A bunch of REITs are planning EGMs at the end of this month, to get unitholders to approve two transformational transactions. Frasers Centrepoint Trust (FCT) will be asking unitholders to approve the acquisition of five malls and an office building on Sept 28. The acquisition is transformative as it will take FCT’s AUM to $6.65 billion, turning it into the second largest retail REIT after CapitaLand Mall Trust (CMT).
In turn, CMT and sister REIT CapitaLand Commercial Trust (CCT) are proposing a merger through a scheme of arrangement, which unitholders of both REITs will be voting for on Sept 29 to form CapitaLand Integrated Commercial Trust. If approved by unitholders, the merger would turn FCT into the largest pure-play retail REIT on the SGX.
In a recent briefing on the merits of the acquisition, Richard Ng, CEO of FCT’s manager, says the acquisitions will double the REIT’s number of leases, increase its catchment population to three million which is more than half the resident population of Singapore, and broaden its geography on the island.
The acquisition targets are part of the portfolio of PGIM Asia Retail Fund (ARF) which was acquired in bits and pieces by FCT and sponsor Frasers Property (FPL) over 18 months. As at Sept 3, FCT and FPL owned stakes of 36.9% and 63.1% in PGIM ARF respectively. Hence the announcement of the acquisition of the re-maining 63.1% by FCT was not a surprise and neither was the price tag of $3.05 billion.
Ng, who was executive director, Asset Management at PGIM (Singapore), joined FCT as CEO of its manager last year. Previously, he was for many years head of asset management at CMT’s manager, and knows a thing or two about retail assets.
“As we’ve gone through Covid-19, [we’ve seen] how important and resilient suburban malls are,” Ng says. In addition, with working from home and decentralising the office now the trends, suburban malls remain attractive. FCT’s two main malls, Northpoint City North Wing and Causeway Point are in the northern part of the island. Three of the five malls are in the east, Hougang Mall is in the northeast and Tiong Bahru Plaza, along with its attached office building Central Plaza, are at the city fringe.
During Singapore’s lockdown known as the “circuit breaker” period, 30–40% of FCT and PGIM ARF’s tenants continued to operate. “We provide essential services and our shopping malls are a hub for social activities. For example, they include libraries and community centres. Our assets are located in good lo-cations near MRT stations,” Ng adds. Accord-ing to him, 54% of FCT’s Gross Rental Income (GRI) and 53% of PGIM ARF’s GRI are from essential services respectively.
DPU, NAV accretion
Based on the latest 12 months to June 30 financials, the CCT-CMT merger should be DPU-accretive as this includes results from 1HFY2020 ended June which incorporates the worst of the circuit breaker closure. CMT’s DPU in 1HFY2020 fell by 49.6% to 2.96 cents and CMT has retained $46.4 million of distributable income in the first six months. CCT’s DPU in 1HFY2020 fell by 24.1% to 3.34 cents, with $7.5 million retained from its 60% share in RCS Trust which owns Raffles City.
According to the scheme document, CMT will pay CCT unitholders 0.72 CMT units and 25.9 cents for every CCT unit. If the merger is voted through in five resolutions in two EGMs on Sept 29, the resulting CICT would be mildly NAV-accretive and DPU-accretive to CMT unitholders to the tune of 4.1%.
For CCT unitholders, the merger is DPU-accretive to the tune of 7.6%, but mildly NAV-dilutive, based on the latest 12-month financials ended June, once again incorporating the impact of Covid. Taking into account just six months to June 30, the merger is unlikely to be DPU-accretive. However, CCT unitholders are compensated by a cash payout.
At FCT, the accretion is mild to pretty positive depending on what data is used. For FY2019 ended Sept 30, 2019, the acquisition adds as much as 8.6% to DPU, based on the assumption of FCT issuing 585.6 million new units through a placement and equity fund raising at an average cost of $2.22. FCT’s NAV as at June 30 was $2.21, and it is trading around $2.66 per unit.
Discounts to volume weighted average price for placements and preferential equity fund raising can be no more than 10%. Hence, FCT is likely to issue units at no lower than $2.39 or thereabouts. This means the DPU accretion of 8.6% based on FY2019 financials, 0.4% based on 9M2020 ended June and with tenant support, and 4.72% based on 9M2020 financials and excluding ten-ant support, are likely to be higher than illustrated in the FCT circular.
Sources of accretion
During the briefing on Sept 4, FCT’s manager and Ng were clear about where FCT will get its accretion from the acquisition. They are tax transparency as the properties are converting from private limited companies in the fund structure to a REIT that does not have to pay income tax. In addition, FCT’s cost of debt assumed for the acquisition is likely to be below 2%, at around 1.88%. This too should result in savings and more income available for distribution.“Currently, the assets are in ARF and for our 36.9% there is an annual tax leakage of $4.7 million and we must see how we can resolve this and benefit unitholders,” Ng says.
Once within FCT, the properties will be aligned to FCT’s fee structure. While FCT held a stake in PGIM, an additional layer of fees existed. Once the fees are based on FCT’s fee structure, this additional layer is eliminated.
For FCT, Ng points out that the recovery in both the FCT and ARF malls have been notable. “The recovery has been very quick with reopening in June and portfolio traffic has stabilised to 60–70% of pre-Covid levels. Most of our tenants have resumed operations,” Ng says.
“Tenant sales for the FCT portfolio in July have recovered close to last year’s level,” he adds. “We always look at the portfolio and potentially value-add [with Asset Enhancement Initiatives (AEI)] over time. There are pockets of opportunities we could still evaluate for the assets. Besides AEI, near term plans are to sta-bilise the assets and work with retailers and as things get better we would be looking at helping retailers in terms of extending leases and retain as many tenants as we can,” Ng details.
Time to vote
FCT’s EGM is quite straightforward. Unitholders get to vote on five resolutions. The first two are the ARF acquisition and equity fund raising as the number of units issued could be more than 50%. Sponsor placement, the whitewash resolution and divestment of Bedok Point make up the the other three.
The CMT-CCT merger is through a scheme of arrangement which is a little bit more complicated, and most of the resolutions are inter-dependent. On the morning of Sept 29, CMT unitholders have to vote three resolutions, the first being on the amendment of the trust deed, where 75% of acceptances is required. This resolution is not interdependent on the vote to merge CMT and CCT where just 50% of unitholdings of unitholders present are needed. The third resolution is to approve the issuance of new CMT units for which 50% approvals are required. CapitaLand cannot vote on the merger and the issuance of new units.
Over at CCT, where the EGM takes place in the afternoon of Sept 29, unitholders would be voting on the amendment of the trust deed, and the merger. For the merger vote, more than 50% approval by headcount representing at least 75% in value of the total number of CCT units held by CCT unitholders present and voting by proxy need to vote in favour for the resolution to pass. CapitaLand again cannot vote.
Interestingly, the merger between ESR-REIT and Sabana Shariah Compliant Industrial REIT, which was announced in July, may not get the 50–75% approval benchmark required because of the opposition of two activist funds. The EGM for the merger has not yet been announced as at Sept 10.
Growth post-transaction
Once the acquisition has been completed, FCT’s additional growth in the near term is likely to be from the post-Covid recovery. CMT-CCT would also be looking at stabilising the portfolio post-Covid. In the immediate term, Tony Tan, CEO of CMT’s manager, points out that some malls have recovered significant-ly, with footfall at IMM returning to 82% of pre-Covid levels, and 73% of pre-Covid levels at Plaza SIngapore/Atrium. Funan, which has not stabilised, could also be a source of additional net property income.
Over at CCT, the completion of CapitaSpring in 2021, which is around 34% leased, would add to AUM and lower gearing. In addition, AEIs at Six Battery Road and 21 Collyer Quay will also be completed in 2021.
More interesting is what happens after 2021. The CBD including Tanjong Pagar is expected to be transformed into a mixed-use precinct with work live-play elements and green spaces. Perennial Real Estate Holdings has announced preliminary plans to redevelop AXA Tower while City Developments plans to redevelop Fuji Xerox Tower. Capital Tower is in this precinct and could also benefit from the new URA Masterplan. What could materialise is a movement of its tenants to CapitaSpring in the future.
If all approvals are obtained at the EGMs, CCT will have development headroom of around $5.8 billion. This would be more than sufficient for the re-development of Capital Tower into an integrated development, which would require perhaps between $1.5 billion and $2 billion.
Another asset that a potential CICT could re-develop is Plaza Singapura/The Atrium Orchard where the Orchard Road area is expected to be transformed into Singapore’s lifestyle destination with innovative and unique non-retail offerings. What these could be, we can only find out in the fullness of time.
