. We remain wary of the prospects in Japan, as office rentals are unlikely to see further uplift following Japan’s recent natural disasters. Furthermore, some occupiers have postponed or are reassessing their office strategies, which will likely delay the market recovery. DTZ has also forecasted Grade A office rents for Tokyo to decline further, only showing growth in 2013. Maintain BUY with a reduced fair value of S$0.87 (prev: S$0.89).