Frasers Centrepoint Trust: Divestment of Changi City Point
- FCT announced CCP divestment at S$338m, 4% above valuation on an exit yield of 4.3%
- CCP positioning within the Changi precinct has been under pressure since the opening of Changi Jewel
- Proceeds to pare down debt to 37% short-term, but could be rechannelled to additional stakes in NEX mall
- Equity Fund Raising risk lifted for now; maintain BUY with current TP of S$2.60
- FCT announced the divestment of Changi City Point for S$338m, at 4% above the latest valuation of the asset at S$325m.
- This translates to an NPI exit yield of c.4.31% (FY22 basis, c.4.5% based on FY23F estimates), above FCT’s purchase price at S$305m.
- Divestment expected to bring an accretion of 1.85% to DPU on FY22 pro-forma on the assumption of debt repayment without moving a needle on NAV/share (flat at 2.33 scts/share).
- Proceeds to be used to pare down debt from 40.2% to 37.1% post-completion to improve FCT’s financial positioning.
- Fixed hedge ratio to increase from 63-73% while cost of borrowing will decline from 3.7% to 3.6%.
- Divestment expected to conclude on 15 November 2023.
- Buyer is a foreign entity with real estate presence within Singapore, including retail assets.
Parting with one of the smaller-scale malls within the portfolio. Changi City Point has historically been a smaller-scale asset within FCT’s portfolio, with importance within the portfolio giving way to larger assets that were added to the portfolio over time (Waterway Point, PGIM portfolio, and a c.24.5% stake in NEX mall). Post-FCT’s portfolio rejuvenation journey, the asset makes up just c.7% contribution to top-line revenue (1H23). Structurally, the positioning of Changi City Point has been under pressure since the opening of Jewel mall in mid-2019, which has a larger footprint and has been able to draw more traffic to the mall.
Moreover, traffic flow has also been impacted by the extended hybrid work arrangement amongst workers in Changi business park precinct it serves, with MICE events in Expo still below full recovery, impacting overall sales momentum. In response, FCT has shifted positioning of the mall to an outlet retail mall in order to appeal to value-hunters, with COACH opening its flagship outlet store in the mall.
We note that revenue and NPI (net property income) continue to be below 2019 levels due to these structural factors, with 1H23 performance reflecting a c.91%/c.92% recovery in gross revenue and NPI, with FY22 traffic flow at c.54% of FY19 levels, below the portfolio average.
Exit yield an attractive c.4.3% in consideration of shorter land lease tenure. We are positive on this sale based on several fronts. Firstly, the land lease tenure of the mall is the oldest within the portfolio – at 46 years – and will start to see a faster rate of valuation decay in the medium term. On a valuation perspective, the sale price of S$1,559 psf may look low in comparison to peer malls within FCT’s portfolio which are north of S$3,000 psf. This is partly due to its lower commanding passing rents at our estimated c.S$10 psf pm, and in part due to its shorter land lease tenure in comparison to peers.
CCP’s low land lease shaves off c.30% valuation in comparison to a 99y LH-based valuation. We take reference from the Bala’s curve as a guide on valuation implications alongside a decline in leasehold value, which sees a property’s valuation accelerating past the 60-year mark. A cross comparison between two of FCT’s assets NEX and CCP – which have 85-year and 46-year leasehold tenures, respectively, remaining – the Bala curve guides that NEX and CCP’s current tenure approximates it to be valued at c.89% and c.70% of a fresh 99-year leasehold basis. We adjust NPI yields across selected FCT properties on a 99y LH basis for a fairer comparison to obtain an implied valuation cap of 3.6% for CCP, even tighter than valuer cap rates for retail assets at c.4.25-4.50% for dominant malls. Thus, this sale, in our view, serves as an opportunity to crystalise NAV for the REIT.
Upcycling to greater stakes in Nex value-accretive in all aspects. Secondly, we see improved financial flexibility to pursue growth ambitions. In the interim, FCT will be using the proceeds to pare down higher-cost debt (north of 5%) in the immediate term to bring gearing down to 37.1%.
At an opportune time in the future, we see FCT having flexibility to acquire sponsor’s remaining 25.5% effective stake in the joint venture owning NEX. If FCT can redeploy its debt capacity into NEX mall at c.4.8-4.9% initial yield will mean immediate DPU accretion in comparison to its CCP exit cap at 4.31%.
Moreover, the need for equity fund raising to fund the acquisition without overstretching its balance sheet is an overhang removed, in our view. As written in our previous report on NEX acquisition (What’s ‘NEX’ in store? – dated 24 Apr 2023), FCT will require c.S$350m to purchase remaining sponsor stakes in NEX (on the assumption of flat cap rates), which can be fulfilled by the divestment quantum from CCP. On a portfolio perspective, this upcycling will be a premium to FCT’s overall portfolio strategy on all aspects including (i) a longer lease tenure for NEX at 85 years, (ii) expansion of presence within the north – north east region of Singapore where retail space per capita is the lowest island-wide, (iii) dominant attributes at NEX mall with excellent mall connectivity to a MRT interchange station, (iv) DPU accretion to a higher yielding asset at high 4%.
FCT’s share price has held up well against peers YTD (-1% YTD), with more room to rally given that Equity Fund Raising overhang on share price has been substantially lifted for now. Maintain BUY with current TP of S$2.60.
FY Sep | 1H2022 | 2H2022 | 1H2023 | % chg yoy | % chg hoh |
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Gross revenue | 176 | 181 | 188 | 6.5 | 3.8 |
Property expenses | (45.7) | (52.6) | (49.6) | 8.6 | (5.7) |
Net Property Income | 130 | 128 | 138 | 5.7 | 7.7 |
Other Operating expenses | (18.2) | (18.0) | (20.0) | 9.6 | 10.9 |
Other Non Opg (Exp)/Inc | 0.0 | 0.0 | 0.0 | - | - |
Associates & JV Inc | 6.60 | 15.8 | 31.1 | 370.7 | 97.2 |
Net Interest (Exp)/Inc | (20.4) | (26.4) | (35.5) | (74.3) | (34.2) |
Exceptional Gain/(Loss) | 0.50 | 0.02 | 0.0 | nm | nm |
Net Income | 100 | 101 | 116 | 15.6 | 13.9 |
Tax | 6.01 | 0.08 | 0.25 | (95.8) | 201.2 |
Minority Interest | 0.0 | 0.0 | 0.0 | - | - |
Net Income after Tax | 106 | 102 | 116 | 9.3 | 14.1 |
Total Return | 0.0 | 83.7 | 0.0 | - | nm |
Non-tax deductible Items | 6.09 | 6.15 | 8.61 | 41.5 | 40.2 |
Net Inc available for Dist. | 109 | 101 | 106 | (3.0) | 5.3 |
Ratio (%) |
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Net Prop Inc Margin | 74.1 | 70.9 | 73.5 |
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Dist. Payout Ratio | 95.6 | 103.1 | 98.8 |
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