Frasers Centrepoint Trust (FCT) on Sept 12 announced that it will be acquiring an additional 10% stake in Waterway Point for a consideration of $132.3 million. This raises the trust’s stake in the mall located in Punggol to 50.0% from 40.0% previously.
Following this move, analysts are upbeat on FCT’s prospects as this suburban mall seems to be attracting a steady footfall from residents in the area.
CGS-CIMB Research is hence keeping its “add” call with an unchdanged target price of $2.75. Analyst Lock Mun Yee is expecting the acquisition to complete sometime in mid-1Q2023.
While FCT did not provide figures for its distribution per unit (DPU) accretion on a pro-forma basis, Lock estimates that the accretion following the acquisition for FY2023 ending September 2023 to be 0.2% if fully debt funded and 1.1% if internally funded. Subsequently, she expects the accretion for FY2024 to be 1.0% if fully debt funded and 1.9% if internally funded.
“According to our estimates, gearing would increase from 33.9% as at June 30 to 36.6% and 35.8% post-acquisition [in FY2023 and FY2024] respectively,” says Lock.
Meanwhile, the analyst notes that FCT’s initially acquired stake in Waterway Point of 33.3% in July 2019 and subsequent 6.7% stake in September 2019 saw negative reversions, due to the pandemic compressing net property income (NPI) yield from 4.7% at the time of initial investment to 4.5% in FY2021.
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But thanks to the economy reopening, Lock views the acquisition favourably, given the mall’s high committed occupancy of 98.4% as at end-September and its superior location. The mall is directly connected to Punggol MRT and LRT stations and the temporary bus interchange.
Leases signed at Waterway Point in 1HFY2022 also achieved positive reversions of 2.2%. “We also expect shopper catchment to be uplifted by the increase in residential units in the Punggol precinct,” says Lock.
While pending the completion of the acquisition, Lock has decided to leave estimates unchanged. And in the event the joint venture (JV) partners decide to sell out their stakes in Waterway Point, FCT is likely to be the preferred buyer due to its existing ownership and familiarity with the mall’s operations.
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Similarly, Citi Investment Research is also keeping both its “neutral” rating and $2.45 target price.
The way analyst Brandon Lee sees it, this is FCT’s first acquisition in about two years, which underlines the trust’s intentions for inorganic earnings growth following the Covid-19 pandemic period and pro-active asset divestment strategy as the trust has sold three assets worth about $400 million from Nov 2020 to May 2021.
However, Lee is aware of the trust’s benign DPU accretion of 0.4%-0.6% (which could be reduced to 0.1-0.3% should 20% of fees be paid in units instead of 100%) that underlines the difficulty FCT and all the other Singapore REITs (S-REITs) face in executing decently DPU-accretive acquisitions in an environment of rising debt cost.
Among the S-REITs, FCT has outperformed year-to-date (ytd). “While we view this incremental acquisition positively in view of Waterway Point's strong attributes, we maintain Neutral on valuations ground,” says Lee, who prefers CapitaLand Integrated Commercial Trust (CICT) and Lendlease Global Commercial REIT (LREIT) among the retail S-REITs.
To that end, Lee is estimating an annualised 1HFY2022 NPI yield of 4.5% and an FY2022 NPI yield of 4.1% on FCT’s acquisition price.
As the acquisition is expected to be funded by a mix of debt and/or internal sources, Lee estimates that this deal will result in FY2021 pro-forma DPY accretion of 0.4-0.6%, predicated on 1HFY2022 NPI yield of 4.5%, 100% debt funding, debt cost of 3.5-3.8% and 100% of fees received in units.
FCT’s gearing is also expected to rise by 1.4 percentage points (ppt) to 35.3%, which implies about $500 million of debt headroom before hitting 40%.
Some of the downside risks that could impede share price include a sharp decline in economic activity (including retail sales); longer-than-expected negative impact from the pandemic; sharper-than-expected spike in interest rates; and risk of overpaying for future acquisitions.
As at 2.00pm, units in FCT are trading 1 cent higher at $2.27.
