News Alert: A huge step forward in its pivot towards new economy assets
- FLCT announced the divestment of Cross Street Exchange for S$810.8m; an impressive 28.3% premium to valuations
- Transaction sets a record-low exit yield of c.2.5%
- Divestment of the property and pivot towards more logistics and business park assets will be well received
- Part of proceeds to repay debt and remaining to be set aside for future acquisitions
Divestment of Cross Street Exchange for S$810.8m
The divestment of Cross Street Exchange represents an impressive 28.3% premium to valuation. The last valuation of the property was just conducted on 30 September 2021, valuing the property at S$632.0m. The divestment to an unrelated party (SCC Straits Pte Ltd) is expected to be completed on 31 March 2022. Some additional details of the property:
- Cross Street Exchange
- 15-storey commercial office with a retail podium
- 2 clusters of heritage shops houses and 4 retail units
- NLA of 390,215 sqft
- Land tenure of 99 years (74 years remaining)
Setting a record low exit yield of c.2.5%
Based on the last valuation, the property’s passing yield is c.3.0%. However based on the divestment price, the implied exit yield is a record-low c.2.5%, significantly lower than yields of other commercial property transactions in the CBD.
List of selected transactions done recently:
Part of proceeds will be utilised to repay debt
Based on pro forma estimates, the divestment will lead to an absence of c.S$12.5m in distribution income for FLCT, translating to a c.4.6% reduction in DPU. We understand that c.49% of the sales proceeds may be utilised to repay debt, potentially bring gearing down to c.29.3%. This provides FLCT with a sizable debt headroom of more than S$3.0bn to embark on future acquisitions.
Our views
Overall, we believe that this divestment is a positive for FLCT especially given the large premium to valuations. Due to the COVID-19 outbreak approximately two years ago, the property was not able to achieve its full potential following the S$38m AEI of the retail podium at the end of FY19. The less than ideal passing yield of c.3.0% of the property created a slight drag on FLCT’s performance, and with its divestment, FLCT can continue to embark on their strategy of pivoting towards more logistics and business park assets.
We believe that this divestment and pivot towards logistics and business parks will be well received given the long term total returns for the sector.
FLCT will be announcing their 1Q FY22 business updates on 7 February 2022, and we will revisit our earnings projections then. Currently, we have a BUY recommendation with a TP of S$1.85.