More room for acquisitions

■ FEHT is divesting Central Square, which will be redeveloped, for S$313m.
■ Proceeds to be used to pare debt, and improve gearing, NAV, DPU.
■ Reiterate Add. Potential acquisitions post disposal to provide income upside.

Divesting Central Square at 58% premium vs. valuation

FEHT entered into a put and call option agreement with CDL Constellation Pte Ltd, a wholly-owned subsidiary of City Developments Limited (CDL), to divest its interest in Central Square (CS) for S$313.2m plus an incentive fee of up to S$18m (subject to certain conditions being fulfilled by 31 Dec 2023, including getting provisional permission for a higher mix of residential use). CS, which accounted for c.8% of FEHT’s 2020 asset under management (AUM), is a mixed-use development comprising a serviced residence (Village Residence Clarke Quay), office, retail units. The divestment consideration, which is in line with expectations, represents a 57.9% premium to the independent valuation of S$198.3m (as at 31 Dec 2020) and a 70.8% premium to the original purchase price of S$183.3m in Aug 2012. After accounting for transaction-related costs, FEHT expects a net gain of S$112m. It expects the divestment to be completed by end 1Q 2022.

Divestment the best strategy for the REIT

The announcement did not come in as a surprise as FEHT had previously said it is exploring various options for CS after it received an outline advice from the Urban Redevelopment Authority to redevelop the property. Under the strategic development incentive scheme, CS could be redeveloped up to a maximum gross floor area (GFA) of 31,758 sq m (+75% vs. current GFA of 17,858 sq m) and to a height of 20 storeys (current: seven storeys). Considering the long redevelopment gestation period and that a REIT has 10% development limit, FEHT concluded that a divestment via a tender exercise is the best strategy for the REIT.

Proforma NAV and DPU to improve post divestment

The proceeds from the divestment of CS will be used to pare down FEHT’s debt. Assuming 83.9% of the divestment net proceeds are used to pay down debt, FEHT’s gearing will be significantly reduced from 41.3% (as at 30 Jun) to 33.5% while its debt headroom will be increased to S$533.6m (based on 45% gearing limit). This will provide FEHT flexibility in acquisitions. While CS accounted for c.8% of FEHT’s 2020 AUM, the divestment will increase its proforma NAV per unit by 7.2% and DPU by 0.8% due to interest savings.

Reiterate Add with an unchanged DDM-based TP of S$0.745

While the recovery of international travel remains uncertain, FEHT’s portfolio is backed by income from master leases and it has no master lease expiry until 2032. This will underpin the stability of its DPU. Potential acquisitions post the divestment of CS would also help to offset some of the income weakness due to the pandemic. Key potential re-rating catalysts: accretive acquisitions. Key downside risks: slower recovery from Covid-19.