Stepping Up

• Acquiring Northpoint 2 & YewTee Mall for S$290.2m
• A combination of debt and equity to fund purchases
• Merits aplenty, Maintain BUY

Acquiring 2 malls at one go. In a much-anticipated move, FCT announced the acquisition of Northpoint 2 and Yew Tee Point – two good quality suburban retail properties for a total consideration of S$290.2m. When completed, FCT’s total portfolio value will increase by 25% to cS$1.5bn. An EGM to approve the transaction is scheduled on 25 Jan 2010.

Finding optimal funding structure. The deal is accretive as the initial yield of the properties average 5.8% and compare favorably to the current implied portfolio yield of 5.5%. However, the quantum of DPU
enhancement will depend on the finalization of the funding structure. In addition to taking on new debt, FCT is proposing to issue up to 152m new units. Based on an estimated debt/equity funding ratio of 45/55,
which will result in gearing increasing slightly to 33.4% by FY10, and pricing of the new units ranging between $1.10-1.50/unit, FY10 DPU maybe enhanced by 0.3-5.7%.

Bigger, better, stronger – post acquisition. When completed, we see FCT emerging as a stronger entity, benefiting not only from higher efficiencies from a larger asset base as well as increased diversification of its property and tenant mix. The fund raising exercise is expected to propel it into the billion-dollar market cap club and increase trading liquidity due to higher free float, thus providing another catalyst for a further stock re-rating. FCT’s sponsor has undertaken to only subscribe for the units in the event of poor participation of the private placement, an event we view as unlikely.

Maintain BUY, TP S$1.63. We have tweaked our current DPU estimates, which have already included the new acquisitions, to incorporate the latest transaction details. We continue to favour FCT as the purest suburban retail Sreit and its visible acquisition pipeline. Maintain BUY with a revised TP of $1.63.

Frasers Reit buys two malls for $290m

FRASERS Centrepoint Trust (FCT) said yesterday that it will buy two suburban malls for $290.2 million.

The retail real estate investment trust (Reit) also said it plans to issue up to 152 million rights units to help finance the mall acquisitions. The remaining amount will be borrowed.

The structure and timing of the issue of new units has not been determined, FCT added.

The Reit will acquire Northpoint 2 at Yishun for $164.55 million and YewTee Point in Choa Chu Kang for $125.65 million from its sponsor Frasers Centrepoint, the property arm of Fraser and Neave.

The transactions are subject to approval by FCT unitholders. The two acquisitions will grow the trust’s portfolio 25 per cent to $1.5 billion.

‘Northpoint 2 and YewTee Point are excellent suburban retail malls strategically located in the town centres of established high-density housing estates,’ said Christopher Tang, chief executive of FCT’s manager.

‘Both malls are in the immediate vicinity of MRT stations, which deliver a high level of shopper traffic. With captive shopper catchments, occupancy rates at or close to 100 per cent and diverse bases of quality tenants, both malls would be invaluable additions to FCT’s portfolio of high-quality suburban malls.’

The trust now has three malls – Causeway Point, Northpoint and Anchorpoint. Northpoint 2, a new extension to Northpoint, has a net lettable area of 85,530 sq ft. YewTee Point has 72,382 sq ft.

FCT said the two additions will enhance its asset, income and tenant diversification, the trust said. The malls will add more than 70 new tenants. And the larger asset and unit base – after the issue of the rights units – is expected to enhance the trust’s overall capital management flexibility.

FCT said that the price of the rights units will be determined closer to the launch date.

FCT units gained four cents or 2.8 per cent to close at $1.45 yesterday.

Proposed acquisitions set to be yield accretive

New acquisitions to grow AUM by 25% to S$1.5b. FCT announced the proposed acquisitions of Northpoint 2 and YewTee Point for S$165m and S$126m, respectively. The acquisitions will grow FCT’s portfolio value to S$1.5b and enhance its position in the resilient suburban retail property market as well as improve income diversification. Maintain BUY, TP of S$1.66.

Strong traffic footfall expected with strategic connectivity. Northpoint 2 and YewTee Point are strategically located in high density residential estates, both of which are located close to major transportation nodes, which deliver high shopper traffic to the malls. Occupancy for both malls stand at almost 100% with average passing rents at between S$12-13/sqft.

Acquisition likely to be yield accretive. Management indicated that the NPI yields from these acquisitions work out to be 5.8%, in-line with our estimates. The final funding structure has yet to be put in place. However, management has set out a realistic illustrative debt/equity structure of 45% and 55%, respectively. This suggests a debt requirement of S$130.6m, raising gearing from 30% to 33%. Approximately 128m new units may be issued at S$1.30, raising its share capital by 20%. Under the current capital financing structure, we expect FCT’s WACC to be ~4.9%, implying a DPU accretion of ~3.5%.

Expanded AUM may address liquidity and compress yields further. With a low cost of equity, we expect the above acquisitions to be accretive, strengthening FCT’s retail oligopoly status in the northern region of Singapore. With an expanded AUM and equity base, concerns over FCT’s poor stock liquidity will be addressed. We expect a further re-rating on the stock as yields could compress closer to its heyday levels seen in 2006-08. We maintain our earnings forecast as we have previously factored these acquisitions. We raise our TP to S$1.66 from S$1.53 to account for higher terminal growth rate assumption of 3% (2.5% previously). At our TP, FCT trades at 5% FY10 yield, a reasonable peg, in our view. Note that FCT traded at 4.6% during heydays of 2006 and 2008, suggesting that the stock has further legs to ride up the
economic recovery.