Growth strategy intact

• Maintain Outperform and target price of S$1.73. Elaboration of management’s plans following FCT’s acquisition announcement of Northpoint II and Yew Tee Point last week has added to our confidence that the outlook remains positive for FCT, with both organic and inorganic growth catalysts in place. We also like management’s steady execution and conservative capital management. We maintain our estimates and DDM-target price of S$1.73 (discount rate 7.9%).

• Significant diversification with new acquisitions. Asset-concentration risks should be substantially reduced with income contributions from Causeway Point dropping from 64% to 51%. Contributions from the top 10 tenants would be reduced from 32.7% to 25.7%.

• More in the acquisition pipeline. FCT is likely to venture into eastern Singapore with its sponsor’s assets, Bedok Mall, and the Changi Business Park mixed development completing over 2010-11.

• Causeway Point’s asset enhancement. Plans to enhance its largest asset, Causeway Point, continue, and would likely be announced this year. Asset enhancement will be carried out in phases so as to minimise disruptions to businesses and income contributions.

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.

It’s the sponsor’s move now

Asset values likely stable in 2010. Frasers Centrepoint Trust (FCT) booked a revaluation surplus of S$37m in 4QFY09 (end Sep), a 3.5% YoY increase in portfolio value. Surprisingly, this was despite the independent assessor hiking cap rates by 25 basis points for Northpoint (NP) and Causeway Point (CP) and by 65 basis points for Anchorpoint (AP). We are neutral on the retail property segment and believe asset values in 2010 may be supported by the high liquidity environment fostered by global central banks.

Acquisition pricing key risk. FCT is likely (in our view) to acquire retail malls Northpoint 2 (NP2) and YewTee Point from sponsor Fraser & Neave [FNN, NOT RATED] in the near term. In November, FCT and FNN extended their put and call option agreement on NP2, which indicates a price range of S$139.5m to S$170.5m, by six months. No other pricing details are available for the two malls but the manager has indicated that it intends to fund any acquisitions using a combination of debt and equity. Our key concern is accretion – physical prices of retail assets have held up better than the prices of the REITs themselves. While FCT has re-rated significantly, the magnitude of un-levered and levered accretion that FNN is willing to concede to FCT is a question mark.

Further investment into Hektar? Malaysia-listed Hektar REIT [NR] said recently that it is in talks to buy new assets, which may be partially financed through fresh equity. FCT may be unwilling to let its 31.06% strategic stake in Hektar be diluted. So if Hektar launches a rights issue, FCT will probably (in our opinion) subscribe and inject further funds into the REIT. The accretion concern also holds true here – if Hektar’s manager does not utilize capital effectively, it impacts the returns to FCT and consequently to FCT’s unitholders.

It’s the sponsor’s move now. FCT is now trading above our S$1.30 fair value estimate and has appreciated some 17% since our September upgrade. It is currently trading at about 1.07x book value and a forward yield of 6.2% based on our estimates. Relative to an average P/NAV of 1.14x in 2006 and 1.22x in 2007, we note that upside from current levels is limited. Meanwhile, the current forward yield already exceeds the average 6.35% forward yield over 2007 (based on consensus estimates). With limited upside and accretion uncertainty on the potential acquisitions, we believe the risk-reward ratio is no longer compelling. Downgrade to HOLD with S$1.30 fair value (unchanged).