SINGAPORE (May 20): In a much anticipated announcement, the manager of Frasers Centrepoint Trust said on May 16 that it would be acquiring a one-third stake in Waterway Point from sponsor Frasers Property (FPL). The purchase consideration on a 100% basis is $1,300 million, or $3,502 psf, based on a net lettable area (NLA) of 371,200 sq ft. The one-third interest, including fees and expenses, will cost FCT $440.6 million. As this is a related-party transaction, it will require unitholders’ permission at an extraordinary general meeting where FPL — which owns 42.01% of FCT — will not be able to vote.
Also on May 16, FCT’s manager announced an equity fundraising (EFR) programme to partly fund Waterway Point. The EFR comprises a private placement and a non-renounceable preferential offering. The private placement comprises 135.7 million new units at $2.382 a unit, to raise $312 million, with an upsize option to raise as much as $369.6 million.
The preferential offering is likely to comprise 48.3 million new units at $2.27 to $2.352 a unit to raise $65.4 million. FCT has announced that it has no intention of raising more than $437.4 million. This is the first time since its IPO in 2006 that FCT is raising such a large amount; the preferential offering is also a first. Since listing, FCT has been one of a handful of real estate investment trusts (REITs) that have not had a rights issue.
On April 4, FCT completed the acquisition of a 17.13% stake in PGIM Real Estate Asia Retail Fund, an open-ended fund, for $342.5 million. The reit is acquiring an additional 1.67% of the PGIM fund for $33.5 million. The PGIM fund owns and manages six retail malls — Tiong Bahru Plaza, White Sands, Liang Court, Hougang Mall, Century Square and Tampines One — and an office property (Central Plaza) in Singapore, and four retail malls in Malaysia.
Defensive suburban mall
Waterway Point is a prime example of a defensive suburban mall. It is located at an MRT-LRT intersection in Punggol, a growing catchment area. According to urban planning consultancy Cistri, Punggol is the fastest-growing residential estate in Singapore. The current population of 175,000 within Waterway Point’s catchment area is expected to grow at a compound annual growth rate of 3.8% between 2018 and 2023.
“When the population and the catchment area grow, it represents more than a linear increase. It has a compounding impact. A population growth of 4% a year translates into very bright prospects for the mall,” says Chew Tuan Chiong, CEO of FCT’s manager. Yet, the Punggol area is under-served by malls, with only 2.77 sq ft per capita of retail space, compared with other areas in Singapore. For instance, the retail space per capita in the Central West region is 6.38 sq ft and that in Central East is 4.77 sq ft.
Since Waterway Point’s opening in April 2016, tenant sales have grown strongly. For FY2018, tenant sales increased 10% and shopper traffic grew 3.9%. Average tenant sales are going for $85 psf a month.
As at March 31, Waterway Point achieved a committed occupancy rate of 98.1% compared with FCT’s portfolio, which reported an occupancy rate of 96% for the same period. Waterway Point’s weighted average lease to expiry is 1.8 years by gross rental income and 1.89 years by NLA. “It is quite similar to FCT’s WALE and expiry profile,” Chew says. In general, around a third of suburban mall leases expire in a year, as most leases in Singapore malls have three-year tenures. However, for this year, FY2019, some 60% of Waterway Point’s leases expire. Most of them have been renewed, Chew says, adding that the “lumpiness” of lease expiries will be more spread out.
Waterway Point’s net property income (on a 100% basis) for FY2018 was 61.1 million, translating into an NPI yield of 4.7%. The NPI yield of FCT’s current portfolio is around 5%. The valuers valued the mall at a capitalisation rate of 4.5%.
When asked whether NPI could continue to improve, Chew was reticent. “I wouldn’t want to comment on future earnings. This is a suburban mall in a good location and strong catchment area. It is reasonable to expect some improvement to some of these numbers and future numbers could be higher because of positive rental reversions,” he says.
According to FCT’s -announcement, -Waterway Point is distribution per unit--accretive. Based on the pro forma -financial effects on the DPU for FY2018, DPU increases from 12.015 cents to 12.049 cents, up 0.29%. However, if the acquisition of the stake in the PGIM fund is included, DPU rises to 12.093 cents from FY2018’s DPU, for an accretion of 0.65%. The DPU accretion takes into account the issuance of new units.
FCT’s largest mall is Causeway Point, which contributed 46.8% to NPI, followed by Northpoint North City (27.7%) and Changi City Point (13.6%). Based on FCT’s May 16 announcement, Waterway Point’s NPI in FY2018 would have contributed some 14.8% to FCT’s FY2018 NPI of $137.18 million, making it FCT’s third-largest mall by NPI contributions.
2QFY2019 DPU at record high
FCT’s 2QFY2019 DPU of 3.137 cents (for the three months to March 31) is 1.2% higher y-o-y and a record high. For 1HFY2019 (the REIT has a September year-end), FCT recorded DPU of 6.157 cents, up 0.9% y-o-y. In 1HFY2019, NPI rose 3.6% y-o-y to $71.83 million as the REIT’s smaller malls recovered. Bedok Point stabilised and Changi City Point’s NPI in 2QFY2019 rose 26% y-o-y.
The portfolio also registered positive 2% average rental reversion, bringing the year-to-date portfolio rental reversion to 5.4%.
The books have already closed for the distribution of 2QFY2019’s DPU of 3.137 cents, which will be paid on May 30.
FCT is the favourite REIT of analysts because of its defensive suburban malls. If its unit price eases because of the equity fundraising exercise, it would give investors looking for a stable yield an opportunity to invest.
Demand for FCT’s placement units is strong. They have been priced at the top end of the indicative price range of $2.30 to $2.382, translating into a discount of just 2.77% to the volume weighted average price of $2.4378 as at May 15, and at a forward DPU yield of 5.16% per annum. FCT last traded at a forward DPU yield of 5.02%. The REIT’s IPO price was 88 cents and it last traded at $2.45. Chart 1 shows the DPU investors would have received since IPO.
