Frasers Centrepoint Trust (FCT) announced its long-awaited acquisition of a further stake in NEX mall in Jan-24, the first notable acquisition and fund raising within the REIT sector this year. The announcement was to purchase the remaining 24.5% stake from Gold Ridge Pte. Ltd. (GRPL), the entity holding NEX mall, raising total stake within the asset to 50%.

First fund raising for the year, strong interest, 2.5x oversubscribed. The merits of this deal differed slightly from the acquisition of an initial stake in NEX mall in early 2023 but overall positive. The REIT’s increased stake in NEX reflects a higher valuation for the mall at S$2,127m, representing a 2% y-o-y increase, supported by cashflow improvement as initial yield remained at an attractive c.4.9% (vs transactions in the 4.1%-4.3% range in Singapore’s suburban retail space). The total cost of acquiring the 24.5% stake was S$532m. This translates to an initial cost outlay of S$321m after taking on GRPL’s debt, and was funded by a private placement of S$200m (which was 2.5x oversubscribed) and debt.
Due to equity financing, DPU accretion was 0.40%, lower compared to the accretion for the initial stake in NEX at 0.52% which was fully funded by debt. The long-term AEI plans in place for the mall and tenant refresh strategies that FCT will explore will help to further extract organic growth from the asset. The GFA optimization strategy to convert 60k sqft of carpark space into retail space should yield another 0.7% DPU accretion when it takes place.

Acquisition at 4.9% cap rate is favourable compared to market transactions in the low 4% range. Given the tightly held retail assets in Singapore, bids for quality retail assets in Singapore have been strong, in the low 4% cap rate range, similar to FCT’s divestment of Changi City Point and Allgreen’s ongoing due diligence to buy Seletar Mall, estimated to be in the low c.4% on our estimates (report link). The deal metrics of NEX mall shines a favourable light on FCT to execute a deal at 4.9% cap rate and sponsor’s continued support in lending its balance sheet to grow the REIT.

Recent discussions with management have shed more visibility on NEX mall’s current performance in comparison to FCT’s acquisition of an initial stake in early-23. From an operating perspective, while NEX has the stature of a dominant mall, similar to FCT’s born and bred malls Causeway Point and Northpoint City, we remain excited about the plans that the FCT has in place to extract more value and returns for the asset in the longer term.

Tenant remix opportunity to increase exposure to specialty stores. With a footprint of 634k sqft, NEX mall is set to be FCT’s largest mall and c.50% bigger than the current largest mall in its portfolio, providing the REIT with a plethora of opportunities to enhance value. We note that the proportion of space dedicated to anchor and mini-anchor tenants is substantially higher at NEX mall at c.53% of NLA, as compared to just 41% for FCT’s comparable malls. This includes two supermarkets (Fairprice Xtra, Cold Storage) and a substantial department store tenant, Isetan group, which occupies three storeys of space at a corner of NEX mall.

This also translates to a larger proportion of GRI contribution from lower-yielding anchor tenants at c.30% as opposed to peers at c.23%. This is also reflected by the mall’s lower occupancy cost that is below FCT’s existing portfolio rate at 15.7%. This implies there is room to raise rents on existing leases. This would be the first opportunity to extract more returns, in our view.

Potential to unlock an additional 40k sqft of retail NLA. FCT has also earmarked potential AEI opportunities in the mall, including (i) AEI to improve mall connectivity to improve traffic flow, (ii) GFA upside potential from partial conversion of carpark space into retail NLA which can further unlock an additional 60k sqft of retail GFA (or approximately 40k sqft of NLA space, or an additional 6% uplift to overall mall NLA). A return on investment of c.7% is required for FCT to pursue the GFA conversion at the mall. This will add 0.5% - 0.7% additional accretion to DPU.

FCT anticipates that these medium-term milestones earmarked for NEX mall will help to close the rental gap at Nex versus comparable malls (Causeway Pt, Northpoint, Waterway Pt). The gross revenue per sqft at Nex is estimated to be c.9% below comparable malls, while annual shopper traffic per sqft is c.37% below.

Staggered growth in the coming years as FCT’s brings up occupancy cost at NEX mall; Tax transparency a bonus, leading to c.2.5% DPU accretion

NEX’s estimated passing rent of S$15psf - S$17 psf pm is below peer mall average of c.S$19 psf pm. On an annualized basis, we estimate that NEX mall’s passing rent rate is S$15psf - S$17 psf pm. We believe this is below the average passing rent of other FCT malls at S$18.9 psf pm. Occupancy cost on the other hand, is below FCT’s retail portfolio average of 15.7%. The inclusion of NEX within its retail ecosystem will lower FCT’s average occupancy cost to 15.5%.

FCT to work its magic to unlock greater value in NEX mall. NEX has historically relied on anchor and mini-anchor tenants to maximise mall occupancy and balance out the asset’s large retail footprint. Opportunities to cut back on anchor space to maximise passing rent and increase traffic footfall at NEX mall, especially towards the colder corners of the mall where Isetan sits, will work in tandem to bring occupancy cost to a more optimal level in FCT’s view (in the range of 16-18%) and bring up passing rents over time.

Tight pricing within the retail landscape has seen relatively flatter DPU accretion. The two tranches of stakes in NEX injected into the REIT has led to DPU accretion of 0.52% and 0.40% respectively. The lower accretion on the second tranche was due to the acquisition being partly funded by higher costs associated with placement and slightly offset by a more favourable cost of debt that was secured at 3.8%, and recycling of divestment proceeds from Changi City Point’s divestment which resulted in a 0.98% accretion gain.

Planting growth milestones with tax transparency at the finish line for bonus DPU accretion of 2.5%. Above and beyond the accretion associated with asset shuffling within the portfolio, DPU will gain by another 0.7% from GFA upside in the retail area at NEX. The ultimate end game we see for NEX is tax transparency at the asset level. We estimate annual tax at the Gold Ridge entity level approximates c.S$14 million, which would be c.S$7m for FCT’s 50% equity stake in the mall. In the longer term, FCT will look to buy out the current JV partners under Gold Ridge, which comprise of a China financial services company and asset operator PGIM. Tax savings of S$7m on FCT’s 50% equity stake implies a bonus accretion of c.2.5% to our DPU estimates.

More to come as FCT anchors itself as a leading suburban landlord in Singapore

Further stakes in NEX mall and WWP an addition of S$1.7bn to existing AUM. With a 50% stake of NEX under its belt, FCT will now own four of Singaporeans top 10 largest suburban malls based on NLA. This includes NEX mall, which will not stand as the largest asset within it’s portfolio, followed by the born and bred FCT malls Northpoint City, Causeway Point, alongside Waterway Point. We recap that there are further stakes within both Waterway Point and NEX mall for FCT to further scale up its ownership from the current 50% equity stake within each asset, to add another c.S$1.7bn to it’s existing AUM of c.S$5.5bn.

NPC (South Wing) now back on the table for considerations. Northpoint City (“NPC”) South Wing continues to sit on FCT’s ROFR pipeline, which we feel is a matter of time before its injection into FCT”s portfolio. The asset is a new extension to FCT”s current property Northpoint City North Wing with arguably better connectivity to public transport nodes given it’s adjacency to the newly integrated bus interchange. Given its launch in late 2017, we believe that the asset has been through its second cycle of lease term and have stabilized sufficiently for injection into the REIT.

The injection of ROFR asset could add another S$1.2bn to FCT’s AUM, and had taken a back seat as FCT’s conquers the chess pieces that were seating outside it’s sponsor’s territory – including the PGIM ARF portfolio back in the pre-COVID days and NEX mall which were released in the market in late-2022.

Best-in-class track record of portfolio rejuvenation. We track FCT”s past divestments and acquisitions in comparison to suburban retail asset valuer cap rate. Our analysis found that FCT’s had historically executed divestments above asset valuation, below valuer cap and recycled proceeds into higher yielding retail assets that are above valuer cap rate range. Divestment of Bedok Point, Anchor Point and Yewtee Point were divested in a tight cap rate range between 2.2% to 4.2%, based off each asset’s average net property income across both FY19 and FY20 to moderate the decline in asset performance across the pandemic year. The re-investment of proceeds into both PGIM ARF and Nex mall were also well-timed to reduce income vacuum from the portfolio reconstitution, while garnering high yields of 4.90% initial entry cap.

Maintain BUY with unchanged TP of S$2.70. We have included the additional 24.5% stake in NEX mall into our estimates with FY24F / FY25F DPU flat at 11.7 Scts / 12.1 Scts. We have assumed that the acquisition will be completed by early Mar-24 and start contributing from then, upside potential from AEI and GFA optimization not reflected in our assumptions yet. The issuance of 91.7m new units from the S$200m private placement to fund the deal is reflected in our FY24F estimates. Our revised estimates for FY24F / FY25F DPU represents forward dividend yields of 5.2% / 5.3% on FCT’s last traded share price of S$2.27.

Is FCT next to join the Straits Times Index? After the recent S$200m equity fund raising exercise and its share price of S$2.33/share, FCT’s total market cap of S$4.02bn positions it as the 34th largest among listed companies in Singapore. According to FTSE Straits Times Index (“STI”), at the last quarterly review in Dec’23, FCT is among the companies in the STI Reserve list, which is made up of the five highest ranking non-constituent stocks of the STI by market capitalisation. As the largest company within the reserve list, depending on the trading performance of FCT in the coming months, there is a chance of a potential inclusion into the STI at the next review date, sometime in March’24.

What is the criteria? Based on our understanding of the ground rules, during the index quarterly review, a constituent of STI will be deleted at the quarterly review if it falls to the 41^st position or below when the eligible securities are ranked by full market capitalisation. FCT’s market cap, which we estimate lands at S$4.02bn when new shares raised start trading, will surpass the market capitalization of existing STI constituents such as DFI Group, Venture Corp and Frasers Logistics Comm Trust. We believe FCT’s current ranking at 34^th place, or 32^nd including placement units, puts it a step closer to potential index inclusion depending on the trading performance of these companies in the coming months.

What was the performance of candidates that were included in the index. The last stock included into the STI was Frasers Industrial & Commercial Trust (“FLCT”) in April’21, replacing Jardine Strategic. We have looked at FLCT’s trading history. While the stock was also impacted by macro factors like rate hike expectations back then, there was a near term tactical trading opportunity for the REIT with the stock up +6% prior to index inclusion that was announced in early April’21. We see opportunity for FCT to trade higher in the coming months on expectations that the REIT could be the next constituent stock in the STI.